Unstable money is the unstable medium of exchange, unstable store of value and unstable unit of account in the economy. Pre–monetary economies had units of account without money being available in the economy. (See Shiller, 1998)
Today the economic values of all economic items are stated in terms of unstable money. Prices are expressed in unstable monetary units. Unstable money is the generally accepted unstable monetary unit of account used to value and account all economic activity by entities applying the stable measuring unit assumption as part of the traditional Historical Cost Accounting model under which they implement financial capital maintenance in fixed nominal monetary units with unstable real values in the world economy during inflation, deflation and hyperinflation.
Unstable money is not fixed in constant real value. Unstable money is fixed in nominal value in economies subject to inflation, deflation and hyperinflation. Unstable money is a fixed nominal unit of account with a daily changing real value (purchasing power). Financial capital maintenance in nominal monetary units, although approved in International Financial Reporting Standards (IFRS) and by the United States Financial Accounting Standards Board (FASB) and implemented worldwide, is a very popular accounting fallacy not yet extinct since it is impossible to maintain the real value of capital in nominal monetary units per se during inflation, deflation and hyperinflation.
Bank notes and bank coins cannot currently be inflation–indexed which makes it impossible for money or the monetary unit of account to be a constant indexed unit of account or a perfectly stable unit of constant real value during inflation, deflation and hyperinflation.
Notwithstanding or despite the above, monetary items in the form of certain time deposits – not the actual bank notes and coins – and other monetary items, e.g. government and commercial capital market bonds, have been inflation–indexed in Chile since 1967 by means of the Unidad de Fomento which is now a monetized daily indexed unit of account. Inflation-indexed government and commercial bonds are issued in many economies, e.g. the UK, Canada, the US, SA, India, Australia, Portugal, France, and many other countries.
The Central Bank of Chile translates the “Unidad de Fomento” on their website to An Inflation–Indexed Accounting Unit and CPI–Indexed Unit of Account (UF).
The UF´s value in Chilean escudos was originally (1967) updated every quarter which would be the official rate for the following quarter. The UF´s original value of 100 has never been rebased like most CPIs. It was updated monthly from October 1975, with the currency changeover to pesos, till 1977. Since July 1977 it was calculated daily by interpolation between the 10th of each month and the 9th of the following month, according to the monthly variation of the Indice de Precios al Consumidor (IPC), the Chilean Consumer Price Index. The Banco Central de Chile has calculated and published the UF´s value daily since 1990. The UF is a lagged daily interpolation of the Chilean CPI. The IPC is independently calculated and published monthly by the Chilean National Statistical Institute.
The UF daily rate is available on the Chilean Central Bank´s website.
Most bank deposits in Chile are 30–day non–indexed deposits or 90–day indexed deposits whose rates are expressed in terms of the UFs. Interest rates on the indexed deposits are expressed as a premium over the UFs. On maturity, the deposits are converted back to pesos at the current UF rate. Shiller, 1998, p3
Daily Consumer Price Index - Part 2
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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