2024 Klein Lecture - Monies, Transactions, and Inflation: Part 1

Modern macroeconomics ignores the recent proliferation of new monies. We show in our model that new monies like credit cards or stable coins or crypto currencies or helicopter money can cause a huge increase in prices, like the 1970s inflation when credit cards emerged in full use. These monies are not perfect substitutes, so shrinking conventional money supply to compensate for the growth of new monies comes at a welfare cost. Price levels are determined by money chasing goods, measured by the separate quantities of each kind of money and the scale of individual transactions. In Part I we introduce a one period version of our model in which we concentrate on the transactions role of monies. We show how fiat wealth (net of taxes) can be positive if there are enough gains to trade. Monies that raise fiat wealth (such as helicopter money) cause more inflation—eventually even hyperinflation—by increasing the interest rate, which reduces transactions. In contrast, credit cards (and central bank purchases of bonds) also cause inflation, but they enhance transactions and welfare. In Part II we present a multiperiod version in which the store-of-value role of money, and expectations about future policy, also affect inflation.