Quick Comment On The Neutrality Of Money
Nick Edmonds wrote an involvement postal service discussing the neutrality of money. He responded to this quote past times Scott Sumner:
This is a fairly criterion "money neutrality" argument. (Money neutrality is an declaration that changing the amount of coin inward an economic scheme exactly changes the cost score without affecting existent activity. In Scott Sumner's example, if the monetary base of operations is multiplied past times a share of 100, all prices increment past times a share of 100, but volumes of existent goods produced should live on unchanged.) Nick Edmond's reply involves a somewhat complex Stock-Flow Consistent model inward which he models the impact of changing the monetary base.
I possess got a much simpler accept on the number of coin neutrality.
In social club for coin to live on neutral, the modify inward the coin render cannot possess got a "distributive impact" (an impact on the distribution of wealth too income). As an extreme example, if the Government of Canada decided to double the Canadian monetary base of operations past times cutting me a rather large cheque, the designing of economical activeness inward Canada would decidedly modify (trust me). More reasonably, changing the monetary base of operations past times the key banks buying bonds does possess got a distributive impact - the authorities has rearranged assets for about members of the someone sector, too yous cease upward amongst the "portfolio residue effect" that allegedly causes Quantitative Easing to work. Keeping inward heed that debt is unequally distributed across households too firms, it is really hard to modify the coin render without having distributive effects.
But at that spot is ane means to modify the coin render without having a distributive impact - re-denominate the currency. For example, supervene upon $1 inward "old dollars" amongst $100 inward "new dollars". Debts too other monetary contracts are as good re-denominated past times the same ratio. Countries possess got done this inward the aftermath of severe inflationary episodes (although they possess got gone the other way, lopping a few zeros off of their currency values). In this case, at that spot are no apparent distributive impacts of the move, too hence coin should live on neutral. But since the authorities did brand the modify inward social club to touching economical activeness (to cease inflationary psychology), coin is mayhap non neutral fifty-fifty inward this case.
In summary, I struggle that inward whatever economic scheme amongst debt, an functioning that preserves coin neutrality is equivalent to the short illustration of a re-denomination of the currency.
(c) Brian Romanchuk 2013
"If the Fed wants to increment all nominal variables past times 100 fold, it exactly increases the base of operations 100 fold."
This is a fairly criterion "money neutrality" argument. (Money neutrality is an declaration that changing the amount of coin inward an economic scheme exactly changes the cost score without affecting existent activity. In Scott Sumner's example, if the monetary base of operations is multiplied past times a share of 100, all prices increment past times a share of 100, but volumes of existent goods produced should live on unchanged.) Nick Edmond's reply involves a somewhat complex Stock-Flow Consistent model inward which he models the impact of changing the monetary base.
I possess got a much simpler accept on the number of coin neutrality.
In social club for coin to live on neutral, the modify inward the coin render cannot possess got a "distributive impact" (an impact on the distribution of wealth too income). As an extreme example, if the Government of Canada decided to double the Canadian monetary base of operations past times cutting me a rather large cheque, the designing of economical activeness inward Canada would decidedly modify (trust me). More reasonably, changing the monetary base of operations past times the key banks buying bonds does possess got a distributive impact - the authorities has rearranged assets for about members of the someone sector, too yous cease upward amongst the "portfolio residue effect" that allegedly causes Quantitative Easing to work. Keeping inward heed that debt is unequally distributed across households too firms, it is really hard to modify the coin render without having distributive effects.
But at that spot is ane means to modify the coin render without having a distributive impact - re-denominate the currency. For example, supervene upon $1 inward "old dollars" amongst $100 inward "new dollars". Debts too other monetary contracts are as good re-denominated past times the same ratio. Countries possess got done this inward the aftermath of severe inflationary episodes (although they possess got gone the other way, lopping a few zeros off of their currency values). In this case, at that spot are no apparent distributive impacts of the move, too hence coin should live on neutral. But since the authorities did brand the modify inward social club to touching economical activeness (to cease inflationary psychology), coin is mayhap non neutral fifty-fifty inward this case.
In summary, I struggle that inward whatever economic scheme amongst debt, an functioning that preserves coin neutrality is equivalent to the short illustration of a re-denomination of the currency.
(c) Brian Romanchuk 2013
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