A Unified Theory of Money

Abstract

We propose a model to unify and compare the three most popular monetary mechanisms: the credit theory, quantitative easing (QE), and the helicopter theory. We show different effects of these mechanisms on goods prices and equity prices. We find that, with a monetary expansion, the credit theory implies a deflationary effect on goods but a mixed effect on assets, QE implies a deflationary effect on goods but an inflationary effect on assets, and the helicopter theory implies an inflationary effect on goods but a deflationary effect on assets. Also, the credit theory implies an economic upturn in the short run but an economic downturn in the long run, QE implies an economic downturn in both the short run and the long run, and the helicopter theory implies an economic upturn in both the short run and the long run. We further identify a negative relationship between goods inflation and asset inflation, called the goods-asset curve, just like the Phillips curve.