Thursday, 21 September 2017

Author Archives Alexander W. Salter

Money in Illiberalism

July 11, 2017
in Blog

A liberal society is governed by the principles of private property and freedom of contract, under the aegis of a nondiscriminatory rule of law.  In such a society, money enables economic actors to coordinate their activities.  Money allows producers and consumers to find common ground, as profit-and-loss accounting enables producers to compare various lines of […]

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Money in Liberalism

June 19, 2017
in Blog

One feature of a liberal society is that its institutions, and especially its formal institutions with coercive backing, are bound by a nondiscriminatory rule of law, and work to protect the sanctity of property and contract for all persons.  In such a society, the general laws of property, contract, torts, etc. govern the provision of […]

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The Institutional Character of Money

May 31, 2017
in Blog

On the one hand, money is the language of commerce; money prices are the very medium of economic experience. On the other hand, there seems to be a deeper reality behind the monetary economy. In this scenario, real resource constraints, as described by Walrasian general equilibrium or Misesian evenly rotating economy, ultimately place bounds on […]

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Is Money Really a Veil?

May 11, 2017
in Blog

My previous post was a crash course on the role of prices in a market economy.  Importantly, prices are money prices.  The vast majority of the time, producers accept the medium of exchange as payment for goods and services, and post prices denominated in the medium of exchange, which also makes the medium of exchange […]

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Let’s get back to basics. What is a price?

March 30, 2017
in Blog

A price is an exchange ratio: you must give up a certain amount of one good in order to get another good.  Barter economies have prices, which are expressed as ratios of the goods themselves.  In money-using economies, prices are expressed in the economy’s medium of exchange, which frequently makes the medium of exchange the […]

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Nominal is Real; Real is Artificial

March 13, 2017
in Blog

A basic tenet of macroeconomics and monetary economics is the difference between nominal variables and real variables. Nominal variables are expressed in current market prices. Real variables are adjusted to reflect the changing purchasing power of money over time (inflation or deflation). For example, the nominal interest rate is the rate that currently prevails in […]

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What the Fed Can’t Do

March 2, 2017
in Blog

The American economy is still in the doldrums.  It is growing and creating jobs at a snail’s pace compared to the years before the financial crisis.  There are several reasons for this.  But the actions of the Federal Reserve bear significant blame.  For now, the public’s anger at the Fed’s questionable activities during and after […]

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The price of time and the price of money

November 2, 2016
in Blog

When discussing the market for money balances, many reputable macroeconomics and money and banking textbooks say that the price of money is the interest rate.  This ‘liquidity preference’ theory is misguided.  The kernel of truth therein is that, in holding higher money balances, an individual is forsaking earning a nominal rate of return on assets […]

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Don’t blame central bankers for persistently low interest rates

August 23, 2016
in Blog

Many who are supportive of free markets blame central banks for the low interest rates that have prevailed since the end of the 2007-8 financial crisis.  This is a mistake. Central banks can, in the short run and all else being equal, lower market interest rates through expansionary open market operations.  But this ‘liquidity effect’ […]

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Against monetary democracy

July 13, 2016
in Blog

Thanks in part to high-profile and controversial public policy since the financial crisis, and to a lesser extent politicians such as Ron and Rand Paul, the monetary and financial arrangements of the United States have become a surprising source of public indignation.  Monetary and financial policy, previously a subject that would put almost all voters […]

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Polycentric banking and financial resilience

May 4, 2016
in Blog

In my previous post, I argued that the institutions underlying laissez-faire banking systems, as approximated by historical cases in Scotland, Canada, and Sweden (among others) provided market actors the incentives and information necessary to maintain aggregate demand stability.  This also means a laissez-faire banking system does a good job of maintaining short-run macroeconomic stability, although this […]

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Polycentric banking?

April 11, 2016
in Blog

One of the most interesting areas within the analysis of governance regimes is the literature on polycentricity.  Polycentric governance systems are characterized by fractured and concurrent authority.  In other words, in polycentric systems, power is decentralized, and there is no final authority that possesses what is typically thought of as sovereignty—the right to make final decisions, beyond which there is no […]

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Austrian business cycle theory and optimal resource reallocation

March 30, 2016
in Blog

Last time, I argued that the two chief components of Austrian business cycle theory (ABCT)—inconsistent consumption and investment plans engendered by faulty interest rate signals, and reallocation of resources during the bust—could be understood even within a tight framework of rational expectations and ‘equilibrium always’ modeling conventions. I will now tackle the second of these […]

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Austrian business cycle theory and rational expectations

February 24, 2016
in Blog

Although Austrian business cycle theory (ABCT) is a powerful price-theoretic explanation for monetary-induced booms and busts, it is not without critics.  Indeed, many find ABCT implausible for two reasons.  The first is that it seems to rely on individuals making systematic and economy-wide errors.  This seems inconsistent with rational decision making, especially the theory of rational expectations.  The second […]

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Austrian business cycle theory and monetary equilibrium

February 3, 2016
in Blog

As Steve Horwitz has shown, the insights of Austrian macroeconomics and monetary disequilibrium theory can be combined to yield a powerful paradigm for understanding how monetary policy affects the economy.  Crucial to this synthesis is the neutrality of money.  Remember that money is neutral when it facilitates exchange, but does not distort the terms of exchange.  […]

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What Austrian business cycle theory does not predict

January 13, 2016
in Blog

Many economists who have broadly free market views on money are sympathetic to the Austrian theory of the business cycle (ABCT).  As developed in the early part of the 20th century by Ludwig von Mises and Friedrich Hayek, and further refined in recent years by Steven Horwitz and Roger Garrison, ABCT links the business cycle to […]

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Monetary predictability

December 14, 2015
in Blog

Supposing we decide a formal monetary constitution is a good idea, what properties should it have?  What essential features of money must a monetary constitution safeguard?  Again referencing James Buchanan, we know that money has properties that render it similar to weights and measures.  Money is a yardstick; if the definition or value of money is […]

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Do we need a distinct monetary constitution?

November 9, 2015
in Blog

Having a monetary constitution is important. But do we need a distinct monetary constitution? Steven Horwitz says no. Agreeing with James Buchanan that a monetary constitution is desirable, Horwitz argues that a general constitution that protects private property rights, provides for contract enforcement, and maintains the rule of law is also a monetary constitution, even […]

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The drawback of a monetary constitution

October 14, 2015
in Blog

My previous posts have been fairly positive towards the idea of a monetary constitution: a binding rule on monetary policy makers that these policy makers cannot change.  A monetary constitution is particularly appealing for those who desire monetary affairs to be brought under the rule of law.  But there is one problem with monetary constitutions that […]

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The nature of central banking and the importance of a monetary constitution

September 28, 2015
in Blog

In my previous posts, I argued that it is imperative to secure a monetary policy regime that adheres to the rule of law.  In this post, I will extend the argument further: truly lawful money requires a monetary constitution of some kind. There is actually considerable sympathy to rules-based monetary policy contemporary macroeconomics.  However, not all monetary […]

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Money and the rule of law, continued

September 3, 2015
in Blog

In my last post, I argued that monetary regimes should be judged not just on macroeconomic grounds, but also on whether they adhere to the rule of law.  In this post, I want to extend that argument: the rule of law should be the primary consideration for judging monetary regimes. Macroeconomic issues matter, but should be viewed as […]

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Money and the rule of law

August 7, 2015
in Blog

When people think of monetary economics, they tend to do so in the context of macroeconomics. The questions that are most often addressed have to do with the effects of particular monetary institutions or policies towards output, employment, inflation and other macro variables of interest. There is nothing wrong with this. In fact, understanding the macroeconomic effects […]

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On interest rate targeting

July 6, 2015
in Blog

Previously I discussed inflation targeting as a popular rule for governing central bank behavior. In this post I will discuss interest rate targeting, another popular recommendation that has its own costs and benefits. The most prominent interest rate rule is the Taylor rule, devised by John Taylor of Stanford University. Taylor originally proposed the rule […]

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Inflation targeting as a monetary policy rule

June 22, 2015
in Blog

Among economists who agree that monetary policy should be conducted according to predictable rules, perhaps no proposed rule enjoys greater support than inflation targeting.  In brief, inflation targeting means the central bank conducts monetary policy such that it comes as close as possible to creating (or rather, setting the macroeconomic conditions for markets to create) […]

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What does monetary policy have to do with interest rates?

May 20, 2015
in Blog

Very little, really.  Despite what we teach our students in Principles classes, and in some more advanced classes on Macroeconomics and Money & Banking, the relationship between changes in the stance of monetary policy and changes in interest rates are ambiguous. The standard story, having its roots in the interest rate theories of old Keynesianism, […]

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Monetary equilibrium and monetary institutions

May 6, 2015
in Blog

I am very excited to join the Sound Money Project and contribute to the understanding of monetary systems that are conducive to economic stability.  To begin, I would like to describe how I think about monetary theory at a general level, and how this informs the study and analysis of monetary institutions. Money is incredibly […]

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