Working Paper: CEPR ID: DP6099
Authors: Willem H. Buiter
Abstract: The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numéraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numéraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numéraire ('sterling') and the means of payment ('drachma'). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numéraire used in private transactions. The second is the proposition that price stability in terms of that numéraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numéraire from the currency: doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numérairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.
Keywords: cashless economy; optimal inflation; price level determinacy; zero lower bound
JEL Codes: E3; E4; E5; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removal of the zero lower bound on nominal interest rates (E43) | greater flexibility in monetary policy (E52) |
| decoupling of the numraire from the medium of exchange (E42) | greater flexibility in monetary policy (E52) |
| numraire managed separately from means of payment (E42) | better targeting of price stability (E52) |
| choice of numraire (F36) | economic behavior in cashless economies (D16) |