A Monetary Model of Unit of Account

Abstract

I develop a dynamic model in which money is used as means of payment in spot transactions (medium-of-exchange role) and competes with goods to denominate payments in credit-based contracts (unit-of-account role). The value of money and its use as the unit of account are determined jointly in equilibrium. I highlight the differences of the two roles for the demand for money and monetary policy. The use of money as medium of exchange is concrete and depends on the expected inflation rate. The use of money as unit of account is abstract and depends on the stability of its value. A good medium of exchange is not necessarily a good unit of account, and monetary policy must decide which role to favor. In particular, inflation targeting is better for medium of exchange, while price-level targeting is better for unit of account.

Keywords: money, medium of exchange, unit of account

JEL Classification: E4, E40, E42