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

a stochastic latent moment model for electricity price formation the wide range of models needed to support the various short term operations for electricity generation demonstrates the importance of accurate specifications for the uncertainty in market prices this is becoming increasingly challenging since electricity hourly price densities exhibit a variety of shapes with their characteristic features changing substantially within the day and over time and the influx of renewable power wind and solar in particular has amplified these effects a general purpose analytically tractable representation of the stochastic price formation process would have considerable value for operations control and trading but existing empirical approaches for the application of standard density functions are unsatisfactory we develop a general four parameter stochastic model for hourly prices in which the four moments of the density function are dynamically estimated as latent state variables and furthermore modelled as functions of several plausible exogenous drivers this provides a transparent and credible model that is suffciently flexible to capture the shape shifting effects particularly with respect to the wind and solar output variations causing dynamic switches in the upside and downside risks extensive testing on german wholesale price data benchmarked against quantile regression and other models in out of sample backtesting validated the approach and its analytical appeal

why the quantity theory of money is not applicable to china together with a tested theory that is using data for the period 1952 88 this paper argues that any statistical relationship between money and prices is not evidence of causation running from money to prices but is due to the consistent nature of planners reactions to purchasing power imbalances this is not an econometric study historical institutional and simple statistical analysis is used an outline descriptive picture of money development for this period in china is offered in the light of the simple theory applied here parallels with post keynesian monetary theory are suggested two appendixes explain the narrow money supply process and present all the data used copyright 1992 by oxford university press

the impact of wind power generation on the electricity price in germany abstract this paper investigates the relationship between intermittent wind power generation and electricity price behaviour in germany using a garch model i evaluate the effect of wind electricity generation on the level and the volatility of the electricity price in an integrated approach the results show that variable wind power reduces the price level but increases its volatility this paper s results also indicate that regulatory change has stabilised the wholesale price the electricity price volatility has decreased in germany after a modification of the marketing mechanism of renewable electricity this gives confidence that further adjustments to regulation and policy may foster a better integration of renewables into the power system

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

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

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

futures pricing in electricity markets based on stable carma spot models we present a new model for the electricity spot price dynamics which is able to capture seasonality low frequency dynamics and the extreme spikes in the market instead of the usual purely deterministic trend we introduce a non stationary independent increments process for the low frequency dynamics and model the large uctuations by a non gaussian stable carma process the model allows for analytic futures prices and we apply these to model and estimate the whole market consistently besides standard parameter estimation an estimation procedure is suggested where we t the non stationary trend using futures data with long time until delivery and a robust l 1 lter to nd the states of the carma process the procedure also involves the empirical and theoretical risk premiums which as a by product are also estimated we apply this procedure to data from the german electricity exchange eex where we split the empirical analysis into base load and peak load prices we nd an overall negative risk premium for the base load futures contracts except for contracts close to delivery where a small positive risk premium is detected the peak load contracts on the other hand show a clear positive risk premium when they are close to delivery while the contracts in the longer end also have a negative premium ams 2000 subject classications primary 60g52 62m10 91b84 secondary 60g10 60g51 91b70

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

the pretence of knowledge lecture to the memory of alfred nobel december 11 1974 this abstract was borrowed from another version of this item

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

empirical inflation models in developing countries sensitivity to the definition of inflation previous developing country inflation studies have demonstrated that the harberger monetarist model s explanatory power may be quite sensitive to the time period or explanatory variables used in this study the model s sensitivity to the definition of the inflation rate variable itself the dependent variable is investigated using a cross section time series data set of 19 developing nations it is shown that the harberger model is sensitive to the manner in which inflation is defined then a similar investigation is conducted for another more recently developed model of the inflationary process the hanson model this model exhibits less sensitivity to the choice of inflation variable

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

factor models in the german electricity market stylized facts seasonality and calibration abstract the class of arithmetic factor models is flexible enough to model all stylized facts occurring in electricity markets including negative prices while still yielding tractable derivative prices in this paper we conduct a thorough review of the requirements and possibilities of factor models we compare different seasonality functions and study their power to deseasonalise day ahead spot prices from the epex germany austria market furthermore we introduce an alternative method to estimate mean reversion speed based on arma time series and a method to evaluate the distributional fit of the model to realised market prices which we apply to two non gaussian estimated models

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

exchange rate sensitivity of the demand for money in spain 1998 exchange rate sensitivity of the demand for money in spain applied economics vol 30 no 5 pp 607 612

fiscal policy monetary targets and the price level in a centrally planned economy an application to the case of china this paper presents a planned economy monetary model of china a money supply equation links changes in broad money to government transactions evaluated at official prices the demand for real money balances by consumers equals the nominal demand for money deflated by an unobserved true price index the model explains money demand as the divergence between the then official and true price indices changes in the money supply are explained by government transactions while money demand is explained by real income and the anticipated true rate of inflation the true rate of inflation is 2 5 times the official rate copyright 1987 by ohio state university press

money and monetization in china s economic reform in addition to privatization marketization liberalization and pragmatization monetization has been argued as the fifth feature in china s economic reform if monetization is taken to mean a process through which variations in money supply or interest rate are to affect macroeconomic variables the construction of four causality relationships between interest rate and investment and money and national income do not support the evidence of such a process in china between the late 1970s and early 1990s

the impact of economic and monetary uncertainty on the demand for money in emerging economies by introducing uncertainty monetary volatility and economic volatility are said to make the public cautious hence increase their cash holdings or their demand for money on the other hand because of monetary and economic uncertainty if the public seek safer assets than money they may hold less cash in the absence of any paper testing for the impact of economic and monetary uncertainty on the demand for money in emerging economies this article fills the gap by considering the experiences of six central and eastern european emerging economies and four other emerging economies we found that the impact is transitory in most countries moreover money demand is found correctly specified and stable in most countries suggesting that policy based on monetary targeting could still be effective despite significant output and monetary uncertainty

private property and economic efficiency a study of a common pool resource abstract the british columbia halibut fishery provides a natural experiment of the effects of privatizing the commons using firm level data from the fishery 2 years before private harvesting rights were introduced the year they were implemented and 3 years afterward a stochastic frontier is estimated to test for changes in technical allocative and economic efficiency the study indicates that 1 the short run efficiency gains from privatization may take several years to materialize and can be compromised by restrictions on transferability duration and divisibility of the property right 2 substantial long run gains in efficiency can be jeopardized by preexisting regulations and the bundling of the property right to the capital stock and 3 the gains from privatization are not just in terms of cost efficiency but include important benefits in revenue and product form

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

the financial structure and the demand for money in thailand this paper uses recently developed econometric techniques to investigate the demand for money in thailand initial estimates show the absence of any long term unique relationship among a monetary aggregate m1 or m2 an income and a price variable however the introduction of an exchange rate in the above relationship shows the presence of a cointegrating relationship this provides some support to mckinnon s hypothesis of currency substitution it also raises some concern about the closed economy focus of earlier studies on money demand in thailand addition of a foreign interest variable to the above models provide some support to the capital mobility hypothesis the long run elasticity estimates for the m1 equation raise some doubts about the desirability of using this monetary aggregate as an intermediate target by the bank of thailand the null hypothesis of a unit income elasticity and zero foreign interest elasticity are not rejected but the hypothesis of price homogeneity is rejected moreover

spot and derivative pricing in the eex power market using spot and futures price data from the german eex power market we test the adequacy of various one factor and two factor models for electricity spot prices the models are compared along two different dimensions 1 we assess their ability to explain the major data characteristics and 2 the forecasting accuracy for expected future spot prices is analyzed we find that the regime switching models clearly outperform its competitors in almost all respects the best results are obtained using a two regime model with a gaussian distribution in the spike regime furthermore for short and medium term periods our results underpin the frequently stated hypothesis that electricity futures quotes are consistently greater than the expected future spot a situation which is denoted as contango

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

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

how stable is the demand for money in emerging economies one of the key elements of implementing the monetary policy is stability of the demand for money the literature includes a large number of studies that have tested the stability of the money demand in developed as well as less developed countries but not in emerging economies of eastern europe as market based data becomes available from these countries there is an urgency to test old theories for these modern market oriented economies in this article we consider the experiences of armenia bulgaria the czech republic hungary poland russia and the slovak republic using the bounds testing approach to error correction modelling and cointegration we show that money demand is stable in these countries

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

stochastic price modeling of high volatility mean reverting spike prone commodities the australian wholesale spot electricity market it is commonly known that wholesale spot electricity markets exhibit high price volatility strong mean reversion and frequent extreme price spikes this paper employs a basic stochastic model a mean reverting model and a regime switching model to capture these features in the australian national electricity market nem comprising the interconnected markets of new south wales queensland south australia and victoria daily spot prices from 1 january 1999 to 31 december 2004 are employed the results show that the regime switching model outperforms the basic stochastic and mean reverting models electricity prices are also found to exhibit stronger mean reversion after a price spike than in the normal period and price volatility is more than fourteen times higher in spike periods than in normal periods the probability of a spike on any given day ranges between 5 16 in nsw and 9 44 in victoria

long run income and interest elasticities of money demand in the united states econometric techniques designed to accommodate nonstationary data are used to reexamine the stability of interest and income elasticities of money demand in the united states estimates based on postwar monthly data reveal a stable relationship between m1 velocity and various measures of interest rates that proxy the opportunity cost of holding money balances tests for the existence of cointegration and methods used to estimate the income and interest elasticities are based on procedures prescribed by soren johansen 1988 corresponding error correction estimates offer insight as to the dynamics of the process that maintains the equilibrium relation between velocity and interest rates copyright 1991 by mit press

defining a free market drivers of unsustainability as illustrated with an example of shrimp farming in the mangrove forest in south east asia we apply causal loop diagrams cld to picture how complex societal scenarios can be understood in terms of interdependent drivers and mechanisms between actors from the public and private sectors respectively and we show how un sustainable scenarios can be understood in terms of insufficient balancing feed back in the system we apply the methodology to picture such imbalances as funda mental drivers behind the tragedy of the commons and we apply it to go deeper into a specific business example in this context a complex case of resource exploitation in far east asia the cld analyses inform a discussion on the interplay between societies on the one hand represented by the government and its legislature and the private sector with its companies consumers and market on the other our study confirms that unsustainability can only be understood and addressed at the systemic level encom passing both natural and social systems where also the virtual and emergent systems of modern civi lization are considered the results show that a market economy can only be sustainable as well as really free when embedded in a systemic and balanced interplay between the actors on the arena the pro vision of the market arena with well thought through rules of the game offered by a well functioning democratic society is needed the challenge for leaders in business and society is to be able to grasp the causalities of the whole system and let this guide and shape sustainable goals as well as leadership and management in coherence with such goals

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

china s inflation 1979 1983 measurement and analysis one of china s economic achievements since the founding of the people s republic has been the maintenance of a relative price stability over a considerable period of time inflation however did emerge several times over the past 30 years after the rapidly rising prices of the late 1940s were brought under control in 1950 some inflationary pressures appeared in 1953 and then again in 1956 but in both cases these pressures were relatively mild and were quickly removed the serious production shortfalls and financial deficits that followed the great leap forward of 1958 59 caused price levels to rise rapidly in 1960 62 this time the inflationary pressures were stronger and lasted longer since 1979 inflation once again has become a major problem in the chinese economy in 1979 the chinese press began to report price increases and these increases apparently became substantial and widespread in 1980 although official reports indicated a slowdown in the growth of prices in 1981 83 inflation has continued to represent a latent threat to china s economic stability and growth 2 since the chinese economy is organized and operated under a socialist system with centralized allocation of major resources and state control over the prices of essential products the character and dimensions of inflation in china should be very different from those in a market economy an analysis of chinese inflation therefore not only may add to the existing knowledge about the operation of the nonmarket economy in china but also may shed light on the complexity of the economic reforms that are being undertaken a fundamental

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

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

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

stability of money demand function revisited in china as china s economic reforms have undergone significant structural changes after 1979 it has been rather difficult to formulate a stable money demand function over the period following that year while previous literature on the long run relationship of money demand in china shows the existence of stable money demand this article revisits the stability of the china money demand function over the period after 1979 to employ the unit root tests and the cointegration tests with structural break the empirical evidence demonstrates that economic and financial deregulation did affect the stability of demand for money in china over the period 1977 to 2002 moreover the estimated long run income and interest elasticity are respectively 1 01 1 11 and 0 14 0 08 using the real m1 m2 equation in addition real income and the interest rate are found to be weakly exogenous we overall do find structural breakpoints mainly in 1980 and 1993 and they look to match clearly with corresponding critical financia

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

money and output viewed through a rolling window abstract we examine the extent to which fluctuations in the money stock anticipate or granger cause fluctuations in real output using a variety of rolling window and increasing window estimation techniques various models are considered using simple sum as well as divisia measures of m 1 and m 2 income prices and both the t bill rate and the commercial paper rate findings indicate that the relation between income money prices and interest rates is stable as long as sufficient data are used and that there is cointegration among the variables considered although cointegration spaces become very difficult to estimate precisely when smaller windows of data are used further both m 1 and m 2 are shown to be important predictors of income for the entire period from 1960 2 1996 3 based on modified versions of what we term the most damaging specifications from friedman and kuttner 1993 and thoma 1994 our new evidence is based in part on a rather novel model selection approach to examining the relationship between money and income 1998 elsevier science b v all rights reserved

the impact of renewable energies on eex day ahead electricity prices in this paper we analyze the impact of renewable energies wind and photovoltaic on the formation of day ahead electricity prices at eex we give an overview of the policy decisions concerning the promotion of renewable energy sources in germany and discuss their consequences on day ahead prices an analysis of electricity spot prices reveals that the introduction of renewable energies enhances extreme price changes in the frame of a dynamic fundamental model we show that there has been a continuous electricity price adaption process to market fundamentals furthermore the fundamental drivers of prices differ among hours with different load profiles our results imply that renewable energies decrease market spot prices and have implications on the traditional fuel mix for electricity production however the prices for the final consumers increased overall because they must pay in addition the feed in tariffs for the promotion of renewable energy

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

bayesian calibration and number of jump components in electricity spot price models we find empirical evidence that mean reverting jump processes are not statistically adequate to model electricity spot price spikes but independent signed sums of such processes are statistically adequate further we demonstrate a change in the composition of these sums after a major economic event this is achieved by developing a markov chain monte carlo mcmc procedure for bayesian model calibration and a bayesian assessment of model adequacy posterior predictive checking in particular we determine the number of signed mean reverting jump components required in the apxuk and eex markets in time periods both before and after the recent global financial crises statistically consistent structural changes occur across both markets with a reduction of the intensity and size or the disappearance of positive price spikes in the later period all code and data are provided to enable replication of results

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

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

electricity forward curves with thin granularity theory and empirical evidence in the hourly epexspot market we propose a constructive definition of electricity forward price curve with cross sectional timescales featuring hourly frequency on the curve is jointly consistent with both risk neutral market information represented by baseload and peakload futures quotes and historical market information as mirrored by periodical patterns exhibited by the time series of day ahead prices from a methodological standpoint we combine nonparametric filtering with monotone convex interpolation such that the resulting forward curve is pathwise smooth and monotonic cross sectionally stable and time local from an empirical standpoint we exhibit these features in the context of epex spot and eex derivative markets we perform a backtesting analysis to assess the relative quality of our forward curve estimate compared to the benchmark market model of benth koekebakker and ollmar 2007

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

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

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

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

causal relationships among economic aggregates in china using china s macro data from 1952 to 1989 the stationarity and causality tests to two types of economic aggregates are applied the first type relates to the conventional money income and consumption relationship and the other is associated with the interest rate money and investment income relationship as embodied in a financial repression model stationarity test results show that a different direction of causality exists when different measurement of price is used a causal relationship between interest rate money and investment income is also found

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

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

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