Typography

James Hamilton and Stephen Williamson recently commented on the Republican Party platform ( pdf ) which calls for a commission to investigate possible ways to set a fixed value for the dollar. Here is a fragment from the platform: Determined to crush the double-digit inflation that was part of the Carter Administration’s economic legacy, President Reagan, shortly after his inauguration, established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar. JDH was puzzled about the odd timing of an appeal to the gold standard, given a decade of low (sometimes negative) inflation. I left my thoughts on JDH's blog. Gold bugs tend to be conspiracy theorists... but here I think I've one-upped them by placi...

William Stanley Jevons, who coined the term "double coincidence of wants" A while back I had an interesting conversation with David Andolfatto on his post Evil is the Root of All Money . This is surely one of the more catchy phrases developed by monetary economists, who tend to the less-flowery end of the literary scale. David fleshes out a model that shows how untrustworthiness, or evil (what is called a lack of commitment in the NME literature), can lead to the emergence of money. David finds this interesting because his model doesn't need the absence of a double-coincidence of wants to exist in order to motivate a demand for money. The double-coincidence problem - the unlikelihood that two producing individuals meeting at random would each have goods that the other wants - has historically been the explanation of choice for the emergence of monetary exchange. After all, if one person doesn't want another's goods, she can still transact by accepting some third...

Gavyn Davies drew some interesting parallels between the ECB and the IMF last week. This follows on his post the " ultimate taboo ", in which he analyzed the idea of "convertibility risk", a term first used by ECB head Mario Draghi in a speech in late July. Gavyn points out that in explicitly drawing attention to its job of controlling convertibility risk - ie. ensuring that all euros are the same - the modern ECB is becoming more like the IMF. Specifically, during Bretton Woods the IMF sometimes financed the balance of payments deficits of member nations in order to ensure the system of fixed exchange rates stayed, well, fixed. When it did so, the IMF was engaging in a mind game of sorts with the market, for the market knew that the IMF knew that the market knew that rates could be modified if attacked with enough force. In admitting to the world the existence of convertibility risk, the ECB is now displaying an IMF-degree of hyper self-awareness... for the first ...

The Rowe/Glasner/Sproul debate continues over hot potato-ish-ness of money. Here is Nick Rowe: The hot potatoes simply pass from one hand to another. Unless they sell it back to the banks, to buy IOUs. But why would they want to do that? If I have opals I want to get rid of I will probably sell them at the specialised opal dealer, who will probably give me the best deal. If I have money I want to get rid of....well, everyone I deal with is a dealer in money. The bank is just one in a thousand. Why would we assume that the bank will always give me a better deal than the other 999? Mike Sproul jumps in, but David doesn't, so instead I left a comment trying to anticipate what David would say: Why would people want to return hot potatoes to the bank? David explicitly sets his illustration of reflux in a world characterized by fixed convertibility. Say the central bank promises to convert deposits into x gold ounces and vice versa. If there are too many deposits being created, people s...

Miles Kimball gave me some help on understanding Wallace Neutrality , which in turn might help me understand more where Stephen Williamson is coming from when he says QE is irrelevant. I asked Miles: I'm not sure if I entirely understand the Wallace neutrality argument. If I may paraphrase, does it mean something like... the Fed could buy a bunch of stocks on the NYSE, and they might be able to push their prices up (their dividend rates down). But if they did so, the price of these stocks would rise above their intrinsic value and profit-seeking agents would immediately take the opposite side of the trade, thereby pushing the purchased stocks' value back to their intrinsic value. So in order for the Fed to permanently increase stock prices above their intrinsic value, there must be some sort of "friction" that prevents profit-seeking agents from taking the other side of the trade. Is that what it means? Miles: Yes... You said it very well. That's a relief. Someti...

I had an interesting conversation about microfoundations at David Andolfatto's blog . David's post comes on the heels of a number of other posts by various bloggers. See here , here , here , here , here , here , and here . Here is David: A narrow view of "microfoundations" is reflected in the idea that the methodology of microeconomic theory (specifying individual preferences, information sets, endowments, constraints, together with an equilibrium concept) can and should be brought to bear on macroeconomic questions. This is in contrast to an earlier methodology that specified and estimated behavioral relations at the aggregate level. (One can legitimately weigh the pros and cons of these (and other) methodologies.)  Not many macro models are "microfounded" in a pure sense. Almost all models make at least some assumptions that may be viewed as ad hoc and provisional (subject to further investigation). I think of an ad hoc assumption as a restriction on beha...