[As Krugman would say, wonks only.]

So the recent post I did defending Tobin led to a comment section discussion with Nick Rowe, George Selgin, Saturos, etc., which eventually ended up on this knotty problem of what is “money.”  Is it all about the medium of account, or the medium of exchange?  They are almost always the same, so it’s hard to find good real world examples.  And it’s even hard to construct thought experiments, as if you separate them, or drop one entirely, it’s hard to know what auxiliary assumptions to make.  I’ll try to show this with four examples, three of which support my view, and two of which support Nick’s (one is consistent with both.)  I’ll let the comment section sort it out:

1.  I’ll start with a sticky wage model (which I prefer), but don’t worry the other examples will all be sticky prices.  We have a tropical country called “Barteria”, where the workers produce fruits and coconuts on large plantations.  They are paid in what they produce, and barter these goods for other fruits, so they can have a diverse diet.  However their wages are denominated in coconuts, and are “sticky” in coconut terms.  But they aren’t paid in coconuts!  Thus suppose they were all paid a wage equivalent to one coconut per hour, and their productivity is 1.2 fruit per hour.  To make the math easy, assume the market price of all types fruit is initially equal to one fruit per coconut.  Thus initially the equilibrium allows the owners to earn 0.2 fruit/worker/hour in profit, and everyone has a job.  Their contract specifies they be paid 8 coconuts worth of fruit per 8 hour day, which at initial prices means 8 fruit for an 8 hour day, and they trade fruit with each other in flexible price markets.

Then a coconut blight kills many of the coconuts, so coconut worker productivity falls in half.  The price of coconuts in terms of other fruits soars, and yet workers continue to insist on being paid (the equivalent of) one coconut per hour.  So if the price of bananas fell to 1/4 coconut, the workers would insist on being paid 4 bananas, so that they would be earning the one coconut that their contract specified.  Unemployment results, as they are just not that productive.  (Although liberals would accuse me of blaming the victim.)

Think my example is far-fetched?  Think the workers would be happy getting their usual one fruit per hour?  Think again.  In 1930 the workers of the major industrial countries were paid in gold.  Not gold itself, rather their wages were denominated in terms of so much gold per hour, paid in some other medium.  Then in 1930 global gold hoarding caused the value of gold to soar.  The price of the commodities that workers buy fell in terms of gold.  You might think workers would say to their boss; “We understand that gold has become more valuable, and thus we don’t need as much to buy our usual purchases, so you can pay us an amount of MOE that buys less gold, as long as we can buy our usual goods.”  But the workers did not say that.  Why not? What’s the title of this blog? They said “We insist on being paid in gold, even though there isn’t enough gold in the world for full employment.  We don’t care that our gold wages will now buy more goods and services, we demand payment in gold.”  And keep in mind that many workers never owned a gold coin in their life.  They were poor.  Yet it remained a token with mystical powers to the workers, a sort of barbarous relic.  The workers crucified the owners on a cross of gold.  (Wow, I’m inventing some great metaphors phrases today!)

BTW,  America’s labor leaders opposed FDR’s devaluation.

In this coconut example there is no medium of exchange.  It’s a barter economy.  But there is a medium of account.  And changes in the value of the MOA cause business cycles.

2.  Now for a sticky price version.  We will assume that prices are sticky in terms of coconuts, but coconuts are not the MOE.  Goods are bartered.  Once again, we assume a coconut market shock that makes coconuts worth more.  What happens?  I seem to recall Nick arguing that nothing happens, people continue to barter as before.  There may be a problem in the coconut market, but no generalized problem of deficient AD.  Yes, that’s one possibility. Score one for Nick.

3.  But it depends on what you mean by “sticky prices.”  In case 2 all transactions occur at market clearing prices.  So in a sense the problem of stickiness is being assumed away.  So I like to imagine a world with a MOE and MOA that are different.  No more barter.  And also assume flexible prices between the MOA and MOE.  Prices are sticky in terms of the MOA, but a varying amount of MOE is needed for transactions.  Real world analogies might be with US dollars as the MOA and Zimbabwe dollars as the MOE, or gold as the MOA, and silver coins as the MOE.  Let’s do the latter.

Assume once again that the demand for gold rises, and gold become more valuable in terms of both silver and all other goods.  Assume the equilibrium value of silver in terms of all other goods is unchanged.  Recall that prices are denominated in terms of gold, the MOA.  Thus something that used to cost 1 silver coin might now cost two.  Because the quantity of silver is unchanged, and thus it’s relative value in terms of goods is unchanged, this is a negative demand shock.  But there are two ways to visualize this case:

a.  The MOA got more valuable while nothing happened in the MOE market; hence the MOA is the key variable.  (My view)

b.  The stock of MOE measured in terms of gold has fallen in half, thus it’s a MOE shock that causes the recession.  (Nick’s view.)

I think in terms of the quantity of MOE, whereas Nick thinks in terms of the value (in MOA terms) of the MOE.

So I’ve considered four cases.  Case 1 and 3a and 3b are all consistent with the MOA driving the cycle.

Cases 2 and 3b are consistent with Nick’s view; the MOE is the key variable.

So it’s three to two, but somehow I don’t expect to maintain the lead when he replies.

PS.  I vaguely recall Keynes saying around 1930 that the basic macro problem was that British wages were too high relative to the amount of gold in the world.  Does anyone recall?  It was when Keynes served on a commission looking at monetary problems.

Update:  Commenter Arthur pointed to a good example of a split MOA/MOE in Brazil, from Marcus Nunes.



33 Responses to “MOA vs. MOE”

  1. Gravatar of Jason Jason
    30. August 2013 at 21:00

    I put together an information theory version of money: it represents both the definition of a bit (medium of account) and the number of bits available to describe the economy (medium of exchange).

    One thing is that it isn’t required (mathematically) that you have linear relationships between the two definitions. The real value of money (fraction of the real economy a dollar buys) can drop faster or slower than the rate the total number of dollars increases. It’s pretty easy to get a situation where increasing the money supply boosts the economy, but it remains possible where increasing the money supply leads to deflation.

    I have a hypothesis that this might have something to do with what’s happened recently here with QE not leading to any inflation and also the situation in Japan where while the monetary base has increased over the past 20 years there still hasn’t been any inflation as a result. This could extend Milton Friedman’s maxim to include a lack of inflation being a monetary phenomenon as well 🙂

  2. Gravatar of Max Max
    31. August 2013 at 00:00

    Gold would be an appropriate MOA for a country that did nothing but mine gold (all other goods imported).

    A benefit of a floating exchange rate money is that the MOA can be the entire set of domestically produced goods and services. The MOA doesn’t have to be deliverable.

  3. Gravatar of Kevin Donoghue Kevin Donoghue
    31. August 2013 at 01:11

    “I vaguely recall Keynes saying around 1930 that the basic macro problem was that British wages were too high relative to the amount of gold in the world.”

    Can’t place that exactly, but he said that sort of thing quite often, e.g. in The Economic Consequences of Mr Churchill:

    “The arguments of Chapter I are not arguments against the Gold Standard as such. That is a separate discussion which I shall not touch here. They are arguments against having restored gold in conditions which required a substantial readjustment of all our money values. If Mr. Churchill had restored gold by fixing the parity lower than the pre-war figure, or if he had waited until our money values were adjusted to the pre-war parity, then these particular arguments would have no force. But in doing what he did in the actual circumstances of last spring, he was just asking for trouble. For he was committing himself to force down money-wages and all money-values, without any idea how it was to be done.”

  4. Gravatar of Bill Woolsey Bill Woolsey
    31. August 2013 at 05:04

    1. Barter examples are of little value. This is especially true when you claim your example is realistic based upon events in a gold standard world–a monetary economy. We are paid in bananas and now we want four times as many bananas in pay is not the same as we are paid in gold denominated money and we want the same amount of gold denominated money but it buys more of the goods and services we want.

    The place where the example would work best is on the coconut farm. There is a blight, and all of the workers want the same amount of coconuts as usual, but there aren’t as many. Say, for example, half the workers are let go, and the remaining workers get paid the same amount of coconuts as before, harvesting half of the coconuts, being all that are produced due to the blight.

    On the banana farm, bananas are being used as a medium of indirect exchange. The workers sell their labor for bananas and then use the bananas to buy oranges and whatever.

    Using coconuts as the medium of account, what has happened to the nominal quantity of bananas when there is a coconut blight? It went down by 75%.

    The bad, yet better analogy is CPI escalator clause with a supply shock. There is trouble in the middle east, and gas prices rise. The higher CPI results in an automatic increase in wages due to the escalator clause. This results in more unemployment.

    Of course, if this means that CPI bundles are being used as the medium of account in this escalator clause world, then the nominal quantity of money which is measured in terms of CPI bundles falls when there is an adverse supply shock.

    Rowe’s barter examples, which I don’t usually like much either, don’t have the fruit used as a medium of indirect exchange. The farmers pick their own fruit and barter it. And so, there is no reason for there to be disruption in the barter-orange market due to a change in the orange-coconut and banana coconut exchange rates.

    By the way, I think your paper gold framing is not helpful.

    If I am short of what you call “cash” and go to the ATM machine, what happens is my shortage of “cash” becomes both a shortage of checkable deposits and cash. There is still a shortage of money.

    Now, if I hold liquid securities and sell them off to get money, mostly deposits and maybe even “cash,” and their yields rise so some people, and maybe even me, is willing to do with less cash because the yield on these securities is so attractive, then that doesn’t end the monetary disequilibrium.

    The interest rates no longer clear the intemporal market. Saving is greater than investment. That means people accumulating more money as saving than firms are spending as investment. That is a shortage.

    In my view, any change in asset prices to clear up an excess supply of money _is_ monetary disequilibrium.

  5. Gravatar of ssumner ssumner
    31. August 2013 at 06:02

    Jason, As far as QE, it’s well understood why there is little inflation. We don’t need new models.

    Max, I disagree, I think it would be a lousy MOA for any country–the value is too unstable.

    Thanks Kevin.

    Bill, I agree that the analogy is not exact, but I still think the gold market of 1930 is an interesting analogy. These were workers who may have never seen gold, and yet who insisted on being paid in gold terms, even as the value of gold rose sharply! That’s really weird, and yet it happened. It suggests my coconut example is not that far-fetched.

    The escalator clause is an interesting analogy, but in that case the real wage is unchanged.

    Regarding your last comment, I see it as a question of semantics, nothing important at stake. I think our views are very close.

    Not sure what “paper gold framing” means.

  6. Gravatar of Nick Rowe Nick Rowe
    31. August 2013 at 08:54

    Still thinking….

    I can’t help but think your case 1 is rigged. That’s because labour is used to produce all other goods in the economy. So naturally labour is the most important good. And naturally if the price of labour is too high, whether in terms of the MOA, or in terms of the GDP deflator, or in terms of the MOE, the whole economy will go wrong.

    I can do a variant on your case 1, where there is neither an MOE nor an MOA, but the workers all unionise and insist on higher real wages with a CLA clause.

    Still thinking…

  7. Gravatar of Nick Rowe Nick Rowe
    31. August 2013 at 08:55

    CLA = COLA in the above.

  8. Gravatar of ssumner ssumner
    31. August 2013 at 09:17

    Nick, Yes, it is rigged, but in a way that I think accurately describes actual business cycles. In my view almost 100% of the drop in output is due to less labor being employed.

    Less labor equals less output. Less output equals less stuff sold. But the fundamental problem is that labor is no longer profitable because nominal wages are sticky and nominal aggregate income falls.

    Yes, any artificial attempt to raise wages (such as FDRs NIRA policy) would also create recession like conditions. It doesn’t have to be the MOA, and in other countries labor wage shocks have occasionally created recessions. (Not recently in the US.)

  9. Gravatar of Arthur Arthur
    31. August 2013 at 10:18

    There is a real world exemple of diferent MOE and MOA relating to inflation. The introduction of Real in Brazil.

    Marcus Nunes even has a post on that:

  10. Gravatar of Saturos Saturos
    31. August 2013 at 10:52

    Scott, for case 3, why go to all the trouble of invoking a gold market? Why not simply posit that the authorities have redefined the value of an “ounce” so that there are only half as many “ounces” of silver in the world? However the producers of all other commodities refuse to label according to the new definition, so the “ounce value” of everything else is still “sticky”. Now is this a shock to the value or quantity of the MoE? Seems like a foolish question to me.

    OTOH the only mechanism you propose for an MoA independently causing a recession is through a drastic rise in all real wages. Basically it’s a story of labour prices failing to adjust while the products of labour do, so the nominal value of products isn’t enough to pay those who make them. The problem with this story is that the pressure on employment only occurs to the extent that prices do fall (raising real wages) so, holding nominal wage rates constant, price level rigidity is a force promoting employment. It doesn’t capture the phenomenon of an aggregate demand curve shifting left – for given prices and relative prices, less quantity demanded of all final goods and services. It’s essentially the falling prices of all outputs, in your story, that reduce the purchasing power of their sellers to pay their employees (in nominal terms). Unemployment is purely a function of the rising real wage, to the extent that the MoA independently causes it – but would empirical evidence support this notion?

    (Put it this way – if this were the true force behind recessions, nobody would even have made the *mistake* of proposing the underconsumption doctrine.)

  11. Gravatar of Saturos Saturos
    31. August 2013 at 10:53

    In case 2 all transactions occur at market clearing prices. So in a sense the problem of stickiness is being assumed away.

    This objection gets to the heart of what seems to be perpetuating the debate. All of us are thinking of unemployment as a failure of some markets to clear. So obviously some price has to be out of equilibrium. In case 1 it is the general level of nominal wages, holding other prices constant, that need to adjust, because the unemployment is just that price being out of equilibrium with the others. In case 2 nothing is out of equilibrium, except perhaps the MoA market (perhaps it is bartered against just one other thing, which in turn barters with everything else), and so no there are no gluts of anything, excepting perhaps an isolated MoA shortage (which is not relevant, as it continues to serve as numeraire at the disequilibrium price) . In case 3 every commodity interacts with every other commodity via the MoE. Every commodity which labour is employed to make and sell has to exchange for silver, which has to exchange for some other commodity. But in our artificial example rates of exchange aren’t quoted silver/commodity, but rather gold/commodity. And payments for commodities are evaluated by taking the offered silver/commodity rate and multiplying it by the gold/silver rate, to check against the quoted gold/commodity rate.

    Now, how does everybody get unemployed here? The goods markets fail to clear, because due to some shock the implicit silver/commodity rates at which they are all sold are all too high. (Half the silver disappears or is hoarded, or the silver/gold and commodity/gold rates adjust differently to a change in the gold market.) People are unable to demand as many commodities from each other, even at given gold prices of commodities. So the derived demand for people who make the commodities falls. And their gold wage rates can’t fall, so they are fired instead. And the gold prices of what they make still don’t fall, as they are too hard to cut given the cost of labour (measured in gold).

    The price that needs to adjust to restore unemployment is the (implicit) average exchange rate between output commodities and silver. Even if wages fell by a lot – if it weren’t possible to cut output prices as a result so that the product of labour could be sold, the derived demand for labour still wouldn’t return to full employment. There’s a test of our hypotheses right there. It’s the wage-and-price level which both need to fall to restore equilibrium withh aggregate demand – not that prices have already fallen too low, and only wages need to fall to match. In your view, there is no glut of output at all – just a labour market in disequilibrium with the goods market, because nominal hourly wages are sticky. In Nick’s view, every output market is failing to clear, because outputs must trade with each other via MoE – and every output/MoE market is stuck above the equilibrium price. But of course that price will depend on the MoA when that exists – that’s the whole point of MoA! The root of that stickiness may well be the inflexibility of nominal hourly wages, and adjustment there may well remove it. But unless falling hourly wages (for given NGDP/AD) also produce a clearing of the goods markets (rather than simply lowering the real wage) it won’t solve the mass unemployment. Again, in your recession, to the extent output is cut back because workers are laid off at the excessive real wage, this puts upward pressure on aggregate supply and the price level – which pushes the real wage upward! So actually there are considerably different views here. Nevertheless I hope going through it so explicitly helps to “dissolve” some the confusion that has had us talking past each other; and we don’t go on accusing each other of dodging or “assuming things away”.

  12. Gravatar of Saturos Saturos
    31. August 2013 at 10:53

    Arthur, here’s an even better real world example:

  13. Gravatar of flow5 flow5
    31. August 2013 at 12:21

    B.S. Everyone is ignorant. 93-96 percent of all demand drafts cleared thru demand deposits after 15 years of deposit deregulation. I’m sure the percentage hasn’t changed much since that date. Transaction based accounts represent our “means-of-payment” money supply. Money times its transaction rate of turnover = AD, & AD = nominal-gDp. The optimum target for monetary policy is bank debits, i.e., the roc in MVt.

  14. Gravatar of George Selgin George Selgin
    31. August 2013 at 13:05

    I don’t get it, flow5: most transactions aren’t for final goods, so MVt is much bigger than MVy, and the last only is more or less equivalent to AD (more or less because you miss some non demand-draft final payments). I wish I were wrong, because in that case my claim that free banking with a stable stocks of reserves helps to stabilize AD would be even stronger. In fact, the demand for reserves is a fn. of debits (including note exchanges), not nominal income per se.

  15. Gravatar of Gordon Gordon
    31. August 2013 at 15:14

    I believe that bitcoin is an example where the MOA is different as prices are expressed in U.S. dollars. I don’t know the history of bitcoin and cannot say whether this has always been true or came about because of the volatility in bitcoin value.

  16. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. September 2013 at 01:39

    So, this is an argument not about what money is, but which bit of money counts (for the question in hand)?

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. September 2013 at 03:05

    By ‘bit’ I mean aspect.

  18. Gravatar of Saturos Saturos
    1. September 2013 at 04:33

    I think so, it’s a “why money matters” argument.

  19. Gravatar of ssumner ssumner
    1. September 2013 at 07:27

    Saturos, You said;

    “OTOH the only mechanism you propose for an MoA independently causing a recession is through a drastic rise in all real wages. Basically it’s a story of labour prices failing to adjust while the products of labour do, so the nominal value of products isn’t enough to pay those who make them.”

    This is not quite true. In my example real wages do rise. However the sticky wage theory itself does not assume anything about sticky prices, real wage cyclicality, etc. At least not in a world where most firms are monopolistically competitive.

    Now obviously if prices are also sticky then sticky prices must play a role in causing recessions. But that doesn’t mean sticky wages stop playing a role. My exercise showed that sticky wages are enough, by themself, and that a MOA could cause a recession without a MOE.

    You said;

    “It doesn’t capture the phenomenon of an aggregate demand curve shifting left”

    Sure it does. A fall in NGDP is a shift to the left of AD. It’s that simple.

    I’m not sure I understand your longer comment, but let me see if I do, and you can respond. I think that you are saying that in a world of sticky prices the MOE MUST be implicated in the problem, in the AD shortfall. I think that is also Nick’s point. I agree, but I think that’s equally true of the MOA. Now here’s another way of explaining why I think it’s more USEFUL to focus on the MOA, when both the MOA and MOE are involved:

    Suppose the stock of gold (MOA) falls in half—big problem. Prices need to fall in half, but are sticky. Suppose the stock of silver (MOE) falls in half. No problem. The price of silver doubles and there is still plenty of MOE to buy all the goods and services at the sticky price level. Now you can say the case where the stock of silver falls in half and the price of silver doubles isn’t really a shock to the MOE, because the MOE in nominal terms is unchanged, and that’s true, but I think you can see why I found it most useful to focus on the global gold market during the 1930s, even though gold was no longer a MOE. That’s where the shocks ORIGINATED.

    Gordon, Good example.

  20. Gravatar of Saturos Saturos
    1. September 2013 at 09:07

    Scott, yes I think I agree with your last point. I’m sure your GD analysis is probably perfectly sound. You can probably see the shock as fundamentally originating with MoA. But you have to admit that the mechanism doesn’t quite work without the MoE as well. (That “transmission” of the MoA shock via MoE is crucial.) For instance I’m sure you’d agree that the economy in case 3 would suffer quite a bit if 99% of all the silver coins disappeared overnight (with sticky prices) even if the price of silver adjusted! And what if the silver stock disappeared entirely? That was the point of my link. Also if you see booms as being caused by monetary expansion negating the output constraints of monopolistic competition, that too makes more sense with the quantity demanded of all GDP rising due to more demands expressed with MoE, whereas if you removed MoE entirely depreciation of MoA alone couldn’t have that effect, it would be a more Friedman/Lucas boom mechanism instead.

    I don’t understand your defence of case 1; it seems clear that your example doesn’t work unless you’re also assuming that output prices aren’t sticky, and works only to the extent that they’re not. So the recession is purely being caused by the real-wage increase, which doesn’t sound like what I would call a “demand-side recession”. As Nick points out this mechanism is equivalent to saying that all the employees unionize and hike their wages relative to the prices of what they sell; to me aggregate demand issues are fundamentally different to relative price disequilibrium issues, and your example is working by throwing out equilibrium between labour inputs and their outputs (separate speeds of adjustment to MoA appreciation). To me the MoE is both a necessary and sufficient condition for causing the booms and busts of aggregate demand, whereas MoA is not. But I think frankly there is sufficient agreement between us already; this would be a good point to “agree to disagree”.

  21. Gravatar of Tom Brown Tom Brown
    1. September 2013 at 10:28

    Scott, love this post. I hope Nick gets back to you after he’s done thinking.

  22. Gravatar of ssumner ssumner
    1. September 2013 at 11:07

    Saturos, I don’t follow the “no MOE” hypothetical. That’s like saying “What happens if the MOA is fine but you remove all electric production?” Yes, you’d have a recession. MOE performs a very useful role. It greases transactions. But the MOA role is fundamental–it causes changes in the MOE that result in less nominal expenditure. Or at least it seems fundamental to me, perhaps there are no testable implications.

    I don’t think the 99% drop example is useful, as I was assuming 100% price flexibility between the MOA and MOE. If we weaken that assumption, then you are undoubtedly correct.

    I strongly disagree with your second paragraph. Go to any textbook and you’ll see that “sticky wages” is one of the reasons the SRAS curve slopes upward. Now assume the AD curve is a hyperbola (given NGDP) Now shift the level of NGDP up or down. With an upward sloping SRAS curve you get the standard business cycle effects. And that’s pure AS/AD. It’s a 100% aggregate demand shift. And it doesn’t even matter what you call it—it produces stylized facts that look like AD shifts.

    Obviously it’s nearly a tautology that with sticky prices a shock the the MOA value of the MOE will have real effects. That I accept.

    Thanks Tom.

  23. Gravatar of ssumner ssumner
    1. September 2013 at 11:10

    Lorenzo, In my view it’s about what money is. In models of the economy money must be the MOA. There is no exception, as the price level is 1/value of money. It does not need to be the medium of exchange.

    In the gold-silver example you model the price level by modeling the value of an ounce of gold, not an ounce of silver.

  24. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. September 2013 at 15:08

    So, the answer to the question how can the MoA set prices if it is not exchanged for things? is the MoA is exchanged for the MoE. But then your barter examples have no MoE. So, how can the MoA set prices if it is not exchanged for things and there is no MoE?

  25. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. September 2013 at 16:30

    To clarify, I get that a unit of account doesn’t have to be exchangeable for anything. But we are talking about a medium of account which is setting the price level.

  26. Gravatar of Jason Jason
    1. September 2013 at 19:15

    “Jason, As far as QE, it’s well understood why there is little inflation. We don’t need new models.”

    Show me the model 🙂

    It seems that part of the macro world thinks the lack of inflation due to QE is the result of a liquidity trap (the Fed can’t produce inflation) and part of it thinks the Fed just doesn’t want inflation. That just sounds like it is well understood to those who subscribe to either of the two understandings.

  27. Gravatar of Saturos Saturos
    1. September 2013 at 23:02

    The remaining disagreement seems to be about what independent power the MoA has. Scott is emphasizing real wage changes as a driver of business cycles, disequilibrium between wages and prices. Here I think Nick will disagree that this is the main force behind booms or busts. Another point I made was that, even with complete flexibility in the MoA/MoE market, one way of highlighting MoE’s importance is by considering what happens even if the total nominal value of the stock of MoE doesn’t change, but there simply aren’t enough coins circulating for there to be fungible exchange media available – that this is more like what actually occur when all businesses start complaining of “lack of demand for their product” or “consumer confidence”, rather than workers becoming too expensive; and that is why I posted the link to the Tabarrok post as some evidence. But I would also like to emphasize that Scott and I agree entirely on the policy implications and the way to analyse something like the nominal shock that caused the great depression, or this one.

  28. Gravatar of ssumner ssumner
    2. September 2013 at 10:26

    Lorenzo, The MOA is exchanged for things, it’s just not the MOE.

    Jason, Check out Krugman’s 1998 model of temporary currency injections.

    Saturos, I’m claiming the MOA is a better explanation even in a pure sticky price model, for reasons I explain in the post. But I agree that a MOE explanation is POSSIBLE when you have sticky prices.

    If the stock of gold falls in half, and you have a recession, and then if the stock of silver falls in half and the stock of exchange media is maintained and a recession avoided only because the nominal price of silver doubles, then I think it’s pretty clear that the MOA is the dog and the MOE is the tail.

  29. Gravatar of J.V. Dubois J.V. Dubois
    3. September 2013 at 00:01

    I agree with Nick that the example is rigged and even if I do not know why exactly yet I *think* that Lorenzo is up to something with his premise that for MoA to have any meaning (in setting price level) it needs to be actually exchanged (for MoE)

    Why do I say that your example is rigged? Because it works even if there is no MoA in any meaningful sense. Imagine that workers will always want to have their wage tied to something dimensionless. That the number bananas they will earn as wage will not be tied to “Bananas worth of 1 Coconut” but that number of bananas will be fixed to “1”. Or it will be decided by a roll of the dice. Or that they will get number of bananas based on how worthy their labor was in the eyes of local shaman. Does it mean that in these examples dimensionless unit “1” or “dice roll” or “shaman” are media of account? It does not make sense. But you can easily have recession even if MoA does not make sense – just make required wages higher than productivity.

    And note that in one example (dice roll) we do not even have to talk about concept of “sticky wages” to produce recession – even you want to count “number of dicerolls” as a sticky parameter.

    And as a sidenote to Lorenzo’s idea, try to think about this – how do you measure economic activity? I say that you have to count it in units of media of exchange. If 10 coconuts were exchanged for 10 bananas you may say that the economic activity is “10 bananas and 10 coconuts”. You cannot say that just because in some totally unrelated economy 100 miles away the the coconuts and bananas have each market price of 1 apple that our (10 coconut and 10 banana) economy is worth 20 apples.

    PS: anyways thank you for the post. It was a pretty good one.

  30. Gravatar of Scott Sumner Scott Sumner
    3. September 2013 at 10:16

    JV, You said.

    “I agree with Nick that the example is rigged and even if I do not know why exactly yet I *think* that Lorenzo is up to something with his premise that for MoA to have any meaning (in setting price level) it needs to be actually exchanged (for MoE)”

    I agree. And in my sticky wage example it is exchanged in flexible price markets. Without exchange there is no price.

    I don’t follow your next example. An economy with no MOA is pure barter. I agree that real wages may be too high in a barter economy, I’ve never claimed that monetary shocks are the only cause of recessions. Raising the minimum wage to $50/hour would cause a recession, but it isn’t a monetary shock.

    You measure NGDP on terms of coconuts.

  31. Gravatar of J.V. Dubois J.V. Dubois
    4. September 2013 at 02:07

    Scott: Yes I agree. There really can be a “recession” in Barter economy. For instance if people are normally trading back-scratches 1 for 1 but change it to 1 for 2 during Christmast we may say that there is no trade on Christmas and therefore economy is in recession. And this is something that you evoke in your example. And I think this does not relate to problems that we have in a monetary economy.

    Thinks about your example. Is there insufficient demand in the economy in any way when there is coconut blight? We can say that there is an excess demand of people for bananas that is balanced by insufficient demand for labor. Can we say that there is excess demand for coconut just because coconuts are traded for bananas? I do not think so. Nobody wants extra coconuts for his labor but everybody wants extra bananas. Your “trick” is that you put an equal signe between coconut and bananas by assuming that they are traded one for another. But I think it does not work so.

    PS: What I wanted to say with measuring is something different. Imagine an economy where million bananas are exchanged for million coconuts and there is some odd transaction where one banana is exchanged just for a milk from 1 coconut.

    You cannot say that just because the one odd transaction was a free market one that the size of the economy is therefore 2,000,002 coconut milks.

    PPS: Just to reiterate this is really a good post and you still may be right. Maybe we call recessions really is what you say.

    But I do not think so. I do not prefer that definition. I prefer Nick’s definition – recession is when thinks are harder to sell and easier to buy. Your example is about things getting both harder to sell and harder to buy.

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