the definition of money copyright, 1996 © dale carnegie & associates, inc. lecture 1
TRANSCRIPT
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The Definition of Money
Copyright, 1996 © Dale Carnegie & Associates, Inc.
Lecture 1
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Introduction
This lecture examines the definition of money.
What is meant by money?
Why is it important that we define it correctly?
What are the problems associated with measuring money
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Financial Innovation & Deregulation
• Global markets have seen financial innovation and deregulation.
• This has led to the breakdown in the traditional relationships between the measures of money and economic activity.
• This has raised the issue as to what is meant by money.
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Definition - a procedure
• One of two procedures.
• Attach labels to real world objects - Nominalist.
• Attach labels to concepts and then search for the corresponding real world entity - Empiricist.
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Characteristics of Money
• Medium of Exchange - (concrete)
• Unit of Account - (abstract)
• Store of Value.
• “Nothing is more ultimate than money. Instead of going out of existence, unwanted money gets passed around until it ceases to be unwanted” Yeager
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Artificial historical framework
• Commodity money - problem of jointness
• Localised issue - reputation
• Government issue - legal tender
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Forms of money
• No generalised market for titles - (Paul Davidson)
• Legal restrictions - (Neil Wallace)
• Means of Final Payment - (Charles Goodhart)
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Liquidity
• Separation of money from other assets is its superiority in liquidity
• potential to liquidate - use in transactions
• term to maturity - low capital risk
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Pesek and Saving -1
• Money is contrasted with debt. Debt pays interest while money does not. Debt is Inside money
• Non-interest bearing deposits are an asset to the holder but a liability to no one, while interest bearing deposits are a debt like a bond
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Pesek and Saving - 2
• Interest payment on deposits loses its property of ‘moneyness’
• Demarcation between ‘money’ and ‘debt’
• moneyness measured by (rd-rm)
• debtedness measured by rd
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Critique
• Friedman & Schwartz - transactions services have become a ‘free good’, available without cost to the holder
• ‘moneyness’ is a joint product with ‘debtedness’
• Newlyn suggests - criterion of ‘neutrality’
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Empirical measures - Constant Elasticity of Substitution
technology
1
1
21ˆ MMM
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Other empirical approaches - Laumas
n
i
k
jjtjiti MMY
0 0
21
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Divisia - 1
• di - rate of growth of the ith medium of exchange
• Di - stock of the ith medium of exchange
• marginal cost = interest income foregone = ‘user cost of money’
• wi = DiUi and Ui = Rmax - Ri
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Divisia - 2
1,2,....n i
i
ii
w
dwm
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Divisia - 3
Asset Net interest costNotes and Coin Treasury Bill RateNon-interest bearing demand deposits Treasury Bill RateInterest bearing demand deposits TBR – Demand deposit rateTime deposits TBR – Time deposit rateBuilding Society deposits TBR – BS share rateTreasury Bills TBR – TBR
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Conclusion
• The definition of money has become important for 2 reasons
• 1 Trends in financial innovation have blurred the distinction between money and non-money
• 2 measuring money is important for policy
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How can the emergence of money be explained?• Money must emerge as an optimal
exchange system from a world of barter.
• What are the specific properties of money that make its use general?
• Money is a social phenomenon - exists only in societies where exchange takes place.
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Classical View
• Money exists on efficiency grounds.
• The problem of double coincidence of wants
• The search for a trading partner involves costs. The longer the search time the lower the transaction cost.
• But the longer the search time, the higher the waiting cost
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A Dynamic Model by Niehans - Assumptions• All exchanges involve transactions costs
• lower transactions costs involved with using good xn
• The greater the frequency of exchange, the lower the transactions cost.
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ZxxExx
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Efficiency gain for n good world
1
)1(21
n
nn •Trades with barter•Trades with money
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Clower – Cash in Advance Model
• Goods buy money
• Money buys goods
• But goods do not buy goods
• How can the Classical transactions costs approach give us Clower’s result?
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Evolution of Money
• By assumption 1 – all transactions incur costs• By assumption 2 – a) x3Ex2 and b) x1Ex3 incur
lower costs than c) x1Ex2
• Therefore a) and b) will be more frequent than c)• By assumption 3 the costs of a) and b) will fall
relative to c)• In the limit c) dissappears
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Niehans – Evolution of Money
•x1
•x2
•E