Thursday, November 1, 2012

My synopsis of the MOE vs MOA debate

Bill Woolsey, Scott Sumner (here and here), and Nick Rowe and a debate that was fun to follow. It seems to me that they more or less end up on the same page. Here's my rough synopsis.

The argument seems to have started as a semantic battle over the definition of the word money. Scott holds that money is the medium of account (MOA), Nick and Bill say it's the medium of exchange (MOE). I say ignore this part of the conflict. Pretend the word money doesn't exist. Money. The semantics detract from the main points of the debate which, to me at least, is about how price rigidity, MOA, and MOE interact to cause recessions.

Scott's point centres around the following example. The MOA in Zimbabwe is gold. This means that the sticker prices of goods and services are set in gold ounces. But Zimbabweans pay for these things using a central bank issued Zim$. Shopkeepers keep a sign at the till showing the current exchange rate between an ounce of gold and Zim$ so people who have bought x ounces worth of goods know how many Zim$ to pay. Say that the demand for gold in China explodes. Scott says that shopkeepers will lower their gold sticker prices in response. If some of those prices are rigid, you can get a recession. It would seem here that shocks to the MOA are doing all the heavy pulling in creating this recession, which is what Scott is trying to show.

The point of contention seems to be this: sure, a fall in sticker prices of things would cause the recession, but why do sticker prices fall in the first place?

If one starts by assuming a Walrasian market then sticker prices fall instantaneously. This adjustment is ensured by the omniscient "auctioneer" who announces prices and clears trades on behalf of all market participants. The change in Chinese preferences for gold is immediately conveyed to Zimbabwean shopkeepers, the appropriate trades determined, and the market opens for business at these new prices and distributions.

But in the absence of a centralized system, how do the changes in Chinese preferences get conveyed to Zimbabwean shopkeepers and trades get cleared? Economies have evolved complex patterns of highly tradeable MOEs that solve these problems. What causes sticker prices to fall goes like this (I'm cribbing this from Bill's post). The increase in the demand for gold in China causes the yuan price of gold to rise. Given the yuan/Zim$ exchange rate, Zimbabwean shopkeepers can infer that the Zim$ has fallen relative to gold. The signs at their tills are updated to show that people must pay more of the MOE to buy the same quantity of stuff.

As a result, the Zim$ that Zimbabweans held in their wallets can't buy as much as before. In order to rebuild their purchasing power they hold off on spending. Shopkeepers have to reduce the sticker prices of their goods in order to attract purchases. Again, if some price are rigid you can get a recession from this. Thus not just the MOA, but various MOEs, the yuan and the Zim$, do some heavy pulling too in creating the recession.

The point of all this is that Nick, Scott, and Bill probably agree on whether the MOA does all the work, or the MOA and MOE combine to do the work in creating the recession, depending on what assumptions one starts with.

Using this model, it's interesting to imagine what would happen if the demand for Zim$ suddenly exploded. Would it cause a recession, given that some sticker prices are rigid? To satisfy the new demand for the MOE, the price of the Zim$ has to rise. Shopkeepers quickly update the signs at their till with the new exchange rate. Sticker prices in the aisles don't need to change at all, so there is no recession. Thus within the framework of the Zimbabwe model, changes in MOE demand are insufficient to cause recessions - a change in the MOA is necessary for the MOE to have recessionary effects. Now if certain shopkeepers who sell certain unique goods are prevented by edict from updating their signs (at the till) fast enough, then it seems to me that you could once again have a recession. But this is because price rigidity has been expanded to include not only sticker prices (the MOA) but till prices (the MOE). Perhaps the important thing out of all this debate is that MOE vs MOA is not the pivotal axis. Rather, what ever you make rigid becomes the pivot.

As for the definition of money, that's probably worth ignoring for now. Money is just one of those words, much like bubble, that probably needs to be thrown out of the economic vocabulary.

PS: Bill Woolsey has a very useful comment here about the definitions of medium of account, unit of account, and redemption media.


  1. No, the main point that I had been trying to get into Scott's head (and am still failing at) is that there are no demand-side recessions without the MoE. Money is actually a "real" thing, not a nominal one: it's job is to reduce transactions costs. Costs that are so great, that, when the flow of money dissipates, we get recessions. Monetary policy to combat recessions is all about making the medium of exchange less scarce.

    So when Scott made yet another comment about monetary policy being all about the medium of account last week, saying that currency was the money that ultimately mattered because it was the MoA (as opposed to being part of the base which is the foundation of all media of exchange) I left the first comment, retorting that recessions were really about the medium of exchange. And that's where it started...

  2. Hi Saturos, I figured I'd wait before answering in case you leave five other posts ;)

    I took these two comments (here and here) that Nick and Scott had reached *some* sort of resolution. I realize you were one of those who got the debate going, but you left a lot of different comments so I lost track. Maybe you can get Scott to let your write a guest post where you can collect all your points in one spot.

    I'd be interested what you think about my third-to-last paragraph. It shows that, if for some reason or other, there is an excess demand for the MOE and rigid sticker prices, then you don't get a recession.

    Furthermore, if you did have a Zimbabwe style recession caused by the interaction of the MOA and MOE and rigid sticker prices, you couldn't get out of it by making the MOE less scarce. To solve the recession you need sticker prices to rise, since those are the troublesome rigid prices. But printing more Zim$ won't change sticker prices, it'll only change the price at the till. So making the MOE less scarce doesn't combat the recession.

    Those are just rough thoughts. Some of these ideas are new to me. I'm willing to be dissuaded.

  3. Hello JP

    I wanted to ask you which authors have developed a monetary theory along the lines of this debate (studying each of those characteristics of money). In other words, who are the intellectual parents of that debate? Who do you base your mental framework on?

    I'd really appreciate any pointers! I'm struggling to understand these topics

    1. JCE,

      I must confess that my thinking on these issues is still evolving. Part of the difficulty of following the debate about MOE, UOA, and MOA is that different people use different definitions for unit-of-account and medium-of-account. In regards to the latter, I've written two posts that try to hone in on the meaning of MOA.

      The group of thinkers who were most interested in splitting up the various functions of money created a field called "New Monetary Economics", or NME. These people include Tyler Cowen, Bill Woolsey, Yeager, Randy Krozner, and Greenfield. Search google for BFH (Black Hall Fama).

  4. This is such a good post.