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Karl Smith claims

Money does not create anything. Value stored as money is value lost; lost because it represents resources not directed towards capital.

There is some truth to what he says, but this claim is false. It’s not that investing in money doesn’t actually cause an increase in capital available, it’s that it happens to invest in not very productive way.
As I’ve said before, I think it’s useful to think of central banks as private “producers of money” (who happen to have a monopoly and aren’t motivated primarily by profit). Think of the dollars as a product built and sold by the Fed. What does the Fed use to produce dollars? They use government bonds. They take them and use them to make their promise that dollars will maintain their value credible. This isn’t the only way money can be produced, other financial assets could be used, such as a basket of stocks. Because of this, investing in money is effectively the same as investing in whatever asset the central bank uses to produce its money (albeit at a worse interest rate).
Assuming the Fed approximately expands the dollar supply when demand to hold dollars goes up (and vice versa), an increase in demand to hold money means the Fed buys whatever asset they use to produce money. This causes an increase in the demand for that asset. You might not think that an increase in demand for government bonds causes good investment on the margin, but it’s also not wasted completely. How much waste depends on: 1) the government bond supply curve 2) the elasticity of demand between government bonds and other assets 3)  how good the government is at doing productive investments relative to private investment.

That said, it’s conceptually easy to make money a poor store of value: give it a large negative interest rate. This is necessary when the asset used to produce money (normally government bonds) have a low or negative interest rate in order to avoid having the central bank subsidize people’s holding of money.

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Neal Radford and others had some  interesting responses to my question about why Hamiltonian MCMC (HMC) might be better than Langevin MCMC (MALA). The gist of it seems to be that HMC is less random-walk like and thus mixes faster and has better scaling with number of dimensions.

Radford points to a survey paper of his (link) which discusses how the momentum distribution should be adjusted for changes in the scaling of the probability distribution (p. 22). This is something which I didn’t see last time I looked at HMC, and it’s necessary for an adaptive HMC algorithm. General use sampling algorithms can benefit a lot from being adaptive.

It also discusses tuning the step-count and step-size. This sounds rather difficult and non-linear.

I am going to try to implement an adaptive HMC algorithm in my multichain_mcmc package. I’d like to make this algorithm adaptive as I’ve done for my MALA implementation, though in general, this needs to be done carefully (see Atchade and Rosenthall 2005).

I’m interested in RM-HMC as it promises automatic scale tuning and better efficiency scaling with high dimensions, but it looks like understanding it requires differential geometry, which I haven’t yet worked through. I believe it also requires 2nd derivatives (which provide scale information), which I haven’t yet figured out how to implement in an efficient and generic manner for PyMC. I suspect that would require a fork and redesign of PyMC.


Economists frequently mention the idea of an Optimal Currency Area. Krugman does it. Barry Eichengreen does it. Even monetary equilibriumist Nick Rowe does it.

As I understand it, the idea is that monetary policy helps alleviate recessions. Because different one area can be in a boom and another in a bust at the same time, it is useful to have small currency areas because then you can have more finely tuned monetary policy. This pushes the currency area that maximizes benefits (the optimal currency area) smaller. The fact that arranging trade with different currencies can be more expensive and that areas can have correlated business cycles pushes the optimal currency area bigger.

If you understand monetary economics from a monetary-equilibrium perspective, this should strike you as exceedingly odd.

First, lets make some important distinctions. Lets say a “recession” is a temporary decline in the production of market goods, without specifying it’s cause. The monetary equilibrium theorists note that an a decrease in the quantity of money relative to the demand for money can cause such a temporary decline in production and has a negative effect on welfare (explanation). Any given recession might be due to monetary disequilibrium  and/or other effects.

Monetary equilibrium theory implies that relieving monetary disequilibrium by adjusting the quantity of money to reflect changes in the demand for money is welfare enhancing because it avoids price adjustment costs as well as the costs of non-equilibrium production.

However, monetary equilibrium theory does not suggest that adjusting the quantity of money to respond to (temporary or non-temporary) changes in production for reasons other that monetary disequilibrium is welfare enhancing. If production of market goods falls because of a real productivity shock, increasing the quantity to compensate increases market good production but is welfare reducing because it adds adjustment costs and moves market good production away from it’s equilibrium level.

Thus, if Optimal Currency Areas are to make sense from a monetary disequilibrium perspective, it must be that different areas in the same currency zone can have monetary disequilibrium in the opposite directions.

The major purpose of the financial system is to move money (and other assets) from those who want them relatively less to those who want them relatively more. People who want to hold money relatively more than others borrow or sell assets and vice versa.

If the financial system is not doing this, then we already have two different currencies. Monetary policy conducted in the first area doesn’t have much of an effect on the second area and vice versa. The same bills in the first area may have a totally different price than in the second area. Making these two kinds currencies more readily distinguishable (by changing the “currency area”) would only make it harder for the whole economy to come to equilibrium.