Discussion of On the Association between Net Monetary Position and Equity Security Prices

Abstract

Robert Freeman proposes to investigate an aspect of general pricelevel accounting (GPLA): the effect of inflation on the value of corporations' net monetary position (NMP). This is not, however, what he actually investigates. His basic data are stock price changes, which are dominated by changes in expectations. General price-level accounting (GPLA) and current value accounting (CVA) deal with inflation in very different ways. GPLA addresses changes in the unit of account, whereas CVA attempts to reflect changes in market value. Because short-period changes in the real value of money-fixed claims of even modest duration are dominated by changes in expectations of future inflation, rather than by the impact of current inflation on the real value of the unit of account, any study of the impact of short-period changes on the corporate balance sheet is automatically in the province of CVA. In this respect, there is a minor problem with Freeman's use of NMP. If one is going to focus on changes in expectations, then, as Freeman realizes, duration becomes very important. But NMP adjusted for the durations of the relevant balance-sheet items really is no longer net monetary position: the adjustments can and often will change not merely the magnitude of NMP, but also its sign. This problem persists deep into the paper. A second problem with Freeman's choice of GPLA as the motivating framework for the present study is that GPLA attempts to reflect changes in the real value of assets and liabilities presented in the balance sheet in nominal terms. Yet by focusing on changes in nominal share values, the author is addressing the impact of changes in the nominal value of real assets and liabilities. But even if one chooses to view Freeman's paper (which, as noted, focuses on expectations) as a study of inflation-related aspects of CVA, rather than GPLA, it still has a serious conceptual problem. Freeman