Monday, October 5, 2015

Coins as a monetary aggregate

Scott Sumner muses that coins might be a good monetary aggregate to look at for what we call "money". We don't have FRED data for the US, but data for Japan is readily available here. Here is the [YoY] growth rate of the supply of coins (the vertical lines indicate recessions in Japan):

Multiply by 100 to get percent. Using coins gets the 1991-2, 1998 and 2008-9 recessions rights, but has a false positive for 1994 and 2005 and misses the 2001 recession.

It doesn't do very well in this model, either:

The better graph uses currency = notes + coins.


  1. At this point it degenerated into a farce. One commenter there shows Sumner's model is improved if we use the number, not the value of coins. Sumner has really no idea how the banking system works, the monetary base doesn't cause anything.

    1. Hi Peter,

      I think everyone involved thought it was more of an entertaining thought experiment than a real model. Once you've gone from value to number of coins I agree it becomes pretty silly.

      But I disagree that the monetary base doesn't cause anything and a different thought experiment shows how it works. Let's say I give you 900 € (and you live in the EU). You'd do one of three things: nothing, deposit some of it in your bank (which gets lent out), or spend part of it. Since we are all complicated individuals with our own motivations I can't say exactly what you'd do. The least informative prior says you'd spend 300 €, put 300 € in the bank and let 300 € sit in your wallet. On average, you'd do something with it. Very few people would just let the 900 € sit under their mattress.

      Did giving you 900 € cause you to deposit the money or spend it? Well, that's philosophical. Personally, I like to say the 900 € opened up your consumption state space and you took your own path through it ... and on average people do wander through part of it.

  2. There's the rub. Don't we need to figure out how to give people money the first. Monetary policy doesn't give money to anyone. If your income went up or you got a tax break or UI then we can start talking about what you'd do with it , monetary policy didn't do any of those things directly. I fail to see how this would work in practice. It's obvious that as prices increase people would need to carry more cash to complete the same number of transactions. I wouldn't think just carrying more money in my pocket would make prices go up except maybe hot potatoes? fairies?

    1. I agree that who gets the money and what form it's in will have a bearing on the efficiency of the mechanism. If I deposit 900 € in your bank account, you have a different set of choices than if I gave you 900 € in cash. If I give you 900 € of bank reserves (not sure how I could do that without you being a bank, but for the sake of argument) you'd have still other choices.

      However, if one of those choices involves spending it on currently produced goods and services and that 900 € was newly printed, then there would be fewer goods and services to go around leading to either increased production by a few units (general equilibrium) or increased prices by a tiny fraction on average (partial equilibrium) ... supply and demand.

      Or nothing could happen in which case you have non-ideal information transfer/recession.

  3. How many wealth managers mailed cash and coins to their clients because of qe?

    Was anyone relieved that because the fed started buying treasuries there was finally a market for them?I think your remark about MBS purchases captures why it was important/different.

    I made a mistake when I typed hot potatoes and fairies for snarkiness (aimed at monetarism)

    I almost added a paragraph nearly identical to your second to last one to clarify that my issue with monetarism is in practice not theory. Confusing helicopter drops with asset swaps.

    2% inflation target seems like like warm potatoes. But we're talking about money burning a hole in my pocket or not. Which I think is different than hot potato.

    Would it be fair as a GROSS simplification of what your up to suggest that an alternative title for information transfer economics could be "path of least resistance economics" (would need to include something about price/money as coordinator but, that's why I wrote GROSS and put it in all caps).

    I apologize for "path of least resistance" as description if its way off base.

    1. Actually, the gross simplification would be one step more abstract. Instead of a "path of least resistance", the information transfer framework asks "is there a path at all?" (Can information be transferred through the market from one macro aggregate to another?)

      The path of least resistance would be the most likely (maximum entropy) path when considering many possible paths.


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