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When economists have models containing “M”, aka ‘money,’ they are not referring to the medium of exchange. Rather M is the medium of account. Here’s a very simple model:

NGDP = M*v(i, z) where v is a function of the nominal interest rate (i) and the share of transactions using money (z).

In that model we are trying to explain changes in a nominal aggregate that is measured in terms of some medium of account, like dollars. But not Bitcoins—at least not yet.

Monetary models basically have two purposes; explaining nominal aggregates like P and NGDP, and explaining business cycles. Nominal GDP shocks create business cycles because nominal hourly wages are very sticky. But wages are denominated in dollars, not Bitcoins. Hence wages are sticky in terms of dollars, not Bitcoins.

As long as wages and NGDP are denominated in terms of dollars, then the “money” in macro models should be dollars, even if Bitcoins become a large share of the media of exchange.

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This entry was posted on March 04th, 2013 and is filed under Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



