Morning Must-Read: Nick Rowe: What’s Special About Monetary Coordination Failures?

I do indeed think that Nick Rowe’s thought is 100% correct here–with perhaps the proviso that other people might not like his definition of what a ‘recession’ is…

**Nick Rowe: What’s special about monetary coordination failures?: “This is a response to Brad DeLong’s and David Glasner’s good posts…

…[that] forced me to think…. Apples and bananas are perishable, but gold lasts forever. One apple tree produces 100 apples per year, regardless. One banana tree produces 100 bananas per year, regardless. Trees cannot be produced. Gold cannot be produced. Gold is the medium of account. Apples and bananas are priced in gold. Those prices may be sticky….

There are two parallel economies… a barter economy… a monetary exchange economy…. For the second shock (a change in preferences away from apples towards bananas), we get the same reduction in the volume of trade whether we are in a barter or a monetary economy. Monetary coordination failures play no role in this sort of ‘recession’. But would we call that a ‘recession’? Well, it doesn’t look like a normal recession, because there is an excess demand for bananas. For both the first and third shocks, we get a reduction in the volume of trade in a monetary economy, and none in the barter economy. Monetary coordination failures play a decisive role in these sorts of recessions, even though the third shock that caused the recession was not a monetary shock. It was simply… because agents became more patient. And these sorts of recessions do look like recessions, because there is an excess supply of both apples and bananas….

P.S.: I think this is all in Benassy, somewhere. P.P.S.: If you said ‘this is all ISLM, only ISLM with and without barter’, you would be basically right…