interest rates and money in the measurement of monetary policy over the last 25 years a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies in light of this work the federal reserve s recent policy of quantitative easing with its goal of affecting the supply of liquid assets appears to be a radical break from standard practice alternatively one could posit that the monetary aggregates when measured properly never lost their ability to explain aggregate fluctuations and for this reason represent an important omission from standard models and policy discussions in this context the new policy initiatives can be characterized simply as conventional attempts to increase money growth this view is supported by evidence that superlative divisia measures of money often help in forecasting movements in key macroeconomic variables moreover the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary

maintaining low inflation money interest rates and policy stance abstract this paper presents a systematic empirical relationship between money and subsequent prices and output using us euro area and swiss data since the 1960 1970s monetary developments unlike interest rate stance measures are shown to provide qualitative and quantitative information on subsequent inflation the usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short term interest rates and real activity measures the analysis sheds light on the recent change in inflation volatility and persistence as well as on the phillips curve flattening and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

valuing oil properties integrating option pricing and decision analysis approaches there are two major competing procedures for evaluating risky projects where managerial flexibility plays an important role one is decision analytic based on stochastic dynamic programming and the other is option pricing theory or contingent claims analysis based on the no arbitrage theory of financial markets in this paper we show how these two approaches can be profitably integrated to evaluate oil properties we develop and analyze a model of an oil property either a developed property or a proven but undeveloped reserve where production rates and oil prices both vary stochastically over time and at any time the decision maker may terminate production or accelerate production by drilling additional wells the decision maker is assumed to be risk averse and can hedge price risks by trading oil futures contracts we also describe extensions of this model that incorporate additional uncertainties and options discuss its use in exploration decisions and in evaluating a portfolio of properties rather than a single property and briefly describe other potential applications of this integrated methodology

estimation of current quarter gross national product by pooling preliminary labor market data two methods of using labor market data as indicators of contemporaneous gross national product gnp are developed the establishment survey data are used by inverting a partial adjustment equation for hours a second gnp forecast can be extracted from the household survey by using okun s law using preliminary rather than final data adds about 2 to 4 percentage point to the expected value of the root mean squared errors and changes the weights that the pooling procedure assigns to the two forecasts the use of preliminary rather than final data results in a procedure that assigns more importance to the okun s law forecast

institutional change and the velocity of money a century of evidence we study common features in the income velocity of money income and interest rates for canada the u s the u k sweden and norway using annual data from 1870 the recently developed and refined techniques of testing for cointegration are employed the evidence suggests there is a unique long run relationship in velocity but not in income and interest rates moreover we find that only a model which includes institutional change proxies is properly specified we argue that the evidence is best interpreted in the context of common historical developments in the respective countries financial systems

is inflation always and everywhere a monetary phenomenon using a sample of about 160 countries over the last 30 years we test for the quantity theory relationship between money and inflation when analysing the full sample of countries we find a strong positive relation between long run inflation and the money growth rate the relation is not proportional however the strong link between inflation and money growth is almost wholly due to the presence of high or hyper inflation countries in the sample the relationship between inflation and money growth for low inflation countries on average less than 10 per annum over the last 30 years is weak

financial technology shocks and the case of the missing m2 m2 growth was unusually weak in the early 1990s when its velocity soared although m2 growth subsequently recovered its velocity plateaued at a high level giving rise to a case of missing money these swings in m2 growth have accompanied opposite swings in bond mutual fund inflows m2 growth is better tracked and the missing m2 problem is resolved when money models are modified to account for shifts in bond mutual fund costs this approach avoids the capital gains and portfolio substitution problems posed by adding bond or equity funds to m2 while capturing the substitution effects relevant to money demand

money and prices evidence from the g7 countries this paper examines the exogeneity of money and prices within a money demand vector error correction model the exogeneity of the variables is central to several buffer stock models however the paper makes two modifications to the traditional approach the first is to explicitly acknowledge the importance of the supply of money function by including the function alongside its demand counterpart the second is to estimate the behaviour of the nominal sector and real sector simultaneously overall the results from the g7 countries suggest that the concerns raised by buffer stock models are relevant

rescaling contraction with a lower cost technology when revenue declines abstract a mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource off shore oil rigs are an illustration since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow so a more appropriate extraction technology becomes economic a real option representation is formulated on a stochastic oil price and deteriorating output volume we consider investment divestment decisions both separately and jointly which have different implications for government policies and also option values the resulting model yields analytical or semi analytical results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases depending on the current revenue if divestment and switching are considered jointly however greater volatility could also promote hysteresis

frank ramsey s a mathematical theory of saving in 1928 frank ramsey a british mathematician and philosopher at the time aged only 25 published an article ramsey 1928 whose content was utterly innovative and sowed the seeds of many subsequent developments beside the theory of optimal growth as developed in cass 1965 and koopmans 1965 one could argue that the essence of several subsequent influential theories such as the permanent income life cycle theory of consumption to model individual saving choices were already contained in that seminal article ramsey f p 1928 a mathematical theory of saving economic journal vol 38 152 pp 543 59

alternative p models of inflation forecasts i introduction inflation forecasts play a key role in monetary and macroeconomics during the past three decades dramatic changes in the inflationary environment have stimulated a wealth of studies on the relative accuracy of alternative models of inflation forecasts in particular mehra 1988 stockton and glassman 1987 and reichenstein and elliott 1987 found varying performance in traditional models including the term structure phillips curve and typical monetarist models across postwar periods against this background hallman porter and small 1991 hps introduced a model called p star p sup as inflation forecasters holy grail the p sup framework is built on the general perception that inflation over the long run is a monetary phenomenon however as christiano 1989 argued p sup entails no practical implication for shorter run horizons that are of primary interest to inflation forecasters he further pointed out that for the period of 1970 89 one to three year ahead forecasts from p sup are not meaningfully more accurate than those from traditional models the usefulness of p sup as an anchor for the price level also suffers from another limitation the assumption that velocity which is the ratio of nominal gdp to a monetary aggregate is stable over the long run hps justified the validity of this hypothesis based on postwar 1955 88 data for the broad monetary aggregate m2 used in their model during the early 1990s however the growth rate of m2 apparently slowed down relative to that of gdp leading to a sharp rise in m2 velocity this consequently caused p sup to persistently underpredict actual inflation duca 1995a has provided a detailed discussion on plausible sources of this instability in velocity the literature has also offered plausible solutions to correct p sup models for the observed structural change ranging from redefining the relevant monetary aggregate to directly accounting for a trend break in velocity while evidence supports that these individual methods improve upon the original p sup formulation there is a lack of research comparing their performance especially in periods other than the early 1990s the first objective of the present study therefore is to fill this void the second objective of this paper is to reevaluate the robustness of earlier findings regarding the relative performance of hps s original p sup model to this end we divide the full out of sample forecast period of 1970 96 into three subsamples our results reveal a pattern of switching forecast performance between money based and output based models across recent periods the fragility of these models highlights the extent of temporal instability in the inflation generating process this paper proceeds as follows the next section describes alternative p sup model specifications and other inflation forecast models section iii discusses the forecast results section iv summarizes and concludes ii model specifications the p sup model the benchmark of the p sup model is the quantity theory of money which relies on the equation of exchange 1 p sub t equivalent to m sub t v sub t y sub t where p is the price level m is a measure of money supply v is the velocity of money y is the level of output real gdp and a time subscript denotes the current value of a variable it follows that if v sub t and y sub t reach their long run equilibrium levels at mathematical expression omitted and mathematical expression omitted respectively then the current equilibrium price level mathematical expression omitted can be determined as 2 mathematical expression omitted according to hps mathematical expression omitted is measured by the historical mean of v sub t and mathematical expression omitted by the level of potential gdp

do demographics prevent consumption aggregates from reflecting micro level preferences abstract most simulated micro founded macro models use solely consumer demand aggregates in order to estimate preference parameters of a representative consumer for use in policy evaluation focusing on dynamic models with time separable preferences we show that aggregation holds if and only if momentary utility functions fall in the identical shape harmonic absolute risk aversion ishara utility class identifying which parameters of ishara utility functions are allowed to vary over time given this theoretical result it should be easy to empirically reject the aggregation properties that the macroeconomic representative consumer identification approach requires it suffices to show that permanent incomes guaranteeing the same living standard across households of different size violate an affine relationship in order to test the validity of this affine equation we develop a vignette survey that produces appropriate data without demand estimation restrictions imposed by models surprisingly in six countries this equation is not rejected lending support to using consumer demand aggregates

energy investment risk assessment for nations along china s belt road initiative abstract overseas energy investment as an effective way of securing energy supply is being favored by the world s leading energy consuming countries however energy investment has the potential high risk on multiple forms including political and regulatory risk currency liquidity and refinancing risk as well as resource risk and so on to effectively evaluate overseas energy investment risk this study proposed a new indicator system from six dimensions furthermore a fuzzy integrated evaluation model based on the entropy weight was constructed to rate the energy investment risk for 50 nations along china s belt road initiative the findings indicate that resource potential and chinese factors have become the main determinant of energy investment risk while environmental constraints and political risk should also be considered for investing decisions in conclusion saudi arabia united arab emirates pakistan kazakhstan and russia are the most ideal choices for china s energy investment balancing resource potential and investment environment

interpreting euro area inflation at high and low frequencies abstract several authors have recently interpreted the european central bank s ecb s two pillar framework as separate approaches to forecast and analyse inflation at different time horizons or frequency bands the ecb has publicly supported this understanding of the framework this paper presents further evidence on the behaviour of euro area inflation using band spectrum regressions which allow for a natural definition of the short and long run in terms of specific frequency bands and causality tests in the frequency domain the main finding is that variations in inflation are well explained by low frequency movements of money and real output growth and high frequency fluctuations of the output gap

economic reforms and long run money demand in china implications for monetary policy although money demand equations have been estimated for many western countries only recently have researchers investigated the demand for money in centrally planned economies like china chow 7 who helped pioneer the analysis of chinese macro data estimates a simple money demand function derived from the quantity theory using annual data from 1952 through 1983 he concludes that the quantity theory provides a reasonable first approximation in explaining the demand for money in china 7 325 portes and santorum 27 use real and nominal adjustment specifications and test for the homogeneity of money demand with respect to the price level and real income feltenstein and farhadian 11 estimate a money demand function based on cagan s 3 work and blejer et al 1 estimate an error correction model using data for only the 1980s both studies find that the demand for real balances is explained by real income and an opportunity cost measure

can we improve the perceived quality of economic forecasts a number of topics are discussed concerning how economic forecasts can be improved in quality or at least in presentation these include the following using 50 uncertainty intervals rather than 95 noting that even though forecasters use many different techniques they are all occasionally incorrect in the same direction that there is a tendency to underestimate changes that some expectations and recently available data are used insufficiently lagged forecasts errors can help compensate for structural breaks series that are more forecastable could be emphasized and that present methods of evaluating forecasts do not capture the useful properties of some methods compared to alternatives

dynamics of inflation in india a p star approach p star models have become increasingly popular in recent years in developed countries however data constraints have limited their applicability to the ldcs in this paper such a model is attempted for india using both annual and quarterly data for the period 1955 1995 it is found that velocity in india is trend stationary and using cointegration techniques it is then possible to develop a model to gauge inflationary pressures in the economy the model is well calibrated to data and in out of sample forecasts it significantly outperforms a seasonal arma benchmark model the velocity gap version of the model is particularly successful

transitional dynamics and the distribution of wealth in a neoclassical growth model abstract the evolution of the personal distribution of wealth in a standard neoclassical growth model is studied if the economy is growing toward the steady state and preferences are such that marginal utility from consumption is infinite finite at some all positive non negative consumption level s then the average saving propensity of agents is positively negatively related to their wealth if the economy is decaying toward the steady state these relationships are reversed if wealth and average saving propensity are positively negatively related the distribution of current period wealth lorenz dominates is lorenz dominated by next period s distribution of wealth

the relevance of p star analysis to uk monetary policy recent articles have attempted to restore the use of a simple measure of the money supply as an indicator of future price levels p star and to reestablish a causal link from money to prices in this paper we argue that the p star approach is flawed it is certainly more complex than traditional monetarist approaches but the fundamental questions of causality are in no way either affected or resolved we argue that the p star relationship does not have a causal link with prices but rather the causality runs from prices to money we also find that there is some causality running from money to real income so that monetary conditions do seem to have some predictive power for future levels of activity copyright 1994 by royal economic society

u s inequality debt constraints or incomplete asset markets abstract to examine the role of debt constraints and incomplete asset markets lack of insurance markets in explaining u s inequality we run horse races between competing models for a widely used model we decompose inequality into its fundamental driving forces the underlying source of inequality in all models is uninsurable idiosyncratic risk both debt constraints and incomplete asset markets are needed to account for inequality but asset market incompleteness is the key friction it better accounts for the concentration and dispersion of wealth and is the most costly friction in terms of welfare tight debt constraints are important for explaining the lower tail of the wealth distribution

optimal path for china s strategic petroleum reserve a dynamic programming analysis abstract this paper proposes a dynamic programming model to explore the optimal stockpiling path for china s strategic petroleum reserve before 2020 the optimal oil acquisition sizes in 2008 2020 under different scenarios are estimated the effects of oil price risks and elasticity value on inventory size are further investigated it is found that the optimal stockpile acquisition strategies are mainly determined by oil price and total inventory costs while oil supply disruption is not considered china s optimal stockpile acquisition rate increases from 19 2 to 52 million barrels from 2008 to 2020 if an oil supply disruption occurs the oil acquisition rate will be reduced significantly however it may not be a good strategy to interrupt oil reserve activities in order to minimize the total costs for the entire planning period

equilibrium portfolios in the neoclassical growth model abstract this paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets preferences are purposely restricted to be quasi homothetic the main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0 fixing portfolios is the optimal equilibrium strategy in stationary endowment economies with dynamically complete markets however when the environment displays changing degrees of heterogeneity across agents the trading strategy of fixed portfolios cannot be optimal in equilibrium very importantly our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non human wealth are linearly independent

the overlapping generations model in 1947 during the last decade while overlapping generations provided the framework for the study of many theoretical issues no one seems to have noticed the use of this model in the book published by maurice allais in 1947 economie et intert the introduction of the model is commonly attributed to a well known article published in 1958 by paul samuelson this note intends to bring the unnoticed anteriority of allais use of the model to the attention of a wide readership the case may be of interest not only to economic theory but also to the more general historicological study of the process by which science is being built indeed my role in the story is surprising and may reveal something worth remembering i had closely studied economie et inwret in 1948 in particular the appendix in which the overlapping generations model is used i later worked on capital theory and intensively reflected in 1958 on the relationship between samuelson s findings and my own results but i did not pay attention to the similarity between the models used independently by allais and samuelson it is only recently when looking for what might be the subject of my contribution to a festschrift in honor of allais that i became conscious of this similarity malinvaud 1986 in the meantime like others i referred to samuelson s article when introducing overlapping generations in my own writings

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

real options for risk management in petroleum development investments irreversible investments made with incomplete information are the mainstay of the petroleum industry sequential non repetitive investment decisions with alternative pathways associated with exploration through full field development are common we demonstrate a policy development approach that combines the bellman equation for dynamic programming with a real options valuation algorithm this represents the first demonstration of the mathematical union of the two techniques for branching decision pathways producing a generalized policy development framework that provides risk management of investments production expansion investment decisions for a central asian gas condensate field are analyzed using the framework

an augmented p star model of indian inflation abstractan augmented p star model is estimated and tested to identify the drivers of inflation in india the model includes monetary and non monetary factors demand pull and cost push factors and

inflation unemployment and duration abstract in tge earky 1990s core cpi inflation and employment cost inflation have been overpredicted by phillips curve models while the duration of unemployment has been unusually high duration adds significant information about core inflation in the post volcker disinflation period

should bond funds be added to m2 abstract in the early 1990s m2 growth has been weaker than estimated while bond mutual funds have grown rapidly this study assesses whether adding bond funds to m2 would yield a monetary aggregate that is more explainable using a standard error correction model of money with and without modifications for bond interest rate and thrift resolution effects results indicate that it is important to net out institutional and ira keogh assets from bond funds as is done for m2 and that adding such a bond fund series to m2 results in an aggregate that is somewhat more explainable than m2

report on maurice allais scientific work maurice allais is without any doubt one of the most outstanding economists of his generation in particular from 1945 onwards he has had a decisive direct and indirect influence on the development of economic research in france and its subsequent opening to the international scientific community initially an engineer himself allais taught economics at the ecole des mines in paris until the 1970s and after world war ii managed to attract a brilliant cadre of young economists or graduates such as marcel boiteux gerard debreu jacques lesourne edmond malinvaud andre nataf the impact of maurice allais on the state of our discipline in france and at the international level has indeed been tremendous not only through his own great scientific achievements but also through those of his students or disciples 1 an anecdote circulates among french economists claiming that the respective careers of two of allais students i e boiteux and debreu were in fact determined by chance after world war ii here was a single fellowship for an extended visit to american universities and the two candidates agreed on flipping a coin in order to decide who would go debreu won and what followed is known boiteux while making profound contributions to economic theory on his way eventually went on to head one of the largest french public firms electricit6 de france see e g boiteux 1956 1 it is doubtful indeed that a coin alone could ever have had such dramatic consequences the respective intellectual bents of the two men were probably already evolving in rather different directions when the event occurred yet the story is revealing of the scientific stature of allais and the surprisingly extensive range of his interests as he was able to gather around him quite a few of the best minds of the time regardless of whether they were attracted by the most abstract theory or by more practical

risk premia in commodity price forecasts and their impact on valuation abstract commodity price driven valuation models require a stochastic price input if the value of managerial flexibility such as the option to defer investment until the optimal time and the option to abandon a project is to be estimated the risk neutral version of the stochastic price model is typically used in academic work however risk adjusted models of the expected spot price are often used in practice these two approaches are connected by a risk premium which is unfortunately often difficult to estimate in this work we use natural gas futures prices in a kalman filter approach with maximum likelihood estimation to parameterize the schwartz and smith 2000 stochastic price model and then apply an asset pricing model to address the large uncertainty of the risk premia parameter estimates to evaluate the impact of the risk premia and other parameters in the two factor price model on project valuation we apply the price model to a prototypical shale gas investment both for a base reference case as well as for cases where there are real options to optimally time decisions to invest or to abandon the project using this approach we are able to determine the implied risk adjusted discount rate that would be used with the spot price forecast given the two factor model risk premia and we also discuss the impact of the risk premia on project value relative to other model parameters

nobel laureate the many other allais paradoxes maurice allais is know for the 1952 allais paradox but other very important parts of his work remain virtually unknown to most economists as paul samuelson 1983 wrote had allais earliest writings been in english a whole generation of economic theory would have taken a different course perhaps the nobel award will encourage economists to examine his work more closely let me first give a quick portrait of maurice allais and then list some of his major contributions to the theory of markets to the theory of capital to decision making under risk and to monetary dynamics

incomplete markets labor supply and capital accumulation we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks borrowing constraints and endogenous labor supply in the exogenous labor supply case e g aiyagari 1994 huggett 1997 the presence of limited insurance increases the demand for savings for precautionary reasons as a consequence capital and output are higher under incomplete markets we show that if labor hours are endogenous labor supply is likely to be lower under incomplete markets because those agents who experience a high shock to productivity are ex post richer and they work fewer hours in some cases this wealth effect can overcome the aggregate precautionary savings and give rise to lower savings and output under incomplete

money and inflation in the euro area a case for monetary indicators abstract this paper examines inflation indicators for the euro area by studying the relationship between inflation output money and interest rates using data spanning 1980 2001 the central finding is that both the output gap and the real money gap the difference between the real money stock and the long run equilibrium real money stock contain considerable information regarding future inflation in contrast the eurosystem s money growth indicator the difference between nominal money growth and a reference value the prominent first pillar in its monetary strategy contains little information about future inflation and no information beyond that contained in the output and real money gaps the predictive performance of the output gap has improved compared to that in a previous version of this paper most likely because of better estimation methods

estimating potential output as a latent variable this article proposes a new method for estimating potential output in which potential real gross domestic product gdp is modeled as an unobserved stochastic trend and deviations of gdp from potential affect inflation through an aggregate supply relationship the output and inflation equations together form a bivariate unobserved components model which is estimated via maximum likelihood through the use of the kalman filter algorithm the procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

formation of inflation expectations from the simple to the rational expectations hypothesis using quarterly survey expectational data for seven ec countries this paper tests how producers form their inflation expectations the results indicate that the simple expectational hypotheses do not give an adequate account of the variation in the price expectational data because they fail to allow for the information contained in forecast models of inflation however the producers generally do not incorporate disequilibrium inflation into their inflation expectations

inflation and money in colombia another p star model this document presents the estimation of a recent version of the p star model by gerlach and svensson 2003 and its predictions for colombia january 1980 to april 2005 the model is designed to explain the inflation gap observed rate minus the target based on the monetary gap and the output gap according to the results the output gap lacks significant effects while the monetary gap has significant positive effects on inflation

what makes the output inflation trade off change the absence of accelerating deflation in japan it is standard to model the output inflation trade off as a linear relationship with a time invariant slope we assess empirical evidence for two sets of theories that allow for endogenous variation in the slope of the short run phillips curve at an empirical level we examine why large negative output gaps in japan in the late 1990s did not lead to accelerating deflation but instead coincided with stable albeit moderately negative inflation our results suggest that this episode is most convincingly interpreted as reflecting a gradual flattening of the phillips curve we find that this flattening is best explained by models with endogenous price durations these models imply that in any economy where trend inflation is substantially lower or substantially higher today than in past decades time variation in the slope of the phillips curve has become too important to ignore

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

real option valuation of free destination in long term liquefied natural gas supplies this paper presents a real option model for the valuation of destination flexibility in long term lng supplies stochastic price dynamics in the different markets is modelled through geometric brownian motion processes mean reversion is considered as well as correlation between markets but instead of the usual correlation in return shocks a price convergence term is introduced representing the arbitrage streams between markets model parameters are estimated from market data on lng prices by maximum log likelihood the goodness of the fit for the proposed model is tested as well as for two alternative models confidence intervals for the parameters are given results for the model are calculated by monte carlo simulation frequency distributions for the main results are plotted the effect of the main parameters of the model is studied i e price volatilities price convergence initial prices in the markets mean reversion extra transportation costs number of alternative markets the value of destination flexibility is found to be an important share of the value of lng

money growth output growth and inflation estimation of a modern quantity theory 1 introduction during the years 1980 1993 annual inflation averaged 81 5 in latin america 12 3 in africa but only 6 4 among 16 countries in the oecd within latin america inflation ranged from 8 2 in honduras to 374 3 in argentina and in africa from 0 6 in the republic of the congo to 61 6 in sierra leone what are the reasons for these large differences if cross country differences in inflation can be linked closely to corresponding differences in money growth the reason is clear but if the link is weak then other reasons must be sought several authors have recently rejected money growth as an explanation of inflation there are three lines of criticism the first typified by baba hendry and starr 1992 estrella and mishkin 1997 and cochrane 1998 argues that the income velocity of and thus the demand for monetary aggregates is so unstable that money growth is an unreliable explanation a second criticism closely related to the first is a time series issue if money the price level and output are not cointegrated then there is no stable long run relationship among them some researchers find evidence of cointegration hoffman and rasche 1991 baba hendry and starr 1992 stock and watson 1993 hoffman rasche and tieslau 1995 swanson 1998 carlson et al 2000 dutkowsky and atesoglu 2001 but others do not stock and watson 1989 hafer and jansen 1991 friedman and kuttner 1993 thoma 1994 the cointegration question remains unsettled a third criticism is quite distinct from the first two it argues that in dynamic general equilibrium models with infinitely lived households money in the household utility function and rational expectations there is a class of policy rules with a unique solution that shows that the price level is independent of monetary policy but dependent strictly on fiscal policy this fiscal theory of price level determination breaks any link between money growth and inflation the key fiscalist models were developed by leeper 1991 sims 1994 1996 and woodford 1994 1995 1998 a simple version is summarized succinctly by mccallum 2001 who demonstrates an alternative mathematical solution to a fiscalist model that yields a monetary explanation of the price level but the monetarist foundations are under vigorous attack 1 this paper specifies and estimates a modern version of the quantity theory of money growth real gdp growth and inflation its traditional feature is that a country s long run inflation rate increases with its money growth rate the modern wrinkle is that inflation is mitigated by real gdp growth i assume that real gdp growth is governed by exogenous forces such as growth in human capital physical capital formation and technological progress the model makes no attempt to explain gdp growth rates long run neutrality is presupposed i show that the quantity theory can be written as a regression model whose theoretical implications can easily be tested section 3 this paper then makes three empirical contributions the first is to estimate a long run version of the quantity theory and test its implications statistically sections 5 and 6 the estimates are long run in the important sense that inflation money growth and real gdp growth rates are annual averages computed for 81 countries over the 14 years from 1980 to 1993 short run changes in the series are excluded by design the second is to partition statistically the roles of money and real gdp growth as determinants of inflation section 7 the third is to conduct out of sample forecasts section 8 here we discover how well the model estimated for one group of countries predicts inflation in others this paper differs from previous work in three important ways first earlier research has not been based on theoretically grounded regression models friedman 1956 1968 klein 1956 friedman and friedman 1980 friedman and schwartz 1982 mccandless and weber 1995 rolnick and weber 1997

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

distributional dynamics in a neoclassical growth model the role of elastic labor supply we examine the evolution of the distributions of wealth and income in a ramsey model in which agents differ in their initial capital endowment and where the labor supply is endogenous the assumption that the utility function is homogeneous implies that the macroeconomic equilibrium is independent of the distribution of wealth and allows us to characterize fully income and wealth dynamics we find that although the dynamics of the distribution of wealth are similar under fixed and flexible labor those of the income distribution are not in response to a structural change income inequality may move in opposite ways depending on whether or not the labor supply is fixed

the long run link between money growth and inflation is inflation always a monetary phenomenon many economists believe that the link between money growth and inflation in the u s has weakened over the last two decades due in part to the federal reserve s policy experiment in 1979 1982 and innovations in the financial sector of the economy i find that the long run relationship between money growth and inflation is strong in a statistical sense and important economically the key result is that the trend or growth component in cpi inflation is entirely due to the trend component of monetary base growth jel c32 e31 e51

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

decentralization in infinite horizon economies an introduction abstract the paper summarizes some issues involved in developing a theory of decentralized resource allocation mechanism in infinite horizon economies even in a classical environment a competitive mechanism may lead to an inefficient or nonoptimal allocation for an infinite horizon economy it remains however to explore whether the usual price quantity messages can be supplemented to design decentralized mechanisms generating optimal outcomes

endogenous market incompleteness with investment risks abstract this paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology the investment risk cannot be fully insured with optimal contracts because shocks are private information we show that the presence of investment risks lead to under accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured we also show that the availability of state contingent optimal contracts compared to simple debt contracts brings the aggregate stock of capital close to the complete markets level institutional reforms that make possible the use of these contracts have important welfare consequences

the relative income hypothesis abstract despite its theoretical dominance the empirical case in favor of the permanent income hypothesis is weak contrary to one of its basic implications a growing body of evidence suggests that rich households save a higher proportion of their permanent income than poor households we propose an overlapping generations economy where households care about relative consumption as a result an individual s consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group a permanent income version of duesenberry s 1949 relative income hypothesis across households the savings rate increases with income while aggregate savings are independent of the income distribution

monetary analysis and monetary policy in the euro area 1999 2006 abstract this paper assesses the practical experience of monetary analysis at the ecb from the introduction of the euro in 1999 through 2006 the paper exploits a unique and rich real time data set containing both the vintages of data and the economic models that have been employed in the ecb s monetary analysis during the first eight years of monetary union it embodies both a description of how monetary analysis was conducted over this period and a quantitative evaluation of the indicators of risks to price stability that derived from this analysis a close investigation of this material is used to evaluate the role monetary analysis has played in the evolution of monetary policy in the euro area

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

a real options based model and its application to china s overseas oil investment decisions abstract this paper applies real options theory to overseas oil investment by adding an investment environment factor to oil resource valuation a real options model is developed to illustrate how an investor country or oil company can evaluate and compare the critical value of oil resource investment in different countries under oil price exchange rate and investment environment uncertainties the aim is to establish a broad model that can be used by every oil investor country to value overseas oil resources the model developed here can match three key elements 1 deal with overseas investment the effects of investment environment and exchange rates 2 deal with oil investment oil price production decline rate and development cost etc 3 the comparability of the results from different countries different countries oil investment situation can be compared by using the option value index ovi china s overseas oil investment is taken as an example to explain the model by calculating each oil investee country s critical value per unit of oil reserves and examining the effect of different factors on the critical value the results show that the model developed here can provide useful advice for china s overseas oil investment program the research would probably also be helpful to other investor countries looking to invest in overseas oil resources

money and velocity during financial crises from the great depression to the great recession abstract this study models the demand for a broad monetary aggregate m2 from the great depression through the great recession key to the model is the interaction between a measure of time variation in economic agents perceived financial risk and an index of the cost of portfolio adjustment the finding of a useful money demand relationship suggests that skepticism regarding the indicator role of a broad liquid money aggregate as a policy guide may be exaggerated further our model provides some guidance for policymakers who face the challenge of unwinding large balance sheets as risk premia return to normal and velocity adjusts

the information content of money in forecasting euro area inflation this article contributes to the debate on the role of money in monetary policy by analysing the information content of money in forecasting euro area inflation we compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using bayesian and other estimation techniques we find that money contains relevant information for inflation in some model classes money based new keynesian dynamic stochastic general equilibrium dsge models and vector autoregressions vars incorporating money perform better than their cashless counterparts but there are also indications that the contribution of money has its limits the marginal contribution of money to forecasting accuracy is often small money adds little to dynamic factor models and it worsens forecasting accuracy of partial equilibrium models finally nonmonetary models dominate monetary models in an all out horserace

the value of time and recent u s money demand instability much controversy has surrounded the u s money demand relationship or more precisely its stability this is rather disappointing in light of the central importance of money demand estimates for the formulation and implementation of effective monetary policy and for almost all theories of aggregate economic activity to date the vast majority of alternative money demand specifications have generally failed to produce a stable money demand function throughout the 1970s and 1980s

institutional hypothesis of the long run income velocity of money and parameter stability of the equilibrium relationship it has recently been argued that when the conventional specification of m2 income velocity is extended to include proxies for two types of institutional change as emphasized by bordo and jonung 1987 1990 corresponding to the processes of monetization and increasing financial sophistication of financial developments this extended model is stable in the sense that one can reject the null hypothesis of no cointegration against the alternative of a single cointegrating vector there may be implications that such an equilibrium relation is a structural income velocity of money function the evidence based on century long data from 1880 to 1986 presented in this paper about parameter instability of the cointegrating vector of velocity with its determinants for canada norway sweden and the united kingdom casts doubt on this interpretation the evidence is based on using formal stability tests moreover it has an eyeball support from the sequential estimates of various parameters of the cointegrating relationship including income and interest semi elasticities

adding bond funds to m2 in the p star model of inflation abstract during the early 1990s m2 growth has been unusually weak and the p star model has underpredicted inflation at the same time bond funds have grown rapidly we find that the p star model performs well recently when m2 is adjusted for bond funds

financial market globalization symmetry breaking and endogenous inequality of nations this paper investigates the effects of financial market globalization on the inequality of nations the world economy consists of inherently identical countries which differ only in their levels of capital stock each country is represented by the standard overlapping generations model modified only to incorporate credit market imperfection an integration of financial markets affects the set of stable steady states as it changes the balance between the equalizing force of the diminishing returns technology and the unequalizing force of the wealth dependent borrowing constraint the model is tractable enough to allow for a complete characterization of the stable steady states in the absence of the international financial market the world economy has a unique steady state which is symmetric and stable in the presence of the international financial market symmetry breaking occurs under some conditions that is the symmetric steady state loses its stability and stable asymmetric steady states come to exist in the stable asymmetric steady states the world economy is endogenously divided into the rich and poor countries the borrowing constraints are binding in the poor but not in the rich the world output is smaller the rich are richer and the poor are poorer in any of the stable asymmetric steady states than in the unstable symmetric steady state

money in an estimated business cycle model of the euro area this article examines the role of money in a small scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood the model allows for both intertemporal and intratemporal non separability in preferences we find first that real balances do not affect the marginal utility of consumption second money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price output and interest rates fluctuations third the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

taxation and income distribution dynamics in a neoclassical growth model we examine how changes in tax policies affect the dynamics of the distributions of wealth and income in a ramsey model in which agents differ in their initial capital endowment the endogeneity of the labor supply plays a crucial role in determining inequality as tax changes that affect hours of work will affect the distribution of wealth and income reinforcing or offsetting the direct redistributive impact of taxes our results indicate that tax policies that reduce the labor supply are associated with lower output but also with a more equal distribution of after tax income we illustrate these effects by examining the impact of recent tax changes observed in the us and in european economies

m3 money demand and excess liquidity in the euro area recent empirical studies have found evidence of unstable long run money demand functions if recent data are used if the link between money balances and the macroeconomy is fragile the rationale of monetary aggregates in the ecb strategy has to be doubted in contrast we present a stable long run money demand relationship for m3 for the period 1983 2006 to obtain the result the short run homogeneity restriction between money and prices is relaxed and a break in the income elasticity of money demand after 2001 is taken into account measures of excess liquidity do not show significant inflation pressures

more evidence on the money output relationship i introduction the empirical relationship between money and real output continues to produce conflicting evidence stock and watson 1989 using monthly u s data for the period 1960 85 report that while actual money growth m1 does not granger cause the growth of industrial production its detrended component does krol and ohanian 1990 internationalize stock and watson s study and find that both actual and detrended ml growth granger cause output growth in the u k but that neither series affects output growth in japan canada and germany friedman and kuttner 1992a 1992b 1993 question the role of money in explaining output behavior they report 1993 that even though the stock watson specification is used simply updating the sample through 1990 yields the result that detrended m1 growth no longer explains output growth friedman and kuttner also argue that the commercial paper rate or the spread between the three month treasury bill and the commercial paper rate provides a better gauge for output s reaction to monetary policy changes replacing the treasury bill rate used by stock and watson with the commercial paper rate or the spread friedman and kuttner find that m1 growth has no marginal explanatory power over output a feature of recent investigations of the money output link is the general use of a var specification based on the presumption that the series are difference stationary e g feldstein and stock 1994 several recent studies however have questioned this presumption due to the low power of unit root tests dejong et al 1992 dejong 1992 dejong and whiteman 1991a 1991b and rudebusch 1993 these studies suggest that it is difficult to distinguish between difference stationary as the null and trend stationary as the alternative hypothesis given the uncertainty about the existence of a unit root in economic time series we re examine the money output relation by specifically considering the affect of assuming that the series are trend stationary or difference stationary such an investigation is important to determine if permanent temporary changes in money and other series create permanent temporary shifts in real output for example if real output and money contain a unit root i e they are best represented by the difference stationary model permanent money shocks may produce permanent shifts in output put another way permanent money shocks may have a long run impact because they affect the stochastic trend component of output and thus change the output level for all future horizons on the other hand if output and other series are represented by a trend stationary model fluctuations around a trend level of these series are stationary mean reverting under this model a transitory money shock may only have a short run impact on output as it quickly returns to its trend level to analyze the sensitivity of results to different stationarity assumptions used we estimate two var systems one system uses the log levels of the variables along with a deterministic time trend the other uses the log difference of the series and excludes the trend term the first system represents the trend stationary specification and the second one represents the difference stationary specification there is some evidence that the money output link may be sensitive to the presence of a deterministic trend term e g eichenbaum and singleton 1986 stock and watson 1989 even so our study provides a direct comparison based on identical data sets of the effects that the two different stationarity specifications have on the money output results while testing the robustness of the money output connection is our main focus we also provide some different perspectives on the debate one is to use both long and short term data sets most studies limit the analysis to quarterly data from the post 1960 era we study the link between money interest rates and output using annual data over the extended period 1915 1993

lessons on monetary policy from the 1980s t he half decade running from mid 1982 to mid 1987 was a pretty good era for u s monetary policy as these things go a sharp easing of policy beginning some time around midyear 1982 helped set in motion a recovery from the most severe business downturn the united states had experienced since the 1930s a downturn that tight monetary policy earlier on had deliberately brought about in order to slow the alarming acceleration of prices the recovery that ensued developed into a sustained expansion that continued without interruption through the end of 1987 thereby setting a new record for the longest recorded business expansion in u s peacetime experience a fiscal policy based on unprecedentedly large and continually growing structural budget deficits was a major factor underlying this record length expansion but at least monetary policy did not stand in the way just as importantly the severe 1981 82 recession served its intended purpose of substantially restoring price stability and even after five years of expansion inflation remained modest by recent historical standards at least as judged by these outcomes for the standard objectives of macroeconomic policy u s monetary policy was a distinct success during these years economists hoping to say something useful about monetary policy have had a tougher time the quantitative relationships connecting income and price movements to the growth of familiar monetary aggregates including especially the m1 measure of the money stock that had been the chief focus of monetary policy during 1979 82 utterly fell apart during this period moreover the collapse of these long standing

the use of real options approach in energy sector investments abstract energy shortage global warming and climate change led to an increase in the use of alternative sources of energy with renewable energy sources res playing a fundamental role in this new energetic paradigm however the investment costs often constitute a major barrier to their spread use moreover the overall benefits of renewable energy technologies are often not well understood and consequently they are often evaluated to be not as cost effective as traditional technologies from the moment that the energy sector started a deregulation process with a high level of competitiveness and associated increased market uncertainty traditional project evaluation techniques alone became insufficient to properly deal with these additional risk and uncertainty factors the diffusion of the renewable energy technologies is also affected by this feature the way investors evaluate their investments call now for the use of more sophisticated evaluation techniques real options approach can deal with these issues and as so began to be considered and applied for the energy sector decision aid this approach it is now extensively widespread in evaluating investment projects in the energy sector a large set of applications in almost all fields of energy decision making from electricity generation technologies appraisal to policy evaluation is available in the literature however the use of this technique in the field of res is still limited and worth to be analysed this paper addresses this issue a review of the current state of the art in the application of real options approach to investments in non renewable energy sources and res is presented giving perspectives for further research in this field

dynamics of income distribution in this paper we have obtained closed form solutions in cass koopmans growth models with heterogeneous agents the relationship between the form of the production function and the dynamics of income distribution is made explicit we then use this relationship to determine what production structure is simultaneously consistent with facts on growth and income inequality our empirical findings give support to models with decreasing returns in the reproducible factor jel classification d3 o1 o4 dans ce memoire les auteurs obtiennent des solutions pour des modeles de croissance a la cass koopmans dans le cas ou les agents sont heterogenes on explicite la relation entre la forme de la fonction de production et la dynamique de la repartition des revenus on utilise alors cette relation pour determiner quelle structure de production est arrimee aux faits connus a la fois quant a la croissance economique et a la repartition des revenus les resultats empiriques supportent les modeles ou les rendements sur les acteurs de production reproductibles sont decroissants

inflation and monetary dynamics in the us a quantity theory approach in this article we investigate the long run link between inflation and money growth in the united states since 1960 a measure of the long run inflation trend is constructed which bears the interpreation of monetary inflation rate and is directly related to the excess nominal money growth process money growth less output growth as postulated by the quantity theory consistent with the memory characteristics of the series their fractional integration and cointegration properties are taken into account in empirical modelling the proposed measure is then compared with several existing measures of core inflation aimed at capturing long run inflation dynamics but unrelated to money growth the monetary long run inflation rate performs well in out of sample forecasting exercises especially over a 2 3 year horizon yielding valuable information to monetary policymakers