last35.txt - n principle central banks can retain control over the economy so long as they retain the ability to define the unit of account Imagine an

last35.txt - n principle central banks can retain control...

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n principle, central banks can retain control over the economy so long as they retain the ability to define the unit of account. Imagine an economy that was just textile manufacturing. Central banks could adjust the definition of a metre to control the business cycle. Lengthening the definition of a metre would lower the real price of textiles [how much you get for a metre ] and, provided prices were sticky, and posted as currency units per metre, boost demand. The notion of having a different unit of account from the medium of exhange surfaced in the context of solutions to the problem of the bound imposed on central bank rates by the property that cash returns zero interest. Buiter and Kimball are associated with the idea that the central bank might manage the unit of account so that the medium of exchange [cash] depreciates in value against it, thus yielding a negative interest rate, and permitting negative rates to emerge on market instruments.
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  • Fall '15
  • DR. Aimal

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