In the comment section of a recent post lots of people objected to my definition of money, which is the “monetary base.” Most did not seem to recall that Larry Summers once made the same argument (that falling interest rates are deflationary), in a paper explaining the Gibson paradox. And he used gold as the medium of account. BTW, the fact that low interest rates being associated with low prices was considered a “paradox” shows that “reasoning from a price change” was a widespread problem until Larry solved the puzzle. (credit also to his coauthor Robert Barsky (who probably did most of the work), and a slightly earlier paper by Chi-Wen Jevons Lee and Christopher Petruzzi.)
Of course we all know that monetary economics has regressed in the last 5 years, and based on recent comments I’ve received the Gibson paradox relationship is once again viewed as a “paradox,” not the natural implication (during periods where the supply of money was relatively stable) of the downward sloping demand for money as a function of nominal interest rates.
Another objection was that my monetary base definition of money is weird, and in some sense “wrong.” If only I understood that demand deposits could also be used as money, I’d see how false my claims really are. OK, just for today I’ll give you all your definition. For today M2 is money, and the monetary base is called “SumNerdyProfessor’sObsession.” Let’s shorten that to the base = SNPO. Now I want you to re-read all the posts I’ve written since February 2009, and replace “money” with “SNPO,” everywhere you see the term ‘money.’ Or at least pretend to. OK, now all my posts are rewritten. Has anything changed?
Nope, all my arguments are equally valid for changes in the supply and demand for SNPO.
I’m begging everyone—no more complaints that I have the wrong definition for money. A rose by any other name . . .
PS. No one seems to research the demand for money anymore, but when I was young it was the most researched topic in all of economics. There are 100s, maybe 1000s of old empirical studies that support my claim that falling interest rates are deflationary, holding the level of
base money SNPO fixed.