New Monetarism in Continuous Time: Methods and Applications*

We develop a New Monetarist model in continuous time where agents trade continuously in competitive markets and infrequently in pairwise meetings. Agents can produce and consume both in flows over time intervals and in discrete quantities at points in time. We detail the methodology to solve individual optimisation problems and characterise the full set of perfect foresight equilibria. We illustrate the role of continuous time and the tractability of our approach with three applications related to monetary policy: (i) forward guidance with policy announcements; (ii) aggregate demand management and firm entry; (iii) open market operations with partially liquid assets.

The Effects of Monetary Policy Announcements

The effects of news (i.e., information innovations) are studied in dynamic general equilibrium models where liquidity matters. As a leading example, news can be announcements about monetary policy directions. In three standard theoretical environments—an overlapping generations model of fiat currency, a new monetarist model accommodating multiple payment methods, and a model of unsecured credit—transition paths are constructed between an announcement and the date at which events are realized. Although the economics is different, in each case, news about monetary policy can induce volatility in financial and other markets, with transitions displaying booms, crashes, and cycles in prices, quantities, and welfare. This is not the same as volatility based on self-fulfilling prophecies (e.g., cyclic or sunspot equilibria) studied elsewhere. Instead, the focus is on the unique equilibrium that is stationary when parameters are constant but still delivers complicated dynamics in simple environments due to information and liquidity effects. This is true even for classically-neutral policy changes. The induced volatility can be bad or good for welfare, but using policy to exploit this in practice seems difficult because outcomes are very sensitive to timing and parameters. The approach can be extended to include news of real factors, as seen in examples.

On Financial Accounting Measurement: A Reconsideration Of SFAC 5 By The FASB Is Needed

<span>This paper attempts to reinforce by means of social theory the procedure and property (attribute) of financial accounting measurement advanced by Salvary (1985, 1989, 1992). The procedure entails estimating the amount of cash flows derivable form existing investment projects; and the measurement property (attribute) is identified as recoverable cost. The cash-in and cash-out principle establishes financial capital maintenance as the appropriate capital maintenance concept to be followed in the measurement of periodic income. An analogy between a bank savings account and an equity security is used to identify the measurement property (attribute) and validate the additivity of financial accounting numbers. Problems with the monetarist model were used to demonstrate the appropriateness (stability) of the measurement scale (monetary unit). The logical analysis developed in this paper makes a compelling case for a reconsideration of Statement of Financial Accounting Concept No. 5 by the FASB.</span>