Sumner Answers Me on MOA: Not By Name of Course

    That's ok. Clearly he had me in mind here:

     "I can see from comments that people are very confused about the role of the medium of account.  I am going to address two misconception in the post.  First I will explain exactly the sense in which the MOA is more central to monetary economics than the medium of exchange, and which sense it is not.  Then I will explain why nominal price levels differ between countries."

     http://www.themoneyillusion.com/?p=23629&cpage=1#comment-276161

     He then goes on to look at a hypothetical case. What's necessary is that this hypothetical economy of his necessarily had a different MOA and MOE. I think one point of confusion is that most people aren't familiar with an economy that has a MOA and MOE that are different.

     Obviously it’s going to be impossible to explain the difference between a MOA and a MOE if the same asset serves both purposes.  We’d end up with an “angels on the head of a pin” debate.  Who could say why money is important if it serves both roles?  At a minimum we need a MOE than is not a MOA.  So let’s assume that a gram of gold is the MOA and a gram of silver is the MOE.  Prices (and wages) are denominated in terms of gold grams, but bills at the cash register are paid in silver coins. They have those modern cash registers with built in computers. The exchange rate is set each morning based on conditions in the gold and silver markets.  An easy way to envision this process is to assume some countries use gold and some use silver. Then the store just looks up the foreign exchange rate each morning and programs the cash register.

Now for my claim that the MOA is more “fundamental” than the MOE.  What do I mean by this?  I mean one thing and one thing only.  Here goes:

A discovery of a new process for easily turning lead into gold would have massive inflationary implications for the economy.  NGDP would soars and debtors would gain while creditors lost.

A discovery of a new process for easily turning lead into silver would reduce the nominal price of silver, but otherwise have no important implications for the economy.

That’s the sense (and the only sense) in which I think the market for the MOA is “interesting” and the market for the MOE is “uninteresting.”  Now I am quite aware of that fact that in the gold alchemy case, the value of the existing stock of (silver) MOE measured in terms of the MOA does soar, so one can also argue that the MOE is important for that reason.  I understand that argument, but simply don’t find it persuasive.  It still seems to me that gold is the dog and silver is the tail.

Now on to international price level differences.  Imagine that Austria uses grams of gold as their MOA, and Argentina uses grams of silver as their MOA.  A visitor from Austria notices that prices in Buenos Aires seem 40 times higher than in Vienna, or at least the price tags on goods in stores that would say “2 grams” in Vienna say “80 grams” in Buenos Aires.  So the “nominal price” (nominal means number) is 40 times higher in Argentina.  Real prices are fairly similar, perhaps slightly lower in Argentina.  The real ratio of price levels is also called the “real exchange rate.”

The Austrian visitor wants to know why nominal prices are 40 times higher in Buenos Aires.  Do you explain the difference with reference to:

1.  The path of nominal interest rates in each country over time.

2.  The path of real interest rates over time.

3.  The path of market interest rates minus the Wicksellian interest rate over time.

4.  Fiscal policy in each country.

5.  Minimum wage laws.

6.  The difference in MOA.

I say answer 6 is not just the right answer, it’s the only non-insane answer.  The market for the MOA determines each price level.  Period, end of story.

       [END  OF SUMNER'S QUOTE]

       

       So that's what he means. Who's buying? For my part I'm still trying to digest it. Again, I think it's hard to see because normally we see the MOA and MOE as the same thing. I guess some of those South American countries that peg their currencies to the dollar are examples of were MOA and MOE are different?

      Now so as not to give Sumner the final word-after all he couldn't even admit that I inspired that post-here is Greg:

      "I must admit to thinking that much of what Tom says seems to support Sumner contrary to what I thought yesterday when he first pointed it out, however (you knew there had to be a however!) I dont think that any of these examples begin to reflect the real world. Part of this is reducing an economy to one or two goods and thinking that exchange rates follow as simple of principles as used in the examples. Pricing really isnt as simple as it seems to be in the monetarist mind. You cant just take the amount of currency in an economy (or reserves) divide them by the number of goods and come up with average price that way. Thats such a third grade view of pricing it seems to me. It assumes that every unit of currency affects prices equally, that every unit of currency is average so to speak. Which I dont think is even remotely true. "

       "I dont as much think that the monetarist claim that inflation is always and everywhere a monetary phenomena is wrong as much as its uninteresting. Sure, introducing a currency and prices in that currency gives one a way to measure inflation that wasnt

     http://diaryofarepublicanhater.blogspot.com/2013/09/does-money-supply-cause-inflation.html?showComment=1379359918212#c3584450309665408388

    No doubt, most of what Tom has said here does seem to support the Monetarist position. The trouble with the idea that the money supply controls inflation is that it ignores the demand side of the money market.  With velocity not stable and with Y-from the equation MV=PY-subject to changes it's not nearly so simple for it to control inflation. In this recession it clearly hasn't.