a globally flexible almost ideal demand system the almost ideal demand system is combined with the fourier expenditure system subject to the assumption that preferences are of the price independent generalized logarithmic class the resulting demand system has the desirable features of each of its components aggregate demand equations are consistent with preferences of a representative consumer and consistent estimates of elasticities are obtained for all observed prices application of the new demand system to u s consumption of meats and fish reveals that it fits the data well and that the restriction to the usual specification is rejected

the relative forecasting performance of the divisia and simple sum monetary aggregates this paper provides direct evidence on the forecasting performance of the divisia monetary aggregates relative to the traditional simple sum monetary aggregates it is shown that forecasts of u s real gdp from a four variable vector autoregression var are most accurate when a divisia aggregate is used rather than a simple sum aggregate particularly at broad levels of aggregation further the two m1 aggregates relative to the broader aggregates are superior predictors of the gdp deflator with a slight edge going to divisia m1 over simple sum m1

wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

financial firm production of monetary services a generalized symmetric baroett variable profit function approach an alternative monetary production model of financial firms is employed to investigate supply side monetary aggregation financial firms are conceived to produce monetary services as outputs through financial intermediation a new method for testing the existence of consistent monetary output aggregates in financial firms production technology is developed in terms of a multiproduct firm s variable profit function and the method does not require homotheticity of the aggregator function we use a generalized symmetric barnett flexible functional form that specification satisfies global curvature conditions and retains its flexibility under the null hypothesis of weak separability neither of those properties is possessed by other flexible functional forms

auctions with endogenous entry abstract predictions from auction models with endogenous bidder participation depend on whether entry takes place under asymmetric information or not auctions that are not revenue equivalent in the former set up may be so in the latter moreover under asymmetric information the social planner does not discourage entry even when the bid preparation cost is large

profit function approximations and duality applications to agriculture monte carlo simulations of profit functions indicate that flexible functional forms may be ranked nearly the same with respect to allen uzawa partial substitution elasticities or price and fixed factor elasticities flexible functional form approximations of output price elasticities are generally worse than approximations of input price or fixed factor elasticities minflex laurent functional forms did not appear to approximate underlying elasticities any better than did their translog and generalized leontief counterparts

equilibrium in auctions with entry the authors model entry incentives in auctions with risk neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic the presence of too many potential bidders raises coordination costs that detract from welfare the authors show that the seller and society can benefit from policies that reduce market thickness i e the relative abundance of buyers their analysis extends well known revenue equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies e g reservation prices in ways not anticipated by models that ignore entry copyright 1994 by american economic association

indirect addilog translation of indirect utility functions the difficulty of specifying a set of consumer demand equations that can simultaneously display compatibility with rational economic behaviour regularity and have the capacity to represent a comprehensive spectrum of consumer behaviour flexibility is well known a variety of approaches have been investigated in the literature but scope for substantial improvement remains the approach of this paper is to start from indirect utility functions producing globally regular if inflexible systems and to improve flexibility by adding parameters through a device termed indirect addilog translation on connait bien la difficulte de specifier un ensemble d equations de demande du consommateur qui puisse en meme temps etre compatible avec un comportement economique rationnel regularite et avoir la capacite de representer un spectre comprehensif de comportements du consommateur flexibilite la litterature specialisee a propose une variete d approches mais il y a encore place a beaucoup d amelioration l approche suggeree dans ce memoire part des fonctions indirectes d utilite qui produisent des systemes globalement reguliers meme s ils sont inflexibles et en ameliore la flexibilite en ajoutant des parametres via un procede qu on a nomme traduction indirecte addilog

methods for measuring the economic impact of ambient pollutants on the agricultural sector discussion ing from pope models for measuring economic impact should consider the follow ing three principles a it should be flexible enough to describe the underlying environ ment b it should accommodate theory and c it should provide results that directly lead to policy implications in this discussion these principles are employed as a criterion for judg ing the merits of papers by dixon garcia and mjelde dgm hamilton mccarl and adams hma and atkinson adams and crocker aac a discussion of their papers is followed by suggestions for future research methods in measuring impacts of ambient pol lutants

exchange rates financial innovation and divisia money the sterling dollar rate 1972 1990 in this paper we examine the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using as a convenient framework the monetary model of the exchange rate we demonstrate inter alia that for the sterling us dollar exchange rate over the period 1972 q1 to 1990 q2 that the use of divisia money makes a significant difference to both the long and short run modelling of the exchange rate

advertising sunk costs and barriers to entry this paper tests hypotheses about the entry deterring effects of advertising the model isolates three separate effects of advertising on entry the effect on the irrecoverable costs of entry the effect on the uncertainty underlying the entry environment and the effect on the measured rates of profit we find that advertising impedes entry since necessary advertising expenditures give rise to a sunk cost which raises the risk of entry however we also find a countervailing force due to advertising in that the entrant perceives a greater likelihood of success in markets where advertising is important our analysis shows that the overall impact of advertising on entry is positive

a model of the financial firm with imperfect asset and deposit elasticities abstract the paper develops an intertemporal model to estimate the production technology of financial firms such as banks price taking is testable in each separate market for assets and liabilities and competitive price taking is a nested special case such tests are applied both to outputs and inputs empirical results for a sample of banks in new york and new jersey indicate that price taking applies only in markets for labor and time deposits in markets for loans demand deposits cash and materials the price taking hypothesis is not accepted

the rationale of the mean standard deviation analysis skewness preference and the demand for money publisher summary this chapter discusses the rationale of the mean standard deviation analysis skewness preference and the demand for money in january 1969 issue of the review of economic studies karl borch and martin feldstein separately criticized the widely used mean variance analysis of portfolio selection borch contended that any system of upward sloping mean standard deviation e s indifference curves can be shown to be inconsistent with the basic axiom of choice under uncertainty he pointed out that one can always pick any two points on an upward sloping indifference curve to represent two bernoulli distributions with probability 1 p of gaining the same amount x in both the cases and probability p of gaining y1 in the case of one distribution and y2 in the case of the second distribution with y2 y1 if the second distribution represents the point to the northeast of the other point then by the dominance axiom the second distribution must be preferred to the first which contradicts the basic meaning of indifference curves feldstein by using a log utility function and a lognormal distribution for investment outcome showed that e s indifference curves for a risk averter need not be convex downwards though upward sloping they would change from convex to concave once the standard deviation of the outcome exceeds the mean multiplied by on the face of it this seems to suggest that risk aversion might decrease as risk is increased beyond a certain extent

optimal auctions revisited in symmetric privately known values oral auctions with costly entry for bidders the seller can do no better than by committing ex ante to a reservation price and entry fees or subsidies which result in no fewer and at most one more bidders than a reservation price equal to the seller s value would in the absence of entry fees or subsidies journal of economic literature classification numbers d44 c72

which road leads to stable money demand this paper denies that the demand for money function is any more unstable than other demand functions and maintains that the controversies regarding unstable money demand are produce by poor methodology that is not shared by other areas of the field of economics when investigating demand function properties this abstract was borrowed from another version of this item

estimating functional forms in cost prices abstract klaus conrad 1983 developed the cost price approach based upon the notion of partially fixed factor proportions as an alternative to the traditional neoclassical method of modeling cost and production functions he showed that a simplified version of his model could be used to estimate a cobb douglas cost function in cost prices we have been able to estimate the full form of conrad s proposed model and extend his technique to the ces and generalized leontief cost functions we also illustrate how to model technical change in cost prices and in cost shares

exact and superlative welfare change indicators an exact welfare change indicator is defined to be a known function of the price and quantity data for two periods for a utility maximizing consumer which is exactly equal to the hicksian equivalent variation a welfare change indicator is termed superlative if it is exactly equal to the equivalent variation for an expenditure function which has a second order approximation property the paper exhibits a number of superlative welfare change indicators and also reviews the earlier attempts of hicks and weitzman to obtain equivalent variation measures that had a second order approximation property

contracting with endogenous entry we analyze entry in markets where a principal contracts with a privately informed agent before learning his production cost the agent knows his probability of having a low cost his ex ante type and decides whether to pay an entry fee to contract with the principal there are two cut off equilibria that determine the possible types of an agent who actually enters the market and neither equilibrium can be discarded by standard selection criteria contrasting with standard intuition in the equilibrium with the highest cut off an increase in the entry fee reduces the marginal type of the agent who enters thus increasing entry and the expected cost of an entrant this equilibrium is selected by a criterion based on robustness to equilibrium risk even though the equilibrium with the lowest cut off is pareto dominant for the agent public policies that increase entry barriers may be welfare improving

on the flexibility of the rotterdam model abstract the rotterdam model is a discrete approximation to a continuous time model and the approximation errors are known to be small unlike other approximations with fixed parameters at the point of approximation the rotterdam model s coefficients differ at each observation but are treated as constants during estimation this procedure introduces relatively large approximation errors which are a potential source of bias in this paper the performance of the rotterdam model in reproducing the characteristics of four integrable demand systems is assessed as anticipated the model s performance is directly related to the variability of the underlying coefficients and the bias in the parameter estimates is minimal if the coefficients are relatively constant the model can also discriminate well against an invalid alternative hypothesis however in the absence of a computationally feasible varying parameter methodology the conclusion has to be that tests of parameter stability are essential when using the rotterdam model

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

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

an empirical comparison of flexible demand system functional forms this paper compares the performance of eight frequently used flexible forms that are either 1 locally flexible 2 effectively globally regular or 3 asymptotically globally flexible results show that the functions with global properties generally perform better particularly those models having asymptotic properties results using us consumption data indicate substitutability among the components of consumption at most data points there is also some interesting substitution volatility around the time of recessions in the usa copyright 2001 john wiley sons ltd

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

estimating a multiple output generalized box cox cost function cost structure and productivity growth in belgian railroad operations 1950 1986 abstract in this paper we estimate a multiple output generalization of berndt and khaled s box cox cost model to study the cost structure and growth in productivity in belgian railroad operations the estimated model includes several commonly used flexible functional forms as special or limiting cases empirical results indicate approximately constant returns to scale and an average rate of productivity growth of slightly less than 2 over the sample period these findings were robust across cost function specifications casting some doubt on the importance of choosing among flexible functional forms

cointegration and structural change an application to the u s demand for money wankeun oh i perform the cointegration tests for the trivariate model of real monetary aggregates real personal income and short term interest rate i find the existence of a long run relationship among these three variables to check the stability of a long run money demand relationship i implement a rank constancy test and cusum test the test results show that real mi is relatively more stable than other aggregates but structural change occurred during the 1970s and early 1980s this is consistent with prior research on money demand jel e41 i introduction incorporating structural change when performing tests on the properties of stochastic processes is important because structural breaks may cause misspecification problems most tests of structural change consider the stability of the parameters over time tests for structural breaks and parameter stability have been studied extensively a partial list includes chow 1966 brown et al 1975 harvey and collier 1977 king 1987 ploberger et al 1989 in the context of unit root processes perron 1989 showed that the presence of a one time change in the level or slope of the trend function can severely distort the results of unit root tests and it is natural to ask how structural change can distort the results of cointegration tests 1 traditional tests of parameter stability ask if the parameters of the model are constant in contrast quintos 1993 proposed a test for stability of the long run relationship s in a cointegrating regression the test is based on johansen s 1988 framework and the test statistic is simply the weighted sum of the likelihood ratio test as given in johansen 1988 quintos s rank test is very different from the traditional cusum and chow tests for parameter stability because her rank test checks for stability of the cointegrating relationship between variables in other words the rank test checks whether cointegration holds for the full period the traditional cusum and chow tests assume that cointegration holds for the full period or does not hold for the full period and tests simply whether the cointegration vector changes for example if there is cointegration from 1960 1990 between revenues and expenditures with cointegrating vector 1 1 then the cusum and chow tests check whether the cointegra ting vector 1 1 is stable throughout the period the rank constancy test checks whether the cointegration rank is stable throughout the period not whether the cointegrating vector is stable at 1 1 in other words the rank test will check whether for example there is cointegration from 1960 1980 and no cointegration from 1980 onward the chow and cusum tests are not designed to check for this the structural stability of money demand relationships has been the issue of a substantial number of empirical studies 2 in general structural stability means stability of the underlying behavioral equations 3 this term includes parameter stability and stability of functional form friedman s 1990 research on the money demand function assumes that a long run equilibrium relationship exists between real money balances real income or real wealth and the opportunity cost of holding real money balances recently there has been strong evidence of cointegration between real income real money balances and a nominal interest rate for instance engle and granger 1987 dickey et al 1991 hafer and jansen 1991 hoffman and rasche 1991 mehra 1993 miller 1991 fischer and nicoletti 1993 and baba et al 1992 report on cointegration among variables in u s aggregate money demand jain and moon 1994 report on cointegration in u s sectoral money demand yashiv 1994 and engsted 1993 on money demand in a high inflation country and hoffman et al 1995 report on international money demand comparison this article asks if long run money demand relationship is stable and if so for which measure of money is it stable over time

economic impacts of new unionization on private sector employers 1984 2001 economic impacts of unionization on employers are difficult to estimate in the absence of large representative data on establishments with union status information estimates are also confounded by selection bias because unions could organize at highly profitable enterprises that are more likely to grow and pay higher wages using multiple establishment level data sets that represent establishments that faced organizing drives in the united states during 1984 1999 this paper uses a regression discontinuity design to estimate the impact of unionization on business survival employment output productivity and wages essentially outcomes for employers where unions barely won the election e g by one vote are compared with those where the unions barely lost the analysis finds small impacts on all outcomes that we examine estimates for wages are close to zero the evidence suggests that at least in recent decades the legal mandate that requires the employer to bargain with a certified union has had little economic impact on employers because unions have been somewhat unsuccessful at securing significant wage gains

the choice among monetary aggregates as targets and guides for monetary policy difficulties in meeting its monetary targets led the federal reserve in october 1979 to adopt a new operating procedure to achieve firmer control over monetary aggregates yet the inflationary environment has fostered financial developments that affect the behavior of the traditional monetary aggregates and that raise questions whether different aggregates may not be better this paper compares the various monetary aggregates for their usefulness as guides for monetary policy in the light of recent financial developments the criterion of usefulness is the ability to influence and predict gnp growth this ability is tested in two ways first by the stability of the velocities of the monetary aggregates and second by the advance information they provide of gnp growth it is presumed that the aggregates with the most stable velocities make the best targets for monetray policy and that those containing the most advance information make the best guides for policy the paper has three main sections the first discusses the criteria for using monetary aggregates as targets and guides the second two sections describe and report tests of the various monetary aggregates as targets and guides a summary of findings is presented as a final section

losing to win tournament incentives in the national basketball association the focus of tournament models has been rank order compensation schemes whereby participants receive higher payments for higher relative performance either incrementally or winner takes all our research focuses on a unique tournament that offers rewards for both winning and losing specifically the national basketball association s regularly scheduled season of games we examine three nba seasons to determine whether team performance responded to changes in the underlying tournament incentives provided by the nba s introduction and restructuring of the lottery system to determine draft order our results yield strong evidence that nba teams are more likely to lose when incentives to lose are present

a system of demand equations satisfying effectively global regularity conditions a parametric specification of an indirect utility function in terms oaf expenditure and two unit cost functions is proposed specification of these unit cost functions in terms of regular functions leads to the notion of an effectively globally regular system of demand equations that is a system of demand equations that is regular over a cone in expenditure price space and for which the regular region includes all points in any given sample and all values of nominal expenditure and prices generating higher values of real expenditure than the sample minimum this general model nests a number of popular demand systems such as the linear expenditure system as special cases an empirical application illustrates some of these ideas copyright 1996 by mit press

the demand for gasoline evidence from household survey data summary in this paper we investigate the demand for gasoline in canada using recent annual expenditure data from the canadian survey of household spending over a 13 year period from 1997 to 2009 on three expenditure categories in the transportation sector gasoline local transportation and intercity transportation in doing so we use three of the most widely used locally flexible functional forms the almost ideal demand system aids of deaton and muellbauer 1980 the quadratic aids quaids of banks et al 1997 an extension of the simple aids model that can generate quadratic engel curves and the minflex laurent model of barnett 1983 which can also generate quadratic engel curves we pay explicit attention to economic regularity argue that unless regularity is attained by luck flexible functional forms should always be estimated subject to regularity as suggested by barnett 2002 and impose local curvature to produce inference consistent with neoclassical microeconomic theory our findings indicate that the curvature constrained minflex laurent model is the only model that is able to provide theoretically consistent estimates of the canadian demand for gasoline our estimates show that the own price elasticity for gasoline demand in canada is between 0 738 and 0 570 less elastic than previously reported in the literature copyright 2013 john wiley sons ltd

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

microfoundations for a stable demand for money function scientific revolutions seldom occur when the prevailing theories appear to be performing well it is only when the accepted theory fails to offer a satisfactory explanation of events that new and more robust theories are proposed of these new theories the one which can explain the successful performance of the previous theory and also the events which led to its demise becomes the replacement so it is in the history of modern monetary economics the failure of the partial adjustment model in the mid s is well documented in the united kingdom and the united states and the search for a replacement has been the main point on the agenda since that time there are many contending theories some of which are advocated by the other contributors to this controversy but the mark of a truly better theory which can be claimed to supersede the partial adjustment model is one that can explain the success and the breakdown of the previous theory as well as the events subsequently central to the argument of this paper is the importance of individual behaviour in the context of a market for monetary assets only by means of careful investigation of the microeconomic behaviour underpinning monetary economics at the individual and the market level can the stability of the money demand function be restored it is the purpose of this paper to suggest that the buffer stock approach has gone further than other approaches in dealing with the fundamental micro foundations of the demand for money it does not suggest that other approaches have no microfoundations but they tend to concentrate exclusively on specific aspects of the micro structure such as separability and ignore others relating to the behaviour of individual optimisers in a monetary market the buffer stock model has firm micro foundations which can explain the events both before and after the breakdown of the partial adjustment model section i provides an historical background to the debate and section ii gives a brief overview of buffer stock models which shows that unlike other approaches they have been able to reconcile the past success of the partial adjustment model with its present failure the nature of the microfoundations of buffer stock models are the source of the success and are discussed in more detail in section iii the final section evaluates the buffer stock approach in the light of the other alternatives

the new monetary aggregates comment in a recent paper published in this journal berkman 10 disputed the usefulness of the new chained tornquist theil divisia quantity indexes of the economy s flow of monetary services which just have begun to become available within the federal reserve system l while a few of his comments have some merit his criticisms are largely based upon a faulty understanding of aggregation theory and he thereby fails to see the forest for the trees

are sunk costs irrelevant evidence from playing time in the national basketball association i introduction sunk costs are irrelevant is a common mantra of price theory but our students seldom believe this claim and for good reason political and corporate leaders alike appeal to sunk costs to justify future policies the escalation effect which borland lee and macdonald 2011 define as commitment to a previous decision despite the expected marginal benefit of that commitment being less than expected marginal cost has become a key element of behavioral economics dating back to seminal work by thaler 1980 and tversky and kahneman 1981 and of economic experiments e g khan salter and sharp 2000 most evidence regarding the relevance of sunk costs stems from anecdotes or artificial experiments we provide a real world test of the escalation effect by estimating the impact of draft position particularly lottery and first round status on playing time in the national basketball association nba whether a team maximizes wins or profits it should give the most playing time to its most productive players regardless of how they were acquired 1 however sports commentators constantly report that teams are committed to specific players because they had used high draft choices or paid high prices to obtain them a classic application of the escalation effect the abundance of data on productivity and playing time allows us to test whether teams give first round draft picks or lottery picks more playing time than other players after accounting for performance we build on earlier studies of playing time in the nba by staw and hoang 1995 and by camerer and weber 1999 hereafter cw by employing data and techniques that have only recently been widely used our estimation builds on staw and hoang and on cw in three ways first our more recent data avoid possible problems of heterogeneity second we have access to variables that better measure playing time and player productivity its main determinant third and most importantly we focus more on the transition between discrete states lottery versus nonlottery and first versus second round than on the precise order of draft picks this shift of focus leads us to use regression discontinuity rd analysis rd enables us to avoid omitted variable bias and thus to discuss causality when evaluating how crossing such thresholds as the lottery or the first round of the draft affects playing time the next section of this article briefly reviews the literature on sunk costs with particular attention to staw and hoang 1995 and cw the third section shows that our data are consistent with those used by previous studies by applying cw s framework and variables to our data section iv explains the relevance of regression discontinuity and presents the empirical model section v addresses several potential threats to the validity of our rd estimates the sixth section presents and discusses our results the seventh section concludes ii the behavioral economics of sunk costs standard neoclassical theory claims that sunk costs have no bearing on current choices because they affect neither marginal benefit nor marginal cost however thaler 1980 and tversky and kahneman 1981 cite psychology studies dating back to the 1950s showing that subjects consider previous expenditures of money or effort when making decisions their findings thus contradict the core neoclassical assumption that agents behave rationally despite the controversy over sunk costs and their centrality to the neoclassical behavioral debate there is little rigorous empirical analysis of their role in decision making one of the few tests comes from staw and hoang 1995 using data for players drafted in the first two rounds of the 1980 1986 nba drafts 2 they regress playing time per season on draft position performance measures and such control variables as race and nationality conditional on players years of experience

normalized quadratic systems of consumer demand functions empirically estimated demand systems frequently fail to satisfy the appropriate theoretical curvature conditions we propose and estimate two demand systems for which these conditions can be imposed globally the first is derived from a normalized quadratic reciprocal indirect utility function and the second is derived from a normalized quadratic expenditure function the former is flexible if there are no restrictions on its free parameters but loses flexibility if the curvature conditions need to be imposed the latter is flexible in the class of functions satisfying local money metric scaling even if the curvature conditions need to be imposed

fractional monetary dynamics we test for fractional dynamics in us monetary series their various formulations and components and velocity series using the spectral regression method we find evidence of a fractional exponent in the differencing process of the monetary series both simple sum and divisia indices in their components with the exception of demand deposits savings deposits overnight repurchase agreements and term repurchase agreements and the monetary base and money multipliers no evidence of fractional behaviour is found in the velocity series granger s journal of econometrics 25 1980 aggregation hypothesis is evaluated and implications of the presence of fractional monetary dynamics are drawn

the empirical reliability of monetary aggregates as indicators 1983 1987 the empirical reliability of monetary aggregates as indicators 1983 1987 i introduction it is widely believed that monetary aggregates have failed to predict real growth and inflation over 1983 87 this presumed breakdown of previously reliable linkages between money growth and future output and inflation has been variously attributed by the present authors among others to changes in money demand induced by regulatory change and to parameter instability due to structural change this paper observes that these disputations may be moot since the traditional definition of money currency plus demand deposits shows no evidence of structural change and yields nearly as low or lower prrediction root mean square errors for both real gnp growth and inflation over 1983 87q2 than the standard errors of estimate obtained for 1961 82 part of the so called breakdown in the monetary indicators especially in the case of m1 may be explained by the fact that current m1 or m1b is defined much like the old m2 and current m1a is defined much like old m1 thus it is probably not too surprising that use of m1 as a monetary indicator does not yield consistent predictive power over a period of time in which it experienced redefinition if there is a mystery in the 1980 it is not why m1a has done so well but why economists abandoned it for broader m1b currency demand deposits and other checkable deposits or ocds 1 with the nationwide introduction of negotiable order of withdrawal now accounts on january 1 1981 m1a fell by 5 5 percent a 22 1 percent per annum rate in the first quarter while m1b rose at a 3 1 percent per annum rate at the time the federal reserve system expected m1a demand to shift down as households chose to substitute from demand deposits to the newly available in most states ocds accordingly the sharp drop in m1a was expected to be reflected in a once for all upward shift in its velocity with no effect on nominal income or its components 2 however consistent with the shock absorber view of money demand even if the long run demand for m1a was unchanged a sharp decrease in its quantity would induce an equal contemporaneous increase in its velocity 3 contrary to the federal reserve s expectation the shock absorber view would thus predict that the actual value of velocity would temporarily exceed its long run equilibrium level so that nominal income would tend to fall or grow less rapidly as m1a velocity adjusted to the money shock figure 1 shows that compared to a relatively small drop in m1 velocity the contemporaneous velocity of m1a moved sharply in the first quarter of 1984 4 the shock absorber hypothesis suggests that contemporaneous velocity movements would be dominated by money supply shocks and thus attributes the different movements of m1a and m1 velocity to differences in magnitude and signs of the shocks in m1a and m1 what milton friedman 1983 calls leading velocity is a crude way of allowing nominal gnp to adjust to past money shocks panels a and b in figure 2 illustrate leading velocity for lags between money and gnp of one and four quarters respectively the longer the adjustment lag the more leading velocity becomes a smooth trend dominated series for m1a 5 however m1b continues to display a sizeable break from its historical pattern this observation suggests that the recent behavior of the economy may be consistent with that indicated by movements in m1a and that the choice to switch to m1b as the standard definition of the narrow money supply was unfortunate and a major source of recent forecasting failure 6 this paper runs a race among m1a m1 and m2 by comparing out of sample forecasting performance and tests of structural stability 7 an explanation is also offered for the observed departure of m1 velocity from its historical trend based on a large battery of conventional tests the results are remarkably favorable to the continued reliability of m1a as a useful indicator of future economic performance and for its relevance as a tool in monetary policy

translog flexible functional forms and substitutability of monetary assets this article attempts to establish the nature of the relationship between monetary assets by estimating a sequence of four nested demand systems the generalized translog the basic translog the linear translog and the homothetic translog the principal attraction of the empirical work is that i am able to test separately for both homothetic and quasi homothetic preferences over monetary assets the tests reject both homotheticity and quasi homotheticity and thus consistency of the strotz gorman two stage optimization i also perform tests on economic theory to establish whether the parameter estimates are consistent with the utility maximizing hypothesis underlying the models these tests indicate that the generalized translog is the preferred model

the optimal level of monetary aggregation in this paper i have three objectives 1 to describe the aggregation theoretic procedure for selecting the optimal monetary aggregates 2 to survey the available empirical evidence for information on the optimal aggregates and 3 to describe the procedures that should be followed to complete a redefinition of the monetary aggregates although all of the federal reserve board s current official aggregates are rejected as targets some newer aggregates are found to be substantially preferable to the official aggregates the board s staff recently completed the official redefinition of its monetary aggregates in a manner largely unrelated to aggregation and index number theory my own research in recent years has sought to remedy that shortcoming except for monetary aggregates most of the data provided by governmental agencies are constructed in accordance with aggregation and index number theory since aggregation theory can be applied to monetary aggregation 1 i constructed new monetary aggregates that are consistent with the economic theory 2 recently the empiri

microfoundations and the demand for money the reader should note that i write this piece in a style that aims to be accessible to that much neglected representative agent the woman on the eurostar train hence unlike the man on the clapham omnibus i assume my intrepid traveller has reasonable knowledge of monetary economics and econometrics but not of the details of the demand for money space constraints force me to indulge in a certain amount of poetic licence but i hope this results in poetic justice there have been many wars fought on this particular battlefield some with almost religious zeal on the theoretical side of the debate we sometimes have the equivalent of religious fundamentalists be they muslims jews christians etc who would dismiss almost any evidence unless it were associated with a strong microtheoretic basis as laid down in the koran talmud or bible the empirical side encompasses agnostics atheists as well as born again econometricians pure theorists inhabit the sunlit uplands while applied economists and policymakers flounder in the muddy plain below occasionally gaining solace from their copy of zen and the art of motorcycle maintenance in general in economics we do not have the luxury of controlled experiments as is the case in the natural sciences what distinguishes good microfoundations from bad and how to weight priors and statistical evidence is subject to much dispute leamer i983 hendry et al i990 as in religion sometimes there is the occasional miracle proclaimed after a suitable interval a new saint may be declared and disciples flock to the new shrine later doubts may arise as to whether a miracle really did occur human behaviour is difficult to explain let alone predict so the search for the equivalent of the holy grail ark of the covenant etc is bound to be arduous in scholarly journals we generally read of the success of the demand for money like diplomats who are sent abroad to lie for the good of their country publication may require applied economists to be somewhat economical with the actualite lovell i983 leamer i983 in this article i want to be as honest as possible about our success and failures in this area the prior information an armchair economist would consider when thinking about the demand for money over the past 40 years in western industrialised countries which have experienced moderate inflation might

curvature restrictions on flexible functional forms an application of the minflex laurent almost ideal demand system to the pattern of spanish demand 1954 1987 this article introduces a new demand model labeled minflex laurent almost ideal demand system which has been achieved by combining the flexible functional minflex laurent form with the price independent generalized logarithm expenditures structure introduced by muellbauer the model has been applied to analyze the aggregate demand behavior of final consumer goods in the spanish economy from 1954 to 1987 when the flexible functional form has been empirically tested the curvature requirements imposed by economic theory have been studied

changes in the cost of intermediation the case of savings and loans the minimum cost output configuration for a firm may change as the result of a variety of factors including changes in market structure in this paper we test this structural change hypothesis with savings and loan data we find support for the hypothesis that separable constant returns to scale production functions characterize the average savings and loan in our sample in 1983 this is in contrast to the cost complementarities found in 1978 we argue that this result may be the result of regulatory changes that allowed savings and loans to alter their production mix to fully capture the benefits of joint production it seems reasonable to assume that the cost minimizing configuration of a multiproduct firm is potentially subject to nonstationarity during periods of structural change in input and or output markets the late 1970s and early 1980s represent such a period of turbulence for many markets in the financial services industry volatile interest rates combined with technological and regulatory changes may have caused firms in this industry to alter their output mixes in an effort to capture cost complementarities from joint production the purpose of this paper is to test this hypothesis of structural change in the savings and loan industry using both a translog and minflex laurent translog mlt specification of the production function we have chosen to investigate savings and loans s ls during the late 1970s and early 1980s for two reasons first s ls provide an ideal vehicle for testing our hypothesis because they were restricted almost exclusively to mortgages and securities as outputs before the passage of the depository institutions deregulation and monetary control act of 1980 and the garn st germain act of 1982 moreover there were also market changes with respect to both the pricing and mix of inputs i e deposits our second rationale involves the fact that there is a large and growing body of literature in the area of what is now called the

vertical integration or separation of the sales function as implied by competitive forces abstract in the present paper we link the decisions concerning the sales strategies that are made by competing firms we demonstrate that when the demand schedules facing competing firms are moderately correlated asymmetric equilibria may arise where only one firm decides to establish its own sales force while its competitor sells its product through an independent sales agency when demand schedules are highly correlated however only symmetric equilibria can arise since firms derive greater benefits from imitating rather than contradicting their rivals choices we demonstrate that vertical separation of its sales function is more likely than vertical integration when firms produce products that are highly substitutable

modelling the monetary multiplier and the controllability of the divisia monetary quantity aggregates fama eugene and richard roll some properties of symmetric stable distributions journal of the american statistical association 63 sept 1968 817 838 parameter estimates for symmetric stable distributions journal of the american statistical association 66 june 1971 331 338 friedman daniel and stoddard vandersteel short run fluctuations in foreign exchange rates evidence from the data 1973 79 journal of international economics 13 aug 1982 171 186 gnedenko b v and a n kolmogorov limit distributions for sums of independent random variables reading ma addison wesley 1968 international monetary fund international monetary fund survev various issues judge george g william e griffiths r carter hill and tsoung chao lee the theory and practice of econometrics new york john wiley and sons 1980 kendall maurice g and alan stuart the advanced theory of statistics 2nd edition vol i london charles griffin and co 1963 kindleberger c p the benefits of international money journal of international economics 2 sept 1972 425 442 mandelbrot benoit the variation of certain speculative prices journal of business 36 oct 1963 394 419 mcfarland james w r richardson pettit and sam k sung the distribution of foreign exchange price changes trading day effects and risk measurement journal of finance 37 june 1982 693 715 moulton westerfield janice an estimation of foreign exchange risk under fixed and floating rate regimes journal of international economics 7 june 1977 181 200 rogalski richard j and joseph d vinso empirical properties of foreign exchange rates journal of international business studies 9 fall 1978 69 79 roll richard the behavior of interest rates new york basic books inc 1970 schmidt peter econometrics new york marcell dekker inc 1976

linear and quadratic spline models for consumer demand functions this paper combines flexible functional form techniques which provide local approximations to indirect preferenc es with respect to prices and incomes with spline techniques that provide global approximations with respect to real income the main technical problem is that real income or utility is an unobserved variable starting with the normalized quadratic expenditure functio n linear and quadratic spline models are introduced theoretically and are empirically estimated using japanese consumer data for four goods fo r the years 1970 87 the semi nonparametric literature initiated by a r gallant is reviewed and a limited semi nonparametric property is claimed to hold for the spline models presented in the paper

entry and product variety with competing supply chains we study a model where an endogenous number of competing manufacturers located around a circle contract with exclusive retailers who are privately informed about their costs the number of brands in the market determined by the manufacturers zero profit condition depends on the presence of asymmetric information and on the types of contracts between manufacturers and retailers with two part tariffs wholesale prices fully reflect retailers costs with linear contracts wholesale prices are constant and independent of retailers costs the number of brands is lower resp higher with asymmetric information than with complete information when contracts are linear resp with two part tariffs moreover although the number of brands is always higher with linear contracts than with two part tariffs joint profits of manufacturers and retailers are higher with linear prices we also discuss manufacturers incentives to choose different contract forms and analyze the effects of endogenous entry on welfare

an empirically oriented demand system with improved regularity properties while the almost ideal demand system has received increasing attention in empirical studies of consumer demand the fact that the underlying piglog cost function is not globally regular has often led to violation of negative semidefiniteness in the estimated slutsky matrix this paper suggests a modification to the piglog class of preferences termed mpiglog which preserves regularity in a wider region of expenditure price space in an empirical section the almost ideal demand system special case of piglog is compared with the analogous special case of mpiglog which the authors term maids the comparison demonstrates the improved regularity features of maids

a divisia system approach to modelling monetary aggregates abstract a complete system of divisia partial adjustment asset equations based on the augmented price expectations baumol tobin inventory and transactions postulates is used to study the dynamic behaviour of monetary aggregates and their components in australia during 1969 iii to 1983 iv the system provides a new and useful approach to modelling demand for money functions for effective monetary policy controls and targetting

separability and capital aggregation in sectoral models of us production separability plays a fundamental role in applied studies of production inasmuch as it provides for consistent aggregation and allows multi stage estimation of models with many inputs this paper examines whether two types of capital structures and equipment are weakly separable from labour and energy and materials in sectoral models of us production and provides an assessment of the effects of maintaining capital separability the study focuses on the elasticity of substitution as a measure of input association and associated standard errors and confidence intervals based on bootstrapping elasticity estimates and tests indicate that capital separability is generally inconsistent with data representing sectoral us production elasticity sign however appears robust to capital aggregation and performs especially well as an indicator of input association

investing to access an adverse selection market abstract i analyse a market with asymmetric information and interdependent values accessing the market is costly and stochastic e g requires lobbying licences or r d for a range of parameter values interventions that raise production or entry costs for all seller types increase trade investment and payoff for all types this effect is driven by a novel feedback loop between the market composition and the investment in access

new indices of money supply and the flexible laurent demand system the article begins by surveying the existing results on the new divisia monetary aggregates charts display the differences in behavior between the divisia aggregates and the federal reserve s official simple sum monetary aggregates the article then compares system wide fit for the simple sum and divisia monetary aggregates when used as data in the joint estimation of a system of demand equations the demand system is derived from a new laurent expansion approximation to the reciprocal indirect utility function the laurent expansion provides a better behaved remainder term than that of the more commonly used taylor series the results favor the divisia aggregates

competitive interest payments on bank deposits and the long run demand for money reply this paper tests two assumptions made in previous demand for money studies the first assumption concerns the role assigned to the interest rate in the demand for money function common practice identifies the rate of interest with the opportunity cost of holding money in section i this formulation is shown to blur an important distinction between the price of money and the price of money substitutes and to implicitly assume that the relevant price variable is the difference between these two distinct prices a second assumption is that the current ban on interest payments on demand deposits is fully effective in section ii i operationally define these price variables and estimate perfectly competitive interest payments on commercial bank deposits this is done by crudely measuring commercial bank marginal costs and assuming that all excess profit is passed on to depositors in indirect ways section iii presents estimates of a more complete longrun demand for money relationship which explicitly includes an own price and a cross price as separate influences and assumes that the prohibition of the payment of interest on deposits is totally ineffective although no firm conclusion is reached concerning the proper functional specification of the demand function the results significantly improve upon previous demand for money estimates which assumed that the interest payment prohibition is totally effective in section iv the results are summarized and implications of the analysis for monetary theory are presented my competitive demand for money formulation leads to a reinterpretation of the existing evidence on what is generally referred to as the interest elasticity of demand for money this estimate is shown to be significantly biased downward it also implies that the demand for and supply of money are more interdependent than is usually assumed

the sensitivity of the true cost of living to price induced and income induced changes in aggregate consumers tastes this article examines the sensitivity of the cost of living to some aspects of price changes and income changes that cannot be detected by laspeyres indexes like the cpi u or cpi w effects of price induced and income induced changes in consumers tastes on the cost of living in the united states from 1947 to 1981 are estimated and found to be generally substantial

the translog utility function and the demand for money in the united states in recent years considerable effort has been directed towards establishing the nature of the relationship between money and nearmonies but with mixed success the approaches vary from multi interest rate single equation studies to the careful simultaneous equations studies summarized and amended by feige and pearce 1977 and extended recently by donovan 1978 offenbacher 1979 and barnett 1980 the empirical results also vary with numerous studies favoring only one interest rate see the surveys in fisher 1978 1983 some claiming that a variety of entities are close substitutes for money e g chetty 1969 and others showing that weak substitution or even complementarity may be the result of the measurement of elasticities of substitution between money and a number of other assets e g feige and pearce 1977 offenbacher 1979 and barnett 1980 the debate seems to have overshadowed a second and equally intriguing issue which centers on the establishment of an acceptable definition of money the basic idea of this study is to take an approach that takes account of the different degrees of moneyness possessed by the various monetary assets this paper produces quantitative estimates of the degree of substitutability of other monetary assets for money in the context of a flexible functional form model with a

functional monetary aggregates monetary policy and business cycles abstract in this paper we take the economic approach to monetary aggregation in the context of highly disaggregated demand systems encompassing the full range of monetary assets in the united states we estimate the effectively globally regular minflex laurent ml and normalized quadratic nq flexible functional forms we produce the ml and nq functional monetary aggregates consistent with neoclassical microeconomic theory also addressing the issue of optimal monetary aggregation we highlight the influence of measurement on statistical inference by investigating whether the ml and nq functional monetary aggregates are of importance in resolving paradoxes associated with the measurement of money in doing so we also provide a comparison between the functional monetary aggregates and the fed s broad sum m2 aggregate and the center for financial stability broad divisia m3 and divisia m4 aggregates our detailed statistical analysis favors the functional monetary aggregates

currency substitution and economic monetary aggregates abstract existing analyses of currency substitution rely on the assumption that domestic monetary assets are perfect substitutes for each other the present paper examines empirically the currency substitution hypothesis using divisia monetary aggregates which relax the perfect substitutability assumption used in earlier work the empirical results support the hypothesis of currency substitution for the united states

vertical restraints with incomplete information when a firm contracts with a privately informed retailer vertical restraints may be insufficient to eliminate distortions arising from having to induce truthful reporting with franchise fee contracts which are equivalent to any other quantity forcing contract two distortions arise the first is the need to transfer surplus to the retailer and the second is a reduction in the marginal return to production with rpm contracts the first best outcome of vertical integration is obtainable if the retailer observes private information only about the state of demand if the retailer observes also private information about retailing costs both distortions persist in an earlier paper rey and tirole 1986 r t compare various forms of vertical restraints in a stochastic environment where retailers have superior private information than the firm about the uncertain state of the world they demonstrate that with asymmetric information vertical restraints may be insufficient in order to reproduce the first best outcome of vertical integration in r t contingencies are not feasible in the contracts since there are multiple retailers who can arbitrage in particular the wholesale price and the franchise fee under franchise fee contracting ff or the retail price imposed upon the retailer under retail price maintenance rpm cannot be selected contingent upon any future communication with the retailers in contrast in the present paper we assume that the firm is served by a single retailer which then facilitates consideration of contingent contracts the reason we make this different assumption is in order to investigate whether more sophisticated contracts can resolve the agency problem we still obtain similar negative results to the ones obtained by r t specifically vertical integration cannot generally be reproduced by appropriate contracting if retailers can observe private information about demand or retailing costs there is another characteristic of the class of contracts considered in r t that we modify in the present analysis while in r t the agent agrees to serve the firm as long as its ex ante expected payoff is nonnegative in the present paper we require that the ex post profits of the agent are nonnegative irrespective of how unfavorable is the realization of the state of nature this

measuring the average marginal tax rate from the individual income tax the economic effects of taxation depend on the configuration of marginal tax rates we consider here the appropriate measure of a marginal tax rate for the federal individual income tax which has a graduated rate structure and allows for numerous legal and illegal deductions from total income our conclusion is that the explicit marginal rate from the tax schedule is the right concept for many purposes hence we construct approximately weighted averages of these marginal tax rates for 1916 80 when weighted by adjusted gross income the arithmetic average of marginal tax rates is 5 in 1920 2 in 1930 6 in 1940 20 in 1950 23 in 1960 24 in 1970 and 30 in 1980 we also discuss the dispersion of marginal tax rates as well as the behavior of average tax rates and deductions from taxable income one noteworthy result concerns the fraction of adjusted gross income that accrues to families that face a marginal tax rate of at least 35 this fraction quadruples from 1964 to 1980 this abstract was borrowed from another version of this item

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

relative prices in the uk personal sector money demand function nonparametric demand analysis is used in order to establish admissible monetary aggregates and also to establish a potential role for relative prices in the money demand function a conventional money demand specification is then contrasted with a money demand function which contains the relative prices of durables nondurables and services as additional regressors evidence from long run cointegration analysis short run error correction models and nonnested testing all confirm a role for relative prices in the u k personal sector s money demand function copyright 1996 by royal economic society

a new empirically weighted monetary aggregate for the united states i introduction this article uses an approach to long run econometric modeling proposed by pesaran et al 2001 hereafter pss to develop an empirically weighted broad monetary aggregate for the united states and to demonstrate the advantages of this type of aggregate from a monetary policy perspective in particular we examine the ability of this type of approach to deal with periods of significant financial innovation and money demand instability a key requirement for monetary aggregates to provide a useful role in guiding monetary policy is that they should be stably related to the objectives of policy such as inflation or nominal income growth in this context the united states has exhibited periodic evidence of significant money demand instability most notably these have been goldfeld s 1976 case of the missing m1 in 1973 74 and the missing m2 episode of the early 1990s feldstein and stock 1996 in both cases the aggregate in question experienced a significant velocity increase and as a consequence previously established and apparently stable money demand relationships began to seriously overpredict the growth in these aggregates the missing m1 episode in 1973 74 together with subsequent evidence that m2 was more predictable than m1 led many economists to use m2 as an indicator of nominal activity hence during the 1980s m2 became the primary intermediate target of monetary policy furthermore the primacy of m2 appeared to be well supported by the available empirical evidence feldstein and stock 1994 for example established that the rate of change of m2 was a statistically significant predictor of the rate of change of nominal gross domestic product gdp over the period 1959 92 furthermore m2 remained statistically significant when short term interest rates were added to the relationship subsequent research such as miyao 1996 and estrella and mishkin 1997 however cast doubt on the robustness of this result carlson et al 2000 p 34 for example summarize the current situation by arguing that the promising empirical conclusions of feldstein and stock 1994 that established predictive content for m2 in a vector error correction setting do not seem to find support in data that extend through the mid 1990s the key factor behind the breakdown in the m2 relation appears to have been the substitution away from time deposits and into mutual funds particularly stock and bond mutual funds in the low interest rate environment of the early 1990s although the definition of m2 has been expanded by the federal reserve in the past to include money market mutual funds mmmfs and money market deposit accounts mmdas for example a number of analysts duca 1995 darin and hetzel 1994 orphanides et al 1994 have advocated that m2 should be expanded further to include these stock and bond mutual funds m2 significantly these studies typically use the simple sum aggregation approach in which all component assets are given equal and constant weights over time this approach does not seem consistent however with the accumulating evidence of a significant shift in wealth holders preferences sometime in the early 1990s carlson et al 2000 for example add to the empirical evidence that had accumulated during the 1990s by suggesting that the instability was associated with a permanent upward shift in m2 velocity between 1990 and 1994 furthermore they argue that our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds p 381 clearly simple sum aggregation is not able to take account of these changes in preferences more significantly however simple sum aggregation cannot take account of any changes in the relationship between component assets and nominal income over time although carlson et al 2000 do manage to reestablish a stable money demand relationship for the mzm money at zero maturity and m2m m2 minus small time deposits aggregates through the 1990s this is only possible by specifically accounting for the financial innovation that occurred in the early 1990s