Working Paper Series


The first two issues of the new AIER Sound Money Project Working Paper Series are available online.

Issue 1

Adaptation and Central Banking
Alexander William Salter, Texas Tech University - Rawls College of Business
William J. Luther, Kenyon College

Abstract:  What governs central bank decisions? Most considerations focus on motivations. Instead, we consider the extent to which specific behaviors have adaptive value in the context of central banking. From this perspective, poor decisions are not the product of poor motivations. They are, instead, a product of the poor institutions within which central bank decision makers operate.

Monetary Search, Proportional Transaction Costs, and the Currency Equivalent Index
Joshua R. Hendrickson, University of Mississippi

Abstract:  Determining the correct monetary aggregate to use is (or at least should be) an important consideration when taking any monetary model to the data. In this paper I present a basic monetary search model with two assets, currency and bonds. I assume that in order for assets to be used in trade, they require some verification that the asset is authentic. Some fraction of the assets are destroyed in the verification process. This suggests that when both assets circulate in equilibrium, the appropriate monetary aggregate is a linearly homogeneous function with the weights of each asset determined by its degree of liquidity. When one normalizes the degree of liquidity of currency to 1, this implies that the appropriate monetary aggregate is the Currency Equivalent Index proposed by Rotemberg, Driscoll, and Poterba (1995). One advantage of this result is that researchers can construct a monetary aggregate that is exactly applicable to the model. Finally, I show that it is only permissible to use simple sum monetary aggregates when all assets offer the same liquidity properties or the central bank conducts policy according to the Friedman Rule.

Getting Off the Ground: The Case of Bitcoin
William J. Luther, Kenyon College

Abstract:  By declaring an item legal tender or making it publicly receivable, governments might generate sufficient demand to determine the medium of exchange. How do private actors launch a new currency? There are two views in the literature. The first requires offering an item with use value to some agents distinct from its role as a medium of exchange. The second suggests agents might coordinate on an intrinsically useless item. With these views in mind, I survey the logs from the original bitcoin forum, bitcoin-list. I find that early participants in the bitcoin community understood the importance of coordination and took steps to coordinate users.

Issue 2

Political Economists or Political Economists? The Role of Political Environments in the Formation of Fed Policy Under Burns, Greenspan, and Bernanke
Alexander William Salter, Texas Tech University - Rawls College of Business
Daniel J. Smith, Sorrell College of Business, Troy University

Abstract:  How do political environments influence the behavior of economists who transition from academic and business environments to policymaking positions? And, more specifically, are an economist’s preexisting beliefs and principles congruent with their policy stances and actions once they transition into a policy role? These questions are particularly relevant when it comes to central banking because central bankers, who wield substantial economic influence, are often selected for policy roles based partly on their stated principles and beliefs. To address these questions, we analyze the writings and speeches of three economists, Arthur Burns, Alan Greenspan, and Ben Bernanke, as they transitioned to becoming chairmen of the Fed. The tension between their previously stated views and their subsequent policy stances as Fed chairmen suggest that operation within political institutions impelled them to alter their views. Our findings suggest it is important to take a realistic view of politics and the political process when discussing central banking and monetary policy.

Austrian Macroeconomics in Search of Its Uniqueness
William J. Luther, Kenyon College
J.P. McElyea, comScore, Inc.

Abstract:  We consider the essential features of an Austrian macroeconomic model and then ask whether these features are unique. We argue that the temporal aspect of the structure of production is not an essential feature. Malinvestments in any dimension (e.g., time, geography, type, etc.) can generate the predicted boom-bust cycle so long as there are costs to reallocation. However, the view that nominal shocks have long term consequences because costs are incurred to remedy past mistakes is not uniquely Austrian. In particular, we note similarities with the New Keynesian notion of hysteresis.

The Evolution of Hayek's Thought on Gold and Monetary Standards
James Caton, North Dakota State University - Department of Agribusiness and Applied Economics

Abstract:  Hayek’s evolving thought on gold and the gold standard is complex and, at times, confusing. Hayek initially supported the gold standard, critiquing those nations whose central banking policies who interpreted as being relatively loose. Early on he viewed attempts at stabilization of exchange rates and price levels to be at odds with the fundamental mechanisms of the gold standard. This put him at odds with economists such as Irving Fisher, Gustav Cassel, and Ralph Hawtrey who promoted stabilization policy as a second best option. This was due to the unwillingness of many nations to establish exchange rates that reflected the impact of money printing during World War I. Hayek viewed these nations as the culprits the gold standard’s degradation whereas nations whose monetary authorities sterilized incoming gold flows tended to receive praise from Hayek. In 1935, however, Hayek’s opinion began to change, reflecting sentiment that sounds much like the arguments of Cassel and Hawtrey. Hayek quickly abandoned the dream of reestablishing the gold standard. His later work on money provides theoretical underpinnings for systems that would promote the same sort of stability and predictability that the gold standard provided.

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William J. Luther, PhD

William J. Luther is an Assistant Professor of Economics at Kenyon College and an Adjunct Scholar with the Cato Institute’s Center for Monetary and Financial Alternatives. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Public Choice, and Quarterly Review of Economics and Finance. His popular works have appeared in The Economist, Forbes, and U.S. News & World Report. He has been cited by major media outlets, including NPR, VICE News, Al Jazeera, The Christian Science Monitor, and New Scientist.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.