What Is Currency Overlay?

Monetary economy refers to the highest stage of the development of the commodity economy. It refers to the close integration of currency and commodity production and the corresponding exchange, distribution, and consumption in an economy and society, forming a highly developed commodity economy. It has four basic characteristics: (1) The degree of commercialization of products is very high, that is, members of society are produced for the market, almost all products are sold on the market, and the required items are also purchased on the market. (2) the degree of monetization of commodities is high, that is, most of the commodity exchanges use currency as the medium, and neither barter or sell on credit; and (3) socio-economic life is highly dependent on currency Currency is not only circulating in the field of commodity exchange, but also widely and increasingly serving the field of non-commodity exchange; (4) people have a strong sense of currency. The commodity economy of the developed capitalist countries is already a monetary economy, and the commodity economy of China's primary stage of socialism is developing towards a monetary economy. ^[1]

Monetary economy

Monetary economy is an economic form from the development of capitalism to global monopolies; it takes market exchange as the direct purpose, including the economic form of stock and securities circulation and currency exchange. After the establishment of the stock, securities, and foreign exchange currency markets, fund capital was generated, and fund oligarchs and oligopoly funds and their monopolies were formed within the fund capital. Thus, a monetary economy was formed as a new economic form. ^[2]

A) Regulations

Western scholars' reform thinking is that since different currency components are incomplete substitutes, they can use their difference indicators to adjust the amount of money. The difference indicator chosen by most programs is the rate of return on monetary assets or the opportunity cost of holding money. The following is a brief introduction to the nine reform programs (methods).

(1850s-70s). Since Gurley and Show (1955) put forward the hypothesis that liquid financial assets are a substitute for currency and may affect monetary policy, many scholars have turned their attention to the study of quasi-currency and the elasticity of substitution of money. The general method of this solution is: establish a narrow money demand function, and use the return rate and income of various quasi-money as explanatory variables to return to find the substitution elasticity of money demand. Feige and Pearce (1977) summarize relevant research literature. The average value of the elasticity of substitution obtained by 16 independent studies is: time deposit-0.13, savings deposit-0.31, treasury bill-0.06, and income 0.57. There were no clear recommendations on how to adjust monetary indicators.

2. Utility function scheme (Chetty, 1969). This is a unique method in alternative elasticity research, based on the utility function. It assumes that holders of monetary assets that seek to maximize utility allocate their total monetary assets between money and quasi-currency, with a currency yield of zero and a price of 1, and the quasi-currency's return over the period becomes its discount. Rate, and determines the slope of the budget line of monetary asset holders. Since there are actually more than one kind of quasi money, this method needs to determine the partial substitution elasticity between currency and quasi money assets, and then calculate the total amount of money weighted by the partial substitution elasticity value. The approximate empirical formula for monetary aggregates established by Chetty is (based on US data from 1945-1966):

In the formula, M ' a is an adjusted currency aggregate index, M is a narrow currency, T is a time deposit, MS is a savings deposit of a mutual savings bank, and SL is a savings deposit of a savings loan association. Chetty's empirical analysis shows that M'a 's income rate is much more stable than the unadjusted index. The GNP forecast is consistent with the unadjusted index, but the adjusted standard deviation of the index increases. Bisignano (1974) extended this method to the substitution of real money with other real financial assets, real durable goods, and considered tax, depreciation and capital gains. His empirical analysis proves that Chetty and other research reports greatly overestimate the elasticity of quasi currency substitution. After the 1970s, the turbulence of financial markets and the outbreak of financial innovations made the concept of quasi money obscure, and the calculation of the elasticity of substitution lost stability and feasibility. As a result, options 1 and 2 lost practical significance. ^[4]

3. Weak Separability Approach (1980-). In the 1880s, some scholars began to study the necessary conditions of currency aggregation (Barnett, 1980; Varian, 1982). They believe that economic aggregation must meet the principle of weak differentiation, and the marginal substitution rate of each commodity in the aggregate does not affect each other. If this principle is satisfied, the consumer utility function U (m1, ..., mn, q1, ..., qm) can be rewritten as U [u (m1, ..., mn), q1, ..., qm]. The partial utility function u (m1, ..., mn) can independently seek to maximize under the given conditions of total monetary expenditure. Varian (1983), Swofford, and Whitney (1987) have all found that some monetary assets (cash C, demand deposit DD, other check deposits NOW, money market mutual fund MMMF, etc.) do show weak differentiation from leisure and other durable consumer goods. Shows that M1 or M2 is an acceptable amount of money. Belongia and Chalfant (1989) report that there is also weak differentiation between different combinations of currency assets. They are C-DD, C-DD-NOW, C-DD-NOW-MMMF. This result implies that there are multiple currency aggregate indicators to choose from.

Today, the weakly differentiated method has become a complementary technology to other monetary index reform programs. For example, Barnett (1980, 2000), Anderson et al. (1997), Binner et al. (2002), and Elger et al. (2004) all use the principle of weak differentiation in compiling their monetary aggregate indicators.

4. Divisia Index Money Program (Divisia Index Money, 1976-). This method also relies on micro utility theory. Barnett's (1978, 1980, 1984, 2000) research has been influential in this area. He believes that monetary assets are a kind of durable goods that provide monetary services. The opportunity cost of holding monetary assets is also called "user cost". The proportion of the expenditure of holding each currency asset (the total user cost of the currency asset) to the total expenditure of holding all currency assets is the weight of the currency asset in the total currency. Obviously, if a currency asset is highly liquid, the yield is low, the difference from the benchmark interest rate is large, and the relative weight in the total amount of money increases. Some institutions and scholars in various countries still use the index for research. The Monetary Service Index MSI (see Option 9) issued by the St. Louis Federal Reserve Bank in the United States for comparative analysis later in this article is a well-known sample of the Divisa Index currency.

Western scholars have used a variety of econometric methods to conduct a large number of empirical analysis of Divisa currencies (such as Barnett, Offenbacher and Spindt, 1984; Chrystal and MacDonald, 1994; Schunk, 2000; Serletis and Molik, 2000; Stracca, 2003 ). Their conclusions are much the same: the Divisa index and the traditional currency total have advantages and disadvantages. The Divisa index currency has not achieved obvious advantages, and it is basically divided equally. Generally, the wider the total currency caliber (such as M3 ), the better the performance of the Divisa index currency. This conclusion is embarrassing! Because the Divisa index currency takes care of the liquidity advantage of the narrow currency, it should have an absolute advantage in the comparison of the narrow currency. This makes people question the correctness of the design theory and method of Divisa index currency.

5. Fisher Ideal Index Number (1985). Spindt (1984, 1985) also used the Divisa index to improve the monetary aggregate indicator. He advocated using the transaction speed of the currency as a weight. However, the currency transaction speed he chose is the "net turnover rate" of currency assets, that is, the speed at which currency is used for final income transactions. We know that in the currency turnover, various transactions are included. He wanted to take out the final income transaction amount completed by each currency component; based on this, calculate the "net turnover rate" of each currency asset; then use the net turnover rate as a weight to calculate the weighted total currency index. Spindt's begging for distance has not only distorted the real currency turnover rate, but the credibility of the final revenue transaction from the total transaction volume is also questionable. His empirical research shows that under normal conditions, the performance of this currency index is strictly consistent with the simple sum of M1 ; under abnormal conditions, it has relative stability. Obviously, his plan is not better than the traditional monetary aggregate with theoretical flaws under normal circumstances.

6. Currency Equivalent Index (Currency Equivalent Index, 1991-). This method uses the difference between the monetary asset interest rate and the standard market interest rate as a weight to calculate a weighted currency index. Rotemberg et al. (1991, 1995) established the calculation method of this index. Barnett believes that the index is inferior to the Divisa in measuring money services. Sertetis and Molik (2000) deny that any monetary indicator (including the index currency) has significance as a monetary policy target.

7. Artificial Neural Networks (Artificial Neural Networks, ANN, 2000-). ANN is an information processing structure composed of interconnected processors that imitates the principle of natural neural networks, which can receive and output information. ANNs are usually set up with specific computer programs and can store model parameters. Gazely and Binner (2003) borrowed this technology to optimize the Divisa index currency. The method is to use the ANN technology to obtain the empirical sensitivity coefficient of the output (inflation) to the input (the five currency components, autoregressive terms and time variables that make up Divisa currency); then use the sensitivity coefficient as the weight to calculate the new di Visa index currency; if the new Divisa currency is substituted into the ANN model and the five components that make up it are replaced, inflation can be predicted. In this way, the weight of Divisa currency, which originally relied on interest rate calculations, was replaced by the sensitivity coefficient of ANN technology. Binner claims that Divisa currency generated using ANN technology is superior to traditional Divisa currency.

8. Dynamic Factor Analysis (DFA, 2001-). DFA is a method of multivariate statistical analysis. The observed variable is expressed as a function of multiple factors and the sum of residual values. In addition to the observed variables, multiple factors determining the observed variables and the weights of each factor need to be estimated simultaneously using the model. Gilbert and Pichette (2003) introduced DFA technology to study the problem of monetary aggregates, with transactions and savings as the two determinants of each currency component. According to preliminary empirical analysis, they believe that the total amount of money compiled by DFA technology is the best indicator of output and price prediction.

9. Monetary indicator reform program supported by the Central Bank. The Divisa index currency is supported by the Bank of England and the Federal Reserve Bank of St. Louis in the United States. The Bank of England has continuously compiled and published the Divisa Index currency. The St. Louis Federal Reserve Bank also continuously compiles or publishes the Monetary Services Index (MSI). MSI is also a sample of Divisa currency; the bank also compiles the currency equivalent index. The two central bank's index compiled by the new method is only for official and other researchers' reference. It does not replace the compilation and publication of traditional currency indicators (the traditional currency indicators in the United States are responsible for the Federal Reserve). Economists working in the central banks of various countries have also received the general support of the central banks. Using the resources of the central banks, they have extensively participated in proposals and experimental activities for currency index reform, and have become the backbone of reform. Since this article will compare the momentum currency, traditional currency totals, and MSI, this article introduces the compilation method of the MSI index. The formula for formulating the nominal MSI is (Anderson et al., 1997):

In the formula (1), represents the nominal monetary component of item i in period t; = 1/2 (), represents the average expenditure share of holding monetary asset i in period t. The total expenditure for holding all monetary assets is:

(2), represents the total expenditure of holding all monetary assets in period t; =, represents the nominal user cost of holding the nominal currency component i in period t (represents the real life index in period t, and represents the period t The rate of return of standard assets, which represents the nominal user cost of holding i currency assets at period t)

By reviewing the reform plans of the major monetary indicators of the above Western countries, we can summarize the following points:

1. Most schemes treat money as an asset rather than a means of circulation. Therefore, they rely on the asset price of moneyinterest rate (or user cost), to calculate the elasticity of substitution (or quantity adjustment weight).

2. The Fisher Ideal Index is an exception. Spindt uses the currency's transaction speed as a weight. But the "net turnover rate" he extracted lost the economic information contained in the real transaction speed of the currency.

3. Divisa index currency is currently the most influential solution. However, most empirical analysis proves that the Divisa Index has no absolute advantage compared to the traditional currency amount. The failure of the Divisa Index in the narrow sense of currency indicates a problem with its theoretical basis.

4. The artificial neural network scheme is theoretically ambiguous. The sensitivity coefficient of experience is affected by those factors. There is no theoretical explanation; the various currency components as input are the quantity of money, excluding the currency speed factor; the completely true currency speed variable in economic reality cannot be related to the amount of money in the measurement model Equivalent view. In addition, the sensitivity coefficient corresponds to a specific output (such as the inflation rate), so relatively different macro variables will have different sensitivity coefficients and different currency amounts. This runs counter to the original intention of the reform of monetary indicators.

5. Motivation analysis programs treat transactions and savings as the two determinants of each currency component. This is equivalent to assuming that the amount of money already includes information on transactions and savings. This is clearly wrong. The transaction function of currency is mainly reflected by its speed. The amount of money lacks the economic information included in the speed of money.

6. So far, no reform plan has theoretically emphasized the significance of real currency speed to the importance of currency, no new currency index has absolute advantages over traditional indicators, and no reform plan has been generally recognized by academics and monetary authorities. . The traditional simple sum of money is still the monetary indicator on which monetary authorities of most countries and most economic research rely. The reform of monetary aggregate indicators in western countries after half a century has been in trouble. What is the reason for this ending?

source

The root cause of the reform is the theoretical flaw in the mainstream western economics. Due to the limitation of the length and subject of this paper, the author can only briefly explain the issues related to this paper.

1. At the micro level, Western scholars lack a dialectical understanding of currency. Western scholars generally believe that computing units, circulation media, and storage methods are the three basic functions of money. Based on these three functions, Western scholars have three major problems in understanding currency. First, it lacks a deep understanding of the nature of money. Money represents value and is a measure of value; changes in the form of money cannot change this essence at all. Western scholars changed the scale of value to a unit of calculation in view of the change in the form of modern currency; they often put this function at the end and were content to explain this function in isolation; ignoring the fact that representative value is the essence of money and the basis of other functions .

Second, there is a lack of dialectical understanding of the functional relationship of the three currencies. The three functions of money are interdependent in quality and quantity. The essence of the unit of calculation is representative value, and the amount of representative value depends on the comparison of the amount of money, the speed of money and the total amount of economic transactions. The amount of money is equal to the total amount of storage means, and the product of the amount of money and the speed of money is equal to the function of the transaction medium. Therefore, the determination of the amount of money's representative value depends on the total amount of storage and trading functions. This dialectical relationship shows that although we can discuss the function of money in isolation at the micro level, the representative value of money involves the interaction of the three functions and the dynamic balance of economic aggregates, which can only be resolved in the macro field.

Third, Western scholars have a great deal of debate about which means of circulation and storage are dominant. The author believes that this debate conceals the core issue. The core problem is that every currency function must have a proper quality and quantity expression. Western scholars have chosen the wrong way to express liquidity. The essence of storage means is asset, which can be expressed by the amount of money and the rate of return of money; the essence of the transaction medium is liquidity, and speed is its soul. The user cost of money is just the lease price of the currency. How can it reflect the speed of the currency and the transaction value of the currency? On this issue, the wisdom of classical economics is still worthy of admiration. As a durable goods in the sense of economics, money's holding cost (value) can be expressed by user costs. But the user cost (value) of money is not the same as the use value of money! The use value of currency as a circulation medium is the constant circulation of value, which is far from the user cost in terms of quality and quantity. The most important thing is that the economic information contained in currency circulation is far from being able to be represented by the cost of the holder.

2. At a macro level, mainstream Western economics has serious structural flaws. Although Keynes's General Theory has made important contributions to economics, it basically negates the role of currency and overemphasizes the importance of interest rates in macroeconomics (Tao Jiang 2000a). The monetary school regained the importance of the quantity of money, but abandoned the true speed of money (Tao Jiang, 2003, 2004a, 2004b). Western mainstream economics combined to abandon the real currency speed, and the result has jeopardized the objective understanding of the importance of currency. Exploring the reform of monetary indicators against the background of such a theoretical structural flaw will not only completely ignore the true speed of money (the rate of income is not the true speed of money), but also lead to skepticism about monetary indicators.

3. On the relationship between microeconomics and macroeconomics, Western scholars also lack scientific boundaries. Different research objects may have different performance laws. The scope of application of classical mechanics in physics is macroscopic, low-speed material movement; the scope of application of quantum mechanics is microscopic, high-speed material movement. The boundaries are clear. There is also a limit to the application of economic principles. Money is fundamentally different from other commodities. Among all economic exchanges, money is extremely special. Modern currency relies entirely on the enforcement of law; its marginal cost is diminishing and is far below the representative value; currency is the most common, most indifferent, the fastest transfer speed, and the lowest transfer cost; the representative value of currency is only Depends on the comparison of various economic aggregates; the true and meaningful speed of money is only observed in the macro field; and so on. Because of so many particularities, the study of money cannot be determined simply by the principles of microeconomics. From the reform proposals of western scholars, we can see that they simply use the utility function theory to analyze the liquidity of money, and equate user costs with money services (or use interest rates as a proxy for money services). Since currency services include liquidity services, the level of user costs also paradoxically reflects the strength of currency liquidity. Mainstream economics ignores an extremely simple fact: the essence of the means of circulation is motion, which must be represented by vectors such as speed or momentum. In the end, the simple transplantation of economic principles led to a serious misunderstanding of currency and a serious flaw in the structure of economics.

It is precisely because of these deep theoretical flaws that western scholars cannot convert the real currency speed into weights to establish a monetary aggregate index with speed characteristics. This is the fundamental reason why Western scholars cannot succeed in reforming the monetary aggregate index. Moreover, after half a century and consuming huge economic resources, we still don't see any signs of self-liberation from Western scholars. Under such circumstances, Nankai scholars have the responsibility to express different understandings of currency, and it is necessary to propose a unique reform plan for currency indicators.