Typography

WWI Liberty bonds, which according to Neil Wallace circulated alongside Federal Reserve notes [ source ] What follows are some thoughts on the coexistence puzzle as well as the folks who find it interesting. There is plenty of hyperbole over the difference between freshwater and saltwater economists, but one peculiarity that surely distinguishes a freshwater economist from his saltier cousin is that they tend to be interested in the underlying motivations guiding monetary exchange, the so-called microfoundations of money. (Saltwater economists tend to be content with broad assumptions about monetary phenomena). Representatives of the microfounded approach, which includes the blogosphere's own David Andolfatto as well as Stephen Williamson —who has anointed his approach New Monetarism—like to refer to their models as "deep models of money". One of the classic questions that continues to interest deep money types is the so-called coexistence puzzle. Zero-yielding financial...

Steve Williamson recently posted a joke of sorts: What's the difference between a New Keynesian, an Old Monetarist, and a New Monetarist? A New Keynesian thinks no assets matter, an Old Monetarist thinks that some of the assets matter, and a New Monetarist thinks all of the assets matter. While I wouldn't try it around the dinner table, what Steve seems to be referring to here is the question of money. New Keynesians don't have money in their models, Old Monetarists have some narrow aggregate of assets that qualify as M, and New Monetarists like Steve think everything is money-like .* This is a interesting way to describe their differences, but is it right? In this post I'll argue that these divisions aren't so cut and dry. Surprisingly enough, Milton Friedman, an old-fashioned monetarist, was an occasional exponent of the idea that all assets are to some degree money-like. I like to call this the moneyness view. Typically when people think of money they take an e...

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...

Stephen Williamson has been thumping the drum on the irrelevance of quantitative easing for some time now. See here , here , here , here , here , here . I jumped into the comments of his most recent on this issue, and have done so here and here as well in the past. I've had problems squaring Steve's irrelevance theory with the very real fact that in the day-to-day drama of financial markets, traders with large portfolios think QE is very relevant. Because they are large traders, and because they think it is relevant, quantitative easing IS relevant. One way to square this is to conclude that both Steve and the markets are right, but it depends on how you approach the problem. Steve is approaching the question from the Miller-Modigliani framework, which carries with it all sorts of assumptions. If those assumptions hold, he's probably right about irrelevance. But as commenter Richard Serlin consistently points out , MM only holds under conditions that don't actually c...

Stephen Williamson had a good post recently in which he noted: Central to Old Monetarism - the Quantity Theory of Money - is the idea that we can define some subset of assets to be "money". Money, according to an Old Monetarist, is the stuff that is used as a medium of exchange, and could include public liabilities (currency and bank reserves) as well as private ones (transactions deposits at financial institutions). Further, Friedman in particular argued that one could find a stable, and simple, demand function for this "money," and estimate its parameters. Lucas does that exercise here, and then uses the estimated money demand function parameters to measure the costs of inflation. What's wrong with that? The key problem, of course, is that the money demand function is not a structural object. Some central bankers, including Charles Goodhart, figured that out. Goodhart's idea is a bit subtle, but there are more straighforward reasons to think that the para...