bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

DEFINITIONS OF MONEY IN ECONOMICS 29
changes in P tT (this is the basis of the Quantity Theory of Money which we
meet again in Section 4.2).
We can think of the task of the monetary authorities in measuring and
attempting to control the money supply in one of three ways:
• they could attempt to distinguish between those deposits that are held
only to allow exchange to take place and deposits held for savings purposes;
• they could attempt to identify a set of assets, changes in the quantity of
which would, in the absence of shocks to Vt, induce predictable changes
in PtT. • they could attempt to identify a set of assets, the size of which is
unrelated to V t.
A common approach to distinguishing between deposits held to allow
exchange to occur and savings deposits was to limit the definition of
‘money’ to non-interest-bearing deposits, on the grounds that people would
only willingly forgo interest on those deposits that they required to carry out
their planned transactions.
We need to acknowledge at this point a potential problem with the use of
T (total transactions). When Irving Fisher published his well-known statement
of the Quantity Theory of Money (Fisher, 1911), he distinguished
between those transactions related to national income (Y) and those related
to financial transactions (F). Thus:
MV = P yY + P f F ...2.2
where Y and F are income and financial transactions respectively. Yet,
when economists today refer to velocity, they are almost always referring to
income velocity, that is to say GDP/M, or PY/M rather than PT/M.
Furthermore, income velocity is reported in official statistics. Although a
number of other reasons have been put forward, perhaps the principal explanation
of this is that a measure of total transactions in the economy is not
readily available.
Pause for thought 2.1:
Why is it so difficult to measure the value of all transactions in an economy,
including financial transactions and the exchange of second-hand goods? Can
you think of ways in which you might try to obtain such a measure?