Monday, March 21, 2011

Alex Tabarrok on the Implications of Excess Money Demand

Nick Rowe recently made the case that excess money demand is the fundamental reasons behind the Keynesian and Monetarist theories of recession.  Alex Tabarrok responds that if Nick is correct there should be a rise in barter transactions and the use of alternative currencies.  He shows that there was extensive use of both during the Great Depression.  Tabarrok has a harder time finding evidence of these occurring during the recent recession. Some commentators provide anecdotal evidence that barter trade has risen.  Whether it has or hasn't, the bigger point is that barter and the use of alternative money assets is a way to mitigate the impact of money demand shocks.  Even if the data were to show these mitigaters are not being used, such a finding could simply mean that the recovery will be prolonged rather than being evidence against Nick's hypothesis.  After all, there is compelling evidence of a serious excess money demand problem in the U.S. economy.

P.S. Some places in the Eurozone are using alternative currencies.

6 comments:

  1. My favorite study of the counter-cyclical nature of complementary currencies is James Stodder's work analyzing the macroeconomic effects of the Swiss WIR system, which confirm's Nick's reading of Keynesianism and Monetarism:

    http://www.lietaer.com/images/Stodder_WIR_paper2009.pdf

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  2. Really? You want us to believe that the large rise in barter transactions in Germany in 1922-23 was the result of too little money in the economy....
    Isn't that a logical implication of your narrative?

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  3. HI:
    Well… I've been trying to figure out how the rise of store debit cards, as Target is using, fit into the monetary equation. I noticed the other day at a Shell station that they are also offering this service.

    I've been thinking that this is a way of getting around a money shortage but can't quite figure out how.

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  4. Worth thinking about:

    The period of Kuhnian normal science is dead in macroeconomics:

    http://hayekcenter.org/?p=4501

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  5. ecb,

    Actually, yes. There wasn't enough money in 1922-23 Germany -- there were lots of Marks, but they had stopped functioning as money for many purposes. Otherwise why would would there a large rise in barter transactions? That's the "paradox" of hyperinflations -- are they an increase or a decrease in the money supply? It seems obvious when we see pictures of Marks littering the streets and wheelbarrows full of cash, but one of the defining properties of money is its role as a medium of exchange. Are we really looking at money in those pictures, or just little pieces of paper?

    An object is money because what people believe about it, and it ceases to be money as soon as enough people no longer believe. It is a fine example of a social construct, if there ever was one.

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  6. Really? You want us to believe that the large rise in barter transactions in Germany in 1922-23 was the result of too little money in the economy....
    Isn't that a logical implication of your narrative?

    ReplyDelete