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Sunday, November 07, 2010

The Resetting of Clocks and Monetary Neutrality

This is mostly for Nick Rowe who says:

...Why does money have real effects? It's just bits of paper. It's not real. We are still stuck on David Hume's puzzle. If we double the number of bits of paper each one should be worth half as much. It should be a purely nominal change. Nothing real should change. If we switch from meauring turkeys in pounds to measuring them in kilograms, the price per unit weight should be divided by 2.2, but the same turkey should cost exactly the same in pounds or kilograms, and we should buy exactly the same number of turkeys as before.

Metrification was a nominal change that had negiligible real effects, as far as I know. Daylight Savings Time is a nominal change that has real effects. Some monetary changes, like currency reforms where we knock a couple of zeroes off the old currency and call it the new currency, are like metrification, where nothing real changes. And maybe all monetary changes are like metrification in the long run. But some monetary changes are like Daylight savings Time, and have real effects, at least in the short run.

If we understood Daylight Savings Time better, and how it works, we might understand monetary policy better. ...

This is a bit on the wonkish side, but here's an example along these lines from David Romer's graduate macro text (pgs. 295-296):

An analogy may help to make clear how the combination of menu costs with either real rigidity or insensitivity of the profit function (or both) can lead to considerable nominal stickiness: monetary disturbances may have real effects for the same reasons that the switch to daylight saving time does.[16] The resetting of clocks is a purely nominal change -- it simply alters the labels assigned to different times of day. But the change is associated with changes in real schedules -- that is, the times of various activities relative to the sun. And there is no doubt that the switch to daylight saving time is the cause of the changes in real schedules.
If there were literally no cost to changing nominal schedules and communicating this information to others, daylight saving time would just cause everyone to do this and would have no effect on real schedules. Thus for daylight saving time to change real schedules, there must be some cost to changing nominal schedules. These costs are analogous to the menu costs of changing prices; and like the menu costs, they do not appear to be large. The reason that these small costs cause the switch to have real effects is that individuals and businesses are generally much more concerned about their schedules relative to one another's than about their schedules relative to the sun. Thus, given that others do not change their scheduled hours, each individual does not wish to incur the cost of changing his or hers. This is analogous to the effects of real rigidity in the price-setting case. Finally, the less concerned that individuals are about precisely what their schedules are. the less willing they are to incur the cost of changing them; this is analogous to the insensitivity of the profit function in the price-setting case.

The question Romer is trying to answer is how it is possible for small menu costs (i.e. small costs of changing prices) to have large effects on the real economy.

I used to get mad at losing an hour of daylight and having it get dark before 5:00 pm, and for many, many years I refused to change my clock (I also hate changing it back in spring and losing an hours sleep). I still had to adjust my schedule to everyone else's so it didn't do much good, but somehow leaving my clocks an hour off made it a tiny bit better. I was surprised at how fast I was able to adjust each fall to the clock being wrong by an hour, though there were several instances when people in my office would get quite confused and panic after looking at the clock and thinking it was an hour later than it actually was. I found that amusing, they found it weird, and I did eventually turn the office clock so that visitors couldn't see it. These days, most of my clocks adjust automatically and I don't bother to change them back, but last year there were a couple of non-self adjusting clocks that I never got around to changing. I doubt I'll bother to change them this year either.

    Posted by on Sunday, November 7, 2010 at 02:34 PM in Economics, Monetary Policy | Permalink  Comments (10)


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