u s money demand structural shifts or heterogeneous agents this paper examines whether observed structural shifts in the money demand function could be the result of agent heterogeneity due to different household income levels following the methodology of stoker 1986 income distribution variables are found to be significant determinants of money demand and once changes in the distribution of income are accounted for there is no evidence of parameter instability a money demand function incorporating income distribution effects is shown to perform as well or better than several standard alternatives on the basis of diagnostic tests non nested hypothesis tests within sample prediction errors and out of sample forecasting

generational accounting a meaningful way to evaluate fiscal policy this paper illustrates the technique of generational accounting a new way to evaluate fiscal policy that overcomes the inherent ambiguities of traditional deficit accounting the authors illustrate why there is no correct measure of the deficit and how generational accounting estimating the fiscal burdens current policy places on different generations provides a clearer picture of the intergenerational and macroeconomic effects of fiscal policy than any measure of the deficit their calculations suggest that despite recent changes u s fiscal policy is unsustainable in that it will ultimately require future generations to bear a much higher burden than those currently alive

the effects of fiscal policy in a two country world economy an intertemporal analysis this paper analyzes the effects of fiscal policy using a two country general equilibrium model a key finding is that a shift in government spending from productive purchases to consumption purchases causes a rising trade deficit and an appreciation of the terms of trade consistent with the u s experiences in the 1980s productive public services play a critical role in these adjustments by driving a wedge between the rates of return on domestic and foreign capital a temporary cut in the capital income tax is also crucial for explaining a persistent trade deficit and an appreciation of the terms of trade copyright 1995 by ohio state university press

demand for money in open economies abstract the demand for real cash balances deduced from an underlying portfolio model of the financial market is shown to depend upon domestic variables and foreign monetary developments the model is estimated using quarterly postwar data for canada germany uk and us there is clear evidence that demand for money is affected not only by changes in domestic variables such as permanent income domestic interest rate and price expectations but also by fluctuations in exchange rate expectations and foreign interest rates the conclusion that domestic monetary policy is fairly ineffective and domestic financial markets are highly vulnerable to changes in foreign financial and monetary developments need to be modified in light of the results presented in this paper

new tests of the life cycle and tax discounting hypotheses abstract we first test a version of the permanent income consumption function recently suggested by barro the results support the theory except that consumption expenditures show sensitivity to transitory income next we use the consumption model to test the tax discounting hypothesis which is strongly supported this support for tax discounting disagrees with results from some earlier studies using more traditional specifications of the consumption function however we show that when certain obviously inadequate estimation procedures are corrected the traditional models also support tax discounting this uniform support for tax discounting suggests that the sensitivity of consumption to transitory income is not due to liquidity constraints

estimating money demand functions the question of which functional forms of money demand regression equations are useful for empirical work is addressed here specifically it is argued that a functional form that focuses attention on the ability of the growth rate of nominal money to predict the inflation rate is a useful way of summarizing empirical evidence on the existence of a stable money demand function the results of estimating and simulating this functional form as well as standard functional forms are presented in the final part of this paper a typical equation expressing the public s demand for real money balances m is as follows

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

is the dollar high because of large budget deficits abstract it is widely believed that the u s dollar has been high in recent years because of large u s budget deficits using three statistical techniques this paper shows that the belief has no empirical support ricardian equivalence may explain the lack of a positive association between the budget deficit and the dollar s exchange rate

exchange rate determination interest rates and an integrative approach to the demand for money abstract this paper presents a simple framework in which the money in the utility function miuf and the cash in advance cia approaches to the demand for money can be seen as equivalent this integrative approach to money demand is extended to a two country world and the equilibrium relationship between terms of trade exchange rates and interest rates implied by the underlying stochastic structure of the economy is discussed a theory of currency substitution is presented

cross country estimates of the demand for money and its components the demand for money aggregates m1 m2 and their components currency demand deposits and time deposits are estimated using a sample of 103 countries at two time periods money demand is found to be affected by age literacy industrial development and political structure as well as income and inflation this expanded demand function helps to explain the considerable changes in money demand that have occurred over long periods and the large variation in money demand found across countries the knowledge thus gained is useful for understanding differences in monetary and taxation policies across countries

asset returns and government budgets in a small open economy empirical evidence for canada abstract in this paper we test the validity of the ricardian equivalence hypothesis by examining the relationship between the term structure of asset returns and macroeconomic policy variables our study extends the work of plosser 1982 1987 to the canadian case adapting his analysis to the small open economy the empirical results we obtain are consistent with the debt neutrality proposition of the ricardian equivalence hypothesis

monetary anticipations and the demand for money abstract it has recently been argued that unanticipated changes in nominal money supply should affect the real demand for money and empirical results which appear to support this hypothesis have been presented unfortunately the econometric techniques used by previous authors yield severel biased estimates in this paper we show how valid estimates may easily be obtained and present some illustrative empirical results using u s data these results do not support the conclusions of earlier authors we find that unanticipated money supply changes do indeed affect the real demand for money but with the wrong sign and that anticipated changes also have a significant effect a consistency test for all models employing the anticipated unanticipated distinction is also proposed

have large budget deficits caused rising trade deficits for the united states the 1980s have been years of both large and unprecedented trade deficits as well as massive federal budget deficits the trade deficit rose from 25 billion in 1980 to 124 billion in 1985 during this same period federal budget deficits soared from 74 billion in 1980 to more than 212 billion in 1985 it is widely believed that the u s trade deficit rose mainly because of the skyrocketing federal budget deficit presenting such a view are for example hutchison and pigott 25 hutchison and pyle 26 clark 11 modigliani 30 and aschauer 2 besides economists many labor unions i e afl cio and official government documents see the economic report of the president particularly of 1984 have all shared similar views the issues involved have important policy implications suppose that the basic reason for rising trade deficits is indeed the escalating federal budget deficit in this case policy makers may focus on curtailing the budget deficit in order to resolve the trade deficit problem that has adversely affected several sectors such as manufacturing industries and agriculture however if such a view concerning the causal role of the budget deficit is incorrect then reductions in the federal budget deficit may not resolve the trade deficit dilemma and moreover attention will be diverted from more relevant and urgently needed policy options 6 the purpose of this paper is to empirically investigate the conventional argument that high federal budget deficit has been the prime cause of the escalating u s trade deficit finding only partial empirical evidence to support it in section ii i argue that most of previous studies in this area appear flawed by a methodological error rendering their tests unreliable for discriminating between a number of equally plausible hypotheses section iii describes the data and methodology used in the paper section iv presents the empirical results section v summarizes and concludes the paper

new concepts of aggregated money the federal reserve board s recent redefinition of its monetary aggregates followed three years of intensive board staff research on monetary aggregation while the new aggregates ultimately were selected along conventional lines some of the staff s research was oriented towards more fundamental changes in monetary aggregation methods this paper reviews such proposals which are based upon the rigorous application of index number and aggregation theory and of principal components analysis in the construction of economic monetary aggregates the usefulness of aggregation and index number theory in acquiring price indices is widely known the theory of the true cost of living index is an application of aggregation theory examples of applied index number theory include the commerce department s implicit price deflator which is a paasche index and the labor department s consumer price index which is a laspeyres index somewhat less well known is the fact that dual to the theory of economic price aggregates and indices is a theory of economic quantity aggregates and indices an example of a highly reputable quantity index is the divisia quantity index the monetary aggregates traditionally are thought to measure the supplied quantity of an economic good called money whenever monetary aggregates are used in the context of economic theory rather than as simple accounting identities the theory of economic quantity aggregation is specifically applicable however published monetary aggregates in all countries have always been computed as simple sums but as fisher 1922 p 29 observed in the conclusion to his classic treatise on index number theory the simple arithmetic average produces one of the very worst of index numbers and if this book has no other effect than to lead to the total abandonment of the simple arithmetic type of index number it will have served a useful purpose with an example of the simple sum index fisher 1922 p 363 found that the bias alone reaches 36 percent although index number theory has not yet found its way into the monetary theory literature all of the literature on index number theory and aggregation theory for the past half century supports the result long ago deduced by fisher 1922 p 361 that the simple arithmetic index should not be used the views expressed herein are solely those of the authors and do not necessarily represent the views of the board of governors of the federal reserve system this research was partially supported by national science foundation grant soc 76 84459 we are deeply indebted to the conference session s discussant of this paper w erwin diewert for volunteering to cede his allocated journal space to us so that the paper could take its current extended form federal reserve board washington d c

an alternative approach to the american demand for money with a decade of evidence behind it the profession seems to have agreed on the fact that a structural break shifted the american demand for money shortly after 1973 it is difficult to pinpoint the source of the trouble precisely let alone to explain the event with an econometric model in their survey judd and scadding 1982 tentatively concluded that financial innovation is the source of the problem while this conclusion has not been universally accepted the instability of the money demand function is largely taken as a given stylized fact the primary goal of this article is to provide an alternative solution to the case of the missing money using the methods of hendry 1979 it should be stressed at the outset that as this paper deals with a problem in the applied literature it is unabashedly empirical in nature the paper attempts to explain an empirical difficulty without presenting a new theoretical model of money demand rather in the context of the standard transactions demand theory for narrow money a number of questions are analyzed with an atypical econometric model was there actually a shift or a series of shifts in the demand for money if not why have other investigators concluded that there was in fact a shift most importantly what function seems to be the most reasonable approximation to the data generation process during the period in question

monetary interdependence among g 3 countries this paper uses vector autoregressions to investigate the interdependence of the monetary policies of the central banks of germany japan and the united states granger sims causalities and innovation accounting mechanisms suggest that tri lateral linkages are strong and complex the results imply that the influence of foreign central banks policies limit each central bank s capacity to determine an independent domestic policy

the search for a stable money demand function a survey of the post 1973 literature phe question of whether the demnand function for money is stable is one of the most important recurring issues in the theory and application of macroeconomic policy what is being sought in a stable demand function is a set of necessary conditions for money to exert a predictable influence on the economy so that the central bank s control of the money supply can be a useful instrument of economic policy as such the notion of a stable demand function appears to involve three key elements e g john t boorman 1976 p 317 and david e w laidler 1977 pp 34 35 first the demand for money relation should be highly predictable in a statistical sense as measured by the usual goodness of fit statistics precision of estimated coefficients and presumably its ability to forecast accurately out of sample second a stable demand function for money has relatively few arguments a relationship that requires knowledge about a large number of variables in order to pin it down is in effect not predictable finally the variables that appear as arguments in the function should represent significant links to spending and economic activity in the real sector in sum a stable demand function for money means that the quantity of money is predictably related to a small set of key variables linking money to the real sector of the economy the importance of a stable money demand function for monetary policy can be illustrated with the standard is lm model in which interest rates and gnp are the endogenous variables in this context a stable demand function for money translates into a well defined relationship between money interest rates and gnp

the role of the budget deficit during the rise in the dollar exchange rate from 1979 1985 the u s dollar appreciated in value over 40 from early 1979 until it peaked in february 1985 also during this period the u s federal government budget deficit grew from 16b to 200b according to hakkio and higgins 15 it is high u s interest rates and foreign capital inflows into the u s that provide the linkage between these two events there is a considerable debate in the literature as to the precise influence of budget deficits upon these various linkages evans 10 for example suggests that large deficits did not cause the rise in the dollar also there are numerous studies refuting the association between deficits and interest rates see evans 11 and hoelscher 16 for example on the other hand plosser 25 reports a positive association between government spending and interest rates and hoelscher 17 reports a positive association between deficits and long term rates this paper uses an open economy vector autoregression var model to investigate these linkages finding that after controlling for the influence of money inflation the dollar and the trade deficit there is indeed causality running from deficits to long term interest rates the model also identifies a relationship between long rates and the dollar value thus verifying the linkage albeit indirect of budget deficits and the dollar value a second concern is that large budget deficits may have led to an accommodative monetary policy causing excessive money growth rates at times for example from 1982 07 1983 09 ml growth averaged 13 and when the dollar value peaked in 1985 ml was growing at about 12 2 a number of authors have examined this issue yet collectively they have not arrived at a uniform conclusion ahking and miller 1 provide a summary of these studies the majority of these studies suffer from at least one of two faults that i attempt to correct in this paper in particular they either suffer from exogeneity problems stemming from single equation models or they suffer from omitted variable bias due to the exclusion of international variables variance decompositions generated from an open economy var indicate that deficits explain more of the variance of the forecast error of money growth than any other variable the results also verify that deficits affect inflation only through their influence on the money supply

managing interacting species in unassessed fisheries abstract this paper addresses the management of multispecies fisheries and suggests the use of restricted fishing policies as an interesting option for unassessed fisheries as is the case within developing countries specifically we consider a predator prey system under two potential management policies an unrestricted regime where agents can compete to harvest from both species and a second one where they are allowed to harvest only predators the performance of both policies is compared from an ecological and an economic point of view for a sufficiently large number of agents or for strong biological interaction parameters the assumed restricted fishing policy yields both higher long run stock levels and profits thus this contribution suggests that such a policy while requiring weaker monitoring governance than instruments based on outputs such as quotas or taxes would meet environmental and economic objectives finally several features of the analysis are discussed including targeting prey instead of predator and the issue of compliance

inflation and government deficits there is a pronounced positive correlation of inflation andgovernment deficits in the united states since world war ii the purpose of this paper is to test the three leading explanationsof this correlation these three explanations are a a deficitincreases prices through a wealth effect b a deficit results inthe federal reserve purchasing debt thus increasing the moneysupply and prices and c expected inflation increases the deficit which is the change in the nominal value of bonds no supportis found for either of the first two hypotheses the results indi cate that expected government deficits have no significance forfuture inflation since world war ii the united states has experienced large federal government deficits and a sustained peacetime inflation three differentconnections between the deficits and inflation are prominent in theliterature the most direct connection between government deficits and inflationis that by increasing the real value of outstanding bonds and perceived netwealth a deficit can raise total spending and the price level this connec tion is also the most long standing and is suggested by metzler 1951 andpatinkin 1965 for example monetarists generally and buchanan and wagner 1977 in particularhave emphasized a different link between deficits and inflation they sug gest that the federal reserve purchases government bonds when the trea sury sells bonds thus increasing high powered money the money supply and the price level the federal reserve might behave this way for exam ple because it is attempting to hold down interest rates on governmentsecurities when deficits occur recently barro 1978 1979 has put forward a hypothesis that deficitsare a result of inflation rather than inflation being a result of deficits thegovernment deficit is the change in the nominal value of outstanding gov ernment bonds if the anticipated inflation rate increases then the nomi nal value of bonds must increase i e the government will run a deficit tokeep the same anticipated real amount of bonds all three of these possible connections between government deficitsand inflation are consistent with the observed positive correlation of defi cits and inflation the implications however are strikingly different con

money demand the effects of inflation and alternative adjustment mechanisms the paper first reconciles a variety of specification tests for partial adjustment money demand models and points out a fundamental identification problem which makes it impossible to distinguish between the real and nominal partial adjustment models if inflation has an independent effect on the long run demand for money the paper also finds that empirical estimates of simple partial adjustment models have some undesirable properties and then considers the shortand long run effects of inflation in a more general distributed lag model

simple tests of distributional effects on macroeconomic equations the presence of distributional effects in macroeconomic equations is shown to coincide with nonlinearity in micro behavioral relationships parameters estimated with aggregate data as in representative agent models contain distributional biases that are not measurable using aggregate data alone tests for distributional effects and other measures of the extent of aggregation problems are derived using distributional data observed over time significant distributional effects are noted for a model of annual aggregate u s commodity expenditure data a static model that accommodates individual heterogeneity is found to be statistically equivalent to a simply dynamic model that accommodates first order autocorrelation

the deficit interest rate link empirical evidence for canada this paper explores whether a positive relationship exists between interest rates nominal or real and deficits as postulated by a conventional macroeconomic model mundell fleming using spectral and time series techniques annual and quarterly data for canada and a variety of definitions for the deficit and government spending variables no empirical link between deficits and interest rates could be detected it is suggested therefore that the evidence is inconsistent with themundell fleming model which predicts a positive association between interest rates and deficits a possible explantion for the observed empirical results may be found in the ricardian equivalence theorem

fishing technology and optimal distribution of harvest rates this paper examines the problem of the optimal management of a joint ownership fishing exploitation where agents use different fishing gears we consider a model in which the fishing activity may affect resource growth not only through the harvest function but also through the natural growth rate of the resource this allows us to capture the fact that some fishing gears alter the natural growth rate of the resource we find that when the natural growth of the resource is altered by the fishing technology the optimal stock is not independent of how harvest quotas are distribute among the agents as a result a fishing policy that firstly determines the optimum stock and secondly decides how to distribute the harvest among the different agents will not be efficient we also analyze the joint determination of optimal stock and harvest quotas and show that positive harvest quotas will only be optimal when countries are characterized by certain asymmetries

structural federal deficits and interest rates some causality and co integration tests the relationship between federal budget deficits and interest rates has been the focus of extensive research recently cebula 4 examined this relationship empirically and concluded that the federal budget deficit does in fact exercise a positive and significant impact upon the nominal moody s aaa rated corporate bond rate 4 208 such a finding is at odds with the great majority of recent empirical studies in this area if valid this finding assigns to large deficits significant adverse effects on both private investment crowding out and on trade balance via an overvalued dollar given these profound public policy implications cebula s finding warrants further examination

interest rates and expected future budget deficits in the united states several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits one possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits in this paper i investigate whether this explanation is valid finding no evidence that it is section ii briefly formulates and discusses the hypothesis under consideration stating some of its implications section iii presents the results of regressing the commercial paper rate moody s aaa bond rate and the ex post real commercial paper rate on current and past government spending budget deficits and real money supplies the regressions have been fitted to the entire sample of monthly data spanning the period between june 1908 and march 1984 and to 11

recent instability of the demand for money an international perspective aggregate money demand functions once an apparent bulwark for macroeconomic research have had to be re examined in the light of the events and discoveries of the 1970s following goldfeld s extensive analysis it now is widely recognized that the demand for mi balances in the united states cannot be explained satisfactorily by standard functions apparently because of shifts occurring in the early 1970s similar reservations see below have been expressed with respect to m3 balances in the united kingdom where the demand relationships appear to have been upset by the introduction of regulatory reforms in 1971 in both cases part of the problem can be traced to specific events but the possibility remains that a more general instability may be present the rapid inflation experienced by all major industrial countries after 1973 the concurrent collapse of the bretton woods system of fixed exchange rates and the attempts by most major central banks to control growth in domestic money stocks may all have altered the responses of the demand for money to the standard functional arguments this paper presents a range of stability tests for a set of demand functions estimated for two monetary aggregates in each of six countries in order to determine whether money demand functions more generally have been stable over the recent period and to attempt to identify the nature and causes of any observed instabilities the major conclusions are that none of the other functions examined displays instabilities as severe as those of the mi function for the united states and that the latter may be unstable in a more persistent and fundamental way than has heretofore been recognized the equations estimated for this study are based on a variant of goldfeld s log linear real balances function the deflated value of money balances is related to real income interest rates and inflation with lagged adjustments introduced via a simple koyck transformation this function obviously is in a simplified form especially with respect to the lag struc

short run money demand abstract the conventional wisdom holds that the short run demand for money is unstable this paper challenges the conventional view by finding a stable demand for m1 in u s data from 1959 through 1993 the approach follows previous work in interpreting long run money demand as a cointegrating relation and it uses goldfeld s partial adjustment model to interpret short run dynamics the key innovation is the choice of the interest rate in the money demand function most previous work uses a short term market rate but this paper uses the average return on near monies the savings accounts and money market mutual funds that are close substitutes for m1 this choice helps rationalize the behavior of money demand in particular the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies

the demand for money a dynamic rational expectations model macroeconomic modelling generally has widely adopted the use of forwardlooking variables in behavioural relationships studies of the demand for money being something of an exception the aim of this paper is to provide preliminary empirical results of a model which explicitly incorporates expectations of the future into the demand function for narrow money the approach adopted is the modelling of the demand for money within a multi period costs of adjustment framework under the assumption of rational expectations agents are assumed to pursue a target or long run level of money balances which is itself a function of prices income and interest rates this results in an empirical specification which consists of both backwardlooking and forward looking components the model is estimated using uk data for the period i963i i983iii the remainder of the paper is divided into four sections in section i we outline the framework in which our model is derived in the following section we discuss the econometric techniques used and in section iii we present our empirical results a final section concludes

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

international transmission of us macroeconomic policy and the inflation record of western europe abstract the interaction between monetary policy government budget deficits and inflation is examined for the four largest western european economies comprising france italy the united kingdom and west germany in order to assess the possible impact of us macroeconomic policy past us monetary base growth deficits and inflation rates are included in the set of explanatory variables for each of the european countries empirical results for the 1962 2 1985 4 sample period reveal interplay between domestic monetary and fiscal policy to be augmented by a significant impact of the us variables across all four countries in the sample

federal deficits and money growth in the united states a vector autoregressive analysis abstract a multivariate var modelling technique is employed in this paper to test for causality between federal deficits and money growth in the united states four alternative causality hypotheses including the common accommodation view are examined in addition to the two policy variables four other related macro variables are included in the empirical analysis namely short term interest rates prices real output and exchange rates the var results consistently reject the accommodation hypothesis and indicate that monetary and fiscal policy actions are set independently in the united states other causality inferences are also obtained and their implications are discussed

the role of money supply shocks in the short run demand for money abstract previous money demand models are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible interest rate fluctuations in response to innovations in nominal money we propose a shock absorber money demand model in which money supply shocks affect the synchronization of asset transactions and so engender a temporary increase or decrease in desired money holdings expected changes do not engender such fluctuations in real money inventories in simultaneous estimates for eight industrial countries the shock absorber model proved empirically superior

does exchange rate appreciation deindustrialize the open economy a critique of u s evidence does exchange rate appreciation deindustrialize the open economy a critique of u s evidence i introduction the sharp appreciation of the dollar in the early 1980s followed by its decline since 1985 has generated considerable interest in the output effects of exchange rate changes many academics practitioners and policymakers believe that the initial rise in the value of the dollar significantly depressed growth in the tradable goods sector of the u s economy particularly in manufacturing output and prevented the tradable goods sector from participating in the initial stages of the general u s economic expansion since 1982 the dollar s subsequent sharp decline in turn they hope will provide an independent stimulus to the nation s manufacturing sector according to this view development within the u s economy was two tiered through 1985 growth was robust in those parts of the economy not directly sensitive to international relative price changes i e nontradables such as services construction transport public utilities etc while growth languished in those parts of the economy producing either exportable or import competing goods i e tradable goods such as manufactures agriculture forestry products etc brinner 1985 marris 1985 cline 1986 branson 1986 and branson and love 1986 1987 1988 provide empirical evidence linking depressed output in manufacturing industries to the strong dollar 1 these results have been interpreted by some as evidence that the appreciation of the dollar has caused or contributed to the deindustrialization of the u s economy e g brinner 1985 2 a major shortcoming of the literature however is that it typically fails to distinguish between exchange rate changes that are truly exogenous and exchange rate changes that are endogenously determined with output changes by policy and other shocks this is especially true in the deindustrialization debate where exchange rate shocks may be largely due to domestic macro economic policies output levels and exchange rates in a general context are both endogenous variables and the association between them depends on the underlying disturbances and policy reactions depending on the underlying disturbance an appreciation of the exchange rate may be associated with an expansion as well as contraction of aggregate output in different sectors for example a disturbance emanating from the foreign exchange market that has the effect of appreciating the dollar e g an exogenous shift in international investors portfolio preferences toward dollar assets may be considered exogenous in some sense and will likely have a depressing effect on output in the tradables sector however a policy induced exchange rate appreciation arising for example from a fiscal expansion in a mundell fleming world with high capital mobility or a monetary contraction has ambiguous effects on aggregate and sectoral output movements 3 while exchange rate effects reduce output in both cases in the case of fiscal stimulus the overall net effect on output is likely to be positive while in the case of monetary contraction negative focusing on the relation between exchange rates and output alone is analogous to attributing output movements along a supply or demand curve to price changes rather than to the underlying factors causing the curves to shift in this paper we take a critical look at the arguments and empirical evidence offered in support of the hypothesis that exchange rate appreciation has been an independent cause of decline in the u s manufacturing sector in section ii we discuss several methodological problems in estimating and interpreting the relation between output and exchange rates in particular we show how the overall association of exchange rate changes with outout depends on the source of the exchange rate change i

unstable money demand and the monetary model of the exchange rate in this paper the authors investigate the importance for the monetary model of exchange rate determination of j frankel 1979 of allowing unrestricted dynamics and of accounting for shifts in the demand for money due to financial innovation based on estimation and simulation results for the canada u s bilateral exchange rate over the 1970 85 period the aut hors find strong evidence in favor of a generalized approach to dynamic specification but find that the shif t adjustment of official money supply data has only minor implications for the empirical results moreover neither modification is sufficient to generate a monetary model that is well supported by the data

the ricardian equivalence proposition evidence from foreign exchange markets abstract the major argument against running large government budget deficits is that they raise interest rates and crowd out real investment conclusive evidence of a relationship between large budget deficits and high interest rates has not been found two competing explanations are tested by examining the impact of government udget announcements on foreign exchange rates the ricardian equivalence proposition that deficits have no crowding out effects is compared to the conventional open economy hhypothesis that capital mobility transfers these effects to foreign exchange rates the results supports the open economy hypothesis over the ricardian equivalence proposition jel f41

errata aggregation distribution and dynamics in the linear and quadratic expenditure systems using canadian data 1965 86 the author confirms and extends thomas m stoker s 1986 results on the rule of distributional effects in demand systems the confirmation consists of evidence from the linear expenditure system model showing that distributional effects are statistically significant and can displace ar 1 dynamics in the disturbances the extension is made to the quadratic expenditure system model and an argument is advanced that standard habit formation dynamics may reflect omitted distributional effects the evidence supports this conjecture this suggests that the author may have been drawing the wrong conclusions from expenditure studies rather than inferring dynamic behavior he should have been concluding that these models are misspecified copyright 1992 by mit press

policy inference using var models policy inference using var models i introduction macroeconomics has a long tradition of examining the response of macroeconomic variables to shocks in alternative policy measures much recent work in this area has been based on the empirical regularities between variables found in vector autoregressive var models the var results in turn have been used to investigate the impact of changes in different policy variables var modeling procedures have been used to test the relative effects of changes in money interest rates broad credit measures and fiscal actions on economic activity 1 moreover because var analysis does not require the specification of an underlying theoretical model it also has been used to study the linkages among macroeconomic variables across national borders 2 although debate over the alleged atheoretical nature of vars continues for example see cooley and leroy 1985 leamer 1985 and braun and mittnik 1985 var models are frequently used for policy analysis how the dynamic specification of a var model is generated and how the dynamics may influence the resulting policy recommendation is the subject of this study while modeling the dynamic relationship among macro variables is a longstanding subject relatively few studies have tested for the effects of alternative lag structures on a given model to our knowledge there has been little systematic analysis of the sensitivity of policy effects to changes in the lag structure of a given var model 3 in this paper we investigate this specification problem using a simple four variable var model similar in spirit to sims s 1980b 4 this model consists of quarterly observations for money real output prices and nominal short term interest rates for the period 1960 through 1985 in selecting this model we opt to focus on the impacts of lag specification on policy inferences derived from a given var model in doing so we ignore the effects of altering the specification in terms of variables included or excluded this approach seems reasonable however since our purpose is to investigate the effects of lag structure not specification problems in general to compare the policy conclusions derived from the alternative dynamic structures we use six different lag selection criteria these criteria briefly described in section ii vary the bias efficiency tradeoff inherent in such statistical procedures section iii discusses the estimation of the var model using the alternative dynamic structures comparison of policy recommendations derived from the models is presented in section iv using variance decompositions anticipating that discussion the evidence from our model suggests that policy recommendations are very sensitive to changes in the dynamic structure conclusions close the paper in section v ii lag length selection procedures many previous researchers have chosen to impose equal lag lengths on each of the variables in their models 5 this approach produces parameter estimates that may suffer from bias or inefficiency depending on whether the model is under or over parameterized we use six different approaches to determine the lag specification five are based on statistical criteria with the exact criteria listed in table i for comparability we also employ the nonstatistical ad hoc procedure of arbitrarily fixing the maximum lag on all variables to be four quarters one of the statistical approaches used is the standard f test 6 the f test imposes zero restrictions on lags beyond some point and tests this restricted model against a more general lag structure the f statistic is calculated sequentially until adding another lag does not statistically improve the fit of the model two of the selection procedures use a mean squared error criterion these are mallows s 1973 c sub p statistic and akaike s 1970

bioeconomics of spatial exploitation in a patchy environment abstract this paper presents a model of renewable resource exploitation that incorporates both intertemporal dynamics and spatial movement the model combines the h s gordon vernon smith hypothesis of a rent dissipation process with ricardian notions that resources are exploited across space in a pattern dependent upon relative profitabilities the population structure is characterized in a manner consistent with modern biological ideas that stress patchiness heterogeneity and interconnections among and between patches generally we find the equilibrium patterns of biomass and effort across the system to be dependent upon bioeconomic conditions within each patch and the nature of the biological dispersal mechanism between patches we use simple examples to illustrate how the distribution of effort throughout the system reflects the heterogeneity and the spatial biological linkages

government debt economic activity and transmission of economic disturbances this paper analyzes the effects of government debt on output and the trade bala nce in a two country rational expectations model of the world economy it is shown that perceived changes in government debt do not affect the level of economic activity but unperceived changes in the home country s government debt are correlated positively with its output and negatively with its trade balance unperceived increases in the foreign country s government debt however have a positive impact on the home country s output and the trade balance empirical evidence from the u s is consistent with most of the implications of the model copyright 1987 by ohio state university press

fiscal policy and the term structure abstract this paper investigates the empirical association between deficits in interest rates it extends the results in plosser 1982 to include the more recent experience the association between a measure of ex ante real rates and deficits is also considered the results largely corroborate the previous results first little or no association between real or nominal interest rates and deficits is found second output and to a lesser extent military spending are found to have a significant association with interest rates

fiscal policy and trade adjustment are the deficits really twins i introduction the unprecedented increase of both the fiscal and trade deficits in the united states during the 1980s led many observers to posit a causal linkage a sizable contingent of economists believe that the twin deficits concept aptly characterizes the recent relationship between federal budgetary policy and the u s trade balance in this view increased federal fiscal deficits during the 1980s were a primary cause of the massive u s trade deficits experienced as the decade unfolded however this posited causal relationship does not command universal acceptance in this paper we examine data on u s trade and federal fiscal measures along with exchange and interest rates to uncover the empirical relationship between them and to discover whether fiscal policy plays an essential role in the adjustment of the massive u s trade imbalance the twin deficits concept asserts that the deficits are twins because they are related in the following manner increased government deficits are thought to put incipient upward pressure on real interest rates this induces incipient capital in flows that lift or appreciate the real exchange value of the currency which erodes competitiveness and after a time lag results in increased trade deficits a number of recent papers examine the relationship between budget and trade deficits each contributes important insights but nothing approaching a consensus has yet emerged miller and russek 1989 find evidence of a secular relationship between the deficits under two of the three statistical techniques they employ bernheim 1988 concludes that the government deficit is a prime determinant of u s trade deficits whereas evans 1989 enders and lee 1990 and dewald and ulan 1990 find no such causal impact of fiscal deficits darrat 1988 and abell 1990 report somewhat mixed results the conflicting results in the existing literature stem from wide differences in the empirical techniques data measures and samples employed further we have found in the literature and in our work reported below that the use of differenced data versus data in level form has a major impact on the results produced and inferences drawn recent empirical literature suggests that stationarity of data is a crucial element in model specification thus the question of whether or not to difference the data should be addressed before estimation and inference classical inference about stationarity of data suffers from what sims 1988 refers to as a discontinuity in the asymptotic theory hence the classical tests used in much of the previous literature have low power to reject the null hypothesis of nonstationarity in levels bayesian inference does not suffer from this problem therefore we generate posterior probabilities using monte carlo integration that estimate probabilities that suggest whether the data are better analyzed in level or difference form despite somewhat contrasting results the classical augmented dickey fuller tests and the bayesian probability estimates both suggest that a difference specification is inappropriate we analyze empirically a five variable nonstructural vector autoregressive var model the model includes both a federal government balance and a government purchases measure to summarize fiscal policy along with these two variables and a trade balance measure we constructed real interest rate and real exchange rate variables spanning a quarterly data sample from 1961 to 1989 we estimate the model in both levels and difference form using the level specification we find strong support for the twin deficit notion that government deficits are a cause of trade deficits whereas in differences we find no such relationship furthermore the results from our monte carlo work imply that the model specified in levels is likely most appropriate for estimation and inference ii contrasting theoretical frameworks the presence of both deficits in a variant of the basic savings investment identity may provide a useful reference as in bernheim 1988 and branson 1985 for discussing the hypothesized causal relationship embodied in popular twin deficits stories 1 tdef gdef i s

a comparison among partial adjustment rational expectations and error correction estimates of the canadian demand for money starting from a dynamic optimization principle the currently most popular approaches to modelling money demand functions are derived the partial adjustment adaptive expectations rational expectations and error correction mechanism formulations are then estimated using a common data set the error correction mechanism equation is found to dominate the others either because their implicit restrictions are rejected rational expectations or by employing the encompassing principle partial adjustment adaptive expectations surprisingly all three forms have similar long run solutions since the short run dynamics differ substantially the results have important implications for the conduct of monetary policy

unobserved diversity depletion and irreversibility the importance of subpopulations for management of cod stocks abstract diversity is often associated with resilience but in this model unobserved genetic or behavioral diversity can explain the collapse of supposedly regulated fish stocks such as cod recent studies have shown the existence of separate sub stocks of cod even at a very fine geographical scale we show that modeling a group of distinct stocks as if it were one large stock will tend to over estimate the growth and harvest potential if quotas are based on such over estimates the unobserved stock diversity can explain sudden stock collapses and unexpectedly slow recovery as observed for canadian cod it is a lack of information concerning diversity that leads to irreversibility the differences between the various stocks may be behavioral or genetic but cannot be observed by the fishermen or regulators who believe that there is a gradual decline in one big stock while in fact they are witnessing the successive disappearance of a series of sub stocks

optimal inflation and the government revenue mix abstract this paper examines the question of optimal inflation and taxation as a government optimal control problem by inclusion of bond finance and portfolio decisions by private agents in a perfect foresight framework it is shown that i optimal steady state inflation is independent of government revenue requirements ii inflation and tax rates do not necessarily move together in optimum

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

a test of steady state government debt neutrality a test of steady state government debt neutrality this paper investigates whether in the steady state the real interest rate is an increasing function of both the government debt and government spending using data from the period between january 1981 and march 1986 the paper finds no evidence of such a relationship these data afford an especially powerful test because the ratio of federal debt to trend output which had fallen from 93 to 33 percent between january 1948 and december 1980 reversed course after the enactment of the economic recovery tax act reaching 47 percent in march 1986 i introduction in conventional macroeconomic analysis government debt is not neutral because households view it as contributing to their net wealth as a result the larger the government debt is the wealthier households feel and the more they consume more consumption in turn spells less investment over time and thus a lower steady state capital stock as a result output is ultimately lower and the real interest rate higher in principle however households need not view government debt as net wealth 1 if households accurately foresee the future taxes that will service the government debt if they face perfect capital markets if taxes do not distort their decisions and if they internalize future generations then they treat the future taxes servicing the government debt as an exact offset consequently government debt is neutral since it does not make households feel wealthier and hence affects nothing 2 nevertheless because most macroeconomists doubt that households accurately foresee future servicing taxes have access to perfect capital markets and internalize future generations they do not model government debt as neutral like perfect competition however government debt neutrality may be a good approximation in many applications even if the assumptions underlying it are unrealistic therefore empirical analysis rather than introspection should determine how one models government debt this paper provides such an empirical analysis the empirical analysis focuses on the steady state relationship between government debt and the real interest rate 3 in the steady state a larger government debt leads to a smaller capital stock and hence a higher marginal product of capital if households view government debt as net wealth consequently the real interest rate is also higher if instead government debt is neutral nothing should happen to the real interest rate u s data from the period between january 1981 and march 1986 have been used here to investigate whether a larger government debt leads to a higher real interest rate in the steady state and hence whether government debt is neutral these data afford an especially powerful test because the ratio of federal debt to trend output which had fallen from 94 to 33 percent between january 1948 and december 1980 reversed course after the enactment of the economic recovery tax act reaching 47 percent by march 1986 moreover this upward trend is likely to continue well beyond 1986 such an enormous increase in federal debt should have raised by steady state real interest rate appreciably if households view government debt as net wealth to any important extent in the absence of evidence that the steady state real interest rate did rise government debt is judged to be neutral in the steady state section ii formulates the model which is estimated in sections iii and iv section v summarizes the paper and then briefly reviews an extensive literature consistent with government debt neutrality ii formulation of the econometric model the appendix demonstrates that if households view government debt as net wealth the real interest rate should be an increasing function of both the government debt and government spending in the steady state see also evans 1988 for this analysis

international evidence on misspecification of the standard money demand equation abstract this paper tests the proposition that the interest rate in the standard money demand equation acts as a proxy for the expected change in interest rates if this is true the interest elasticity in the standard equation will depend on the expectations process for interest rates using cross country data we find that there does exist a relationship between the observed interest elasticity in the standard equation and the predictability of future interest rates from current interest rates

do budget deficits raise nominal interest rates evidence from six countries abstract it is widely believed that budget deficits raise nominal interest rates this paper shows that the belief has no empirical support for six countries ricardian equivalence may explain the lack of a positive association between budget deficits and nominal interest rates

increasing marginal returns and the danger of collapse of commercially valuable fish stocks abstract on the basis of data from the north sea herring fishery we discuss the consequences of increasing marginal returns on the exploitation of renewable resources we show that high but still reasonable discount rates can cause extinction to be optimal even in the ideal case of a sole owner and a resource with a high growth rate in the case of lower discount rates optimal cyclical policies can periodically drive the resource to levels approaching safe minimum standards we discuss the sustainability intergenerational equity social risk aversion and theoretical issues raised by increasing marginal returns