Is Numerairology the Future of Monetary Economics? Unbundling Numeraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate

43 Pages Posted: 20 Jan 2007 Last revised: 1 Aug 2022

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Date Written: January 2007

Abstract

The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numeraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numeraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numeraire ('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 numeraire used in private transactions. The second is the proposition that price stability in terms of that numeraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numeraire 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 numerairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.

Suggested Citation

Buiter, Willem H., Is Numerairology the Future of Monetary Economics? Unbundling Numeraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate (January 2007). NBER Working Paper No. w12839, Available at SSRN: https://ssrn.com/abstract=958491

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

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CESifo (Center for Economic Studies and Ifo Institute)

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Columbia University ( email )

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