Comments from Free Radical
Tom Brown and Mike Freimuth discussed the information transfer model on the latter's blog Free Radical. Mike apparently is a PhD candidate at the same school I went to for my PhD. Small world. Anyway, Mike brings up a couple of points that I thought I'd address here.
It seems like he is just saying that the price level is correlated with the size of the money base.
Actually it gives an explicit functional form for the price level:
$$
P(M) = \alpha \frac{1}{\kappa} \left( \frac{M}{M_{0}} \right)^{1/\kappa - 1}
$$
Where $\alpha$, $M_{0}$ and $\kappa$ are free parameters that can be used to fit the empirical data. Since constant $\kappa$ doesn't work very well, I tried assuming that $\kappa$ could vary since it is actually based on the potentially changing information content of 1 unit of NGDP vs 1 unit of currency (it is proportional to the ratio of the Hartley information for the demand "states" and supply "states"). This gives us:
$$
P(M, N) = \alpha \frac{\log N/c_{0}}{\log M/c_{0}} \left( \frac{M}{M_{0}} \right)^{\frac{\log N/c_{0}}{\log M/c_{0}} - 1}
$$
A different motivation of this equation, entirely from long run neutrality of money, is presented at the link here. The model is the simplest model of economics consistent with long run neutrality (homogeneity of degree zero of supply and demand functions).
The model is also a model of supply and demand in general and is capable of constructing many traditional diagram-based micro and macro economic models.
... it just seems like it boils down to MV=PY to me.
It is, but with a specific model for $V$ and $Y$, namely $V = \kappa P$ and $PY \sim M^{1/\kappa}$.
Putting aside the fact that I’m not exactly sure what he means by the information-carrying capability, one must wonder why this wouldn’t be constantly in question. If the theory is that it works because nobody questions it then I find that theory unconvincing.
The theory doesn't explain why money has value (information carrying capacity, i.e. the capability to be used to mediate information transfer). It is agnostic on that. What it explains are the dynamics of money in terms of the size of the economy and the quantity of money. Given a value of money at one time, it gives the value at another (via the price level). Actually, the model can give the price level from 1980-2014 given the data before 1980 -- and you can extrapolate our current low inflation environment starting in the 1970s. See here:
http://informationtransfereconomics.blogspot.com/2014/05/out-of-sample-predictions-with.html
An analogy: Thermodynamics doesn't explain what atoms are (it was actually worked out without knowing what atoms are) -- it explains the dynamics of huge ensembles of atoms. It doesn't even work out e.g. what the volume is for an ideal gas at a given pressure, but rather figures out the relationship between pressure and volume (e.g. $P_{1} V_{1} = P_{2} V_{2}$). Something like backing theory or some other consideration gives money its value just like quantum mechanics gives the theory behind atoms.
Regarding the "questioning", this was probably unwarranted theorizing on my part. There was something that changed in the US and UK (maybe more countries but I don't have data) that corresponded to the end if WWII that made the coefficients in the equation above change. I think it was Bretton-Woods, but the theory also allows for other major changes in currency to reset the coefficients of the model. In terms of the thermodynamics, we have a law like $P V^{\gamma} = \text{ constant}$; certain things can happen (like a chemical reaction) that causes the "constant" to change.