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Open Economies Review

, Volume 18, Issue 2, pp 127–156

Unbundling Numéraire and Medium of Exchange through a Virtual Currency and a Shadow Exchange RateFirst Online: 03 May 2007


The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numéraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numéraire and medium of exchange-means of payment functions of money. The monetary authorities manage the exchange rate between the numéraire ‘sterling’ and the means of payment ‘drachma’. The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numéraire used in private transactions. The second is the proposition that price stability in terms of that numéraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numéraire from the currency: doing away with currency altogether—the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numérairology—the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.

KeywordsZero lower bound Cashless economy Price level determinacy Optimal inflation ©Willem H. Buiter 2004–2007.

JEL ClassificationE3 E4 E5 E6  Download fulltext PDF

Author: Willem H. Buiter


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