When Monetary Representation Becomes Fragile

Can monetary policy retain a stable and relatively constant level (near to mid term), given the uncertainties of the pandemic? Since this most recent recession began with extensive supply side disruptions - subsequently impacting aggregate demand - no one knows for certain. However, even though the Fed has yet to adopt NGDPLT, the Mercatus center has created a new measure called the NGDP Gap, which among other things will highlight nominal income stability. This new measure could help people determine how closely the Fed adheres to representing economic activity without undue gaps or changes in valuation.

Nevertheless, overall monetary representation may remain somewhat fragile in the years ahead, even if central bankers adhere to an optimal course. Only consider how prior to the pandemic, monetary policy became compromised by structurally uneven equilibrium coordination between tradable and non tradable sectors. The latter is more prone to price making than the former. Plus, they represent human capital in highly different ways which have yet to be fully accounted for. By way of example, the marginal revolution which is so important to tradable sector activity, is less a determinant of economic outcomes in non tradable sector activity. Ultimately, better defined economic roles are needed for all human capital, before non tradable sector activity ceases to detract from equilibrium balance and optimal monetary representation.

Extensive price making in non tradable sectors tends to compromise aggregate output, which in turn makes it difficult to align aggregate output with a stable nominal income trajectory. Since price taking involves better coordination of all resource capacity, it has proven simpler for monetary policy to represent tradable sector output, during long periods of relative tradable sector dominance. However, once general equilibrium is dominated by price making outcomes, assets tend to experience additional pressure as well. As asset values rise, some become convinced that monetary policy is too "loose", even though this actually may not be the case. Rather, when full economic participation is limited to subsets of given populations, the consequent output reductions impose higher prices elsewhere, thus making it appear to some that monetary policy has become too expansionary. In short, monetary policy may struggle to contribute to optimal aggregate output, once price making becomes dominant in general equilibrium.

Fortunately, this sectoral imbalance could be addressed through a broader interpretation of human potential in the marketplace - one which includes more price taking for time value in equilibrium context. By bringing greater economic value to all human capital potential, we could also do much to stabilize monetary representation. A better representation of aggregate time value, would make it simpler for a level nominal target to serve as a reliable snapshot or historical memory of economic value. Toward this end, the adaptation of time use potential as a valid economic unit, might help to restore money to its vital role in defined economic wealth and value.

Further, time use as an expression of economic value, creates more space for a wide range of maintenance functions which otherwise become limited in mature economies, as budgets are strained by competing objectives. Time arbitrage would not only preserve time value for society as a whole, it could contribute to maintenance activities involving a broad spectrum of knowledge and skill, so as to better preserve already existing wealth.