Wanted: Velocity of Money: Paradigm not a Variable
David Hume or his disciples might well have
named “quantity equation” as “quantity identity.” As predicted by Confucius (孔夫子, Kǔng Fū-dž
in pinyin), the misnomer, seemingly trivial, has misled people particularly in
Cambridge and let them suggest the “Cambridge Quantity equation” as keystone of
macroeconomics (e.g. John R. Hicks, 1937).
As
a matter of semantics, after all, an “equation” can represent a theory, but an “identity”
cannot until the time of crossing the River.
Frame of Reference. In
mathematics jargon, an “equation” consists
of multiple “variables.” The “velocity
of money” could be called “a variable” if in the “quantity equation,” that is, M∙V= P∙Y (as
opposed to M∙V≡ P∙Y,
an accounting identity).
Unfortunately,
there exogenous to imagination is no such thing as “velocity” of money. The
rest of us have yet to see money or “liquidity” running on a high way or along
any other line of race. It is merely a factor in frame of thoughts and can
at best represent the “turnover per annum”
as a rate (T-1 in dimension).
More
specifically, David Hume and others think that the concept is of some use in
predicting inflation when the economic environment is more or less static: Ceteris paribus or with most everything
else stationary, we will find, “The larger the (average) money balance the
higher the inflation,” or P ↑in response to M ↑
in the given year of national income
accounting. This approach crosses over two different scenarios (L-1
in dimension).
An
overarching presupposition of all the narratives: The money is namable; or,
most everyone is clear how much is the aggregate quantity of money. With M ambiguous, on the contrary, V can in no way be imaginable far from
being “constant.”
Name
the velocity before supposing its character!
A Question.
Why in the first place was macroeconomics conceived? The root reason might be the
Great Depression, which was caused by an equally-great financial meltdown (e.g.
Ben Bernanke).
The
proximate reason was that certain thought leaders wanted to come up with cures
for business cycles aka economic fluctuations. First of all, money cannot be a “veil”
because we are all dead in the long run. On the contrary, money matters and
that greatly so. When money is “unanimously preferred,” for example, the macro-economy
based on “the Market Value of All Final Goods and Services” (Gregory Mankiw) shall
stall. No money out there, no medium of exchange on the run, no trade in the
market(s), and finally no GDP!
Come
to Cambridge, mutates mutandis was reconceived
as ceteris paribus. To say the
minimum, variables and constants changed roles: the quantity of money is
variable while the velocity “constant” and dismissible. Then and there, the “quantity
identity” was reborn as a child christened “the Cambridge Quantity equation.”
A
trivial question: How “variable” could be the “liquidity,” if unanimously
preferred by the private sector or if controlled by the central bank?
The Cures.
Sometimes the cure is worse than the disease. Other times, the cure helps the
disease chronic. Negligence of the velocity, particularly in the cyclical short
run, can lead us to a dead end, if not to the River.
We
look for the velocity of money as a critical mass (画龙点睛, huàlóngdiǎnjīng
in pinyin) in the macroeconomic
paradigm.
|
1)
New Haven vs. Cambridge 2)
Conveniently in Cambridge 3)
Reasons for money hoarding 4)
More fickle than money 5)
Inflation before stability |
6)
Inflation a matter of kind 7)
Sticky prices, flexible price level 8)
The real framework of thought 9)
The correct ways of disinflation 10)
Insensible tradeoffs: Phillips curve
and Cambridge Quantity equation |
Wanted:
Mrs.
Velocity de la Money
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