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

limited commitment and the demand for money understanding money demand is important for our comprehension of macroeconomics and monetary policy its instability has made this a challenge common explications for the instability are financial regulations and financial innovations that shift the money demand function we provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data limited commitment can also explain why the ratio of credit to m1 is currently so low despite that nominal interest rates are at their lowest recorded levels this article is protected by copyright all rights reserved

re examining the buffer stock model of money this paper critically examines recent papers in the buffer stock or supply side disequilibrium models of money the paper first investigates the assumptions at the m icroeconomic level and concludes that even with these assumptions aggregate behavior does not necessarily follow buffer stock models in which excess cash balances are held involuntarily in a simple model with uncertain cash flows it is shown that in the aggregate short run involuntary cash holdings are negligible if the buffer stock story is applicable it is to a broader definition of money than used in most empirical work the second part of the paper examines empirical work and argues that the buffer stock idea cannot be implemented using single equation techniques and that when viewed appropriately current empirical result s refute the buffer stock idea as it is currently modeled copyright 1987 by royal economic society

the demand for money in developing countries assessing the role of financial innovation traditional specifications of money demand have commonly been plagued by persistent overprediction implausible parameter estimates and highly autocorrelated errors the authors argue that some of these problems stem from the failure to account for the impact of financial innovation they estimate money demand for ten developing countries using various proxies for financial innovations they also assess the relative importance of this variable finding financial innovation can be better modeled as a stochastic random walk trend rather than a deterministic time trend financial innovation plays an important role in determining fluctuations of the demand for money the importance of this role increases with the rate of inflation

effects of financial innovations on the money demand function a canadian evidence a money demand function for the candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants two sets of estimation results have been analysed the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations the estimated equations have been used to generate ex post simulations and forecasts the results suggest that innovations have displaced the money demand function in the early 1980s it also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function

modelling money demand in open economies over the modern floating rate period the role of open economy factors in influencing domestic money demand in major industrial countries over the modern floating rate period is examined the theoretial model for the empirical analysis is derived from a general two country portfolio balance framework that determines the demand for domestic and foreign monetary and non monetary assets in each country the ecm estimates indicate that capital mobility plays an important role in the money demand function in all seven counteries considered currency substitution in contrast is not an important phenomenon

financial portfolio management through the goal programming model current state of the art abstract since markowitz 1952 formulated the portfolio selection problem many researchers have developed models aggregating simultaneously several conflicting attributes such as the return on investment risk and liquidity the portfolio manager generally seeks the best combination of stocks assets that meets his her investment objectives the goal programming gp model is widely applied to finance and portfolio management the aim of this paper is to present the different variants of the gp model that have been applied to the financial portfolio selection problem from the 1970s to nowadays

portfolio analysis with factors and scenarios recently there has been a growing interest in the scenario model of covariance as an alternative to the one factor or many factor models we show how the covariance matrix resulting from the scenario model can easily be made diagonal by adding new variables linearly related to the amounts invested note the meanings of these new variables note how portfolio variance divides itself into within scenario and between scenario variances and extend the results to models in which scenarios and factors both appear where factor distributions and effects may or may not be scenario sensitive

a fuzzy goal programming approach to portfolio selection abstract portfolio selection is a usual multiobjective problem this paper will try to deal with the optimum portfolio for a private investor taking into account three criteria return risk and liquidity these objectives in general are not crisp from the point of view of the investor so we will deal with them in fuzzy terms the problem formulation is a goal programming g p one where the goals and the constraints are fuzzy we will apply a fuzzy g p approach to the above problem to obtain a solution then we will offer the investor help in handling the results

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

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

nominal costs and the demand for real transactions balances the standard specification of constant real transactions costs assumes that over the sample period transactions costs move in lock step with the gnp deflator our model assumes that transactions costs move negligibly compared to the gnp deflator that is nominal transactions costs are assumed constant here rather than real transactions costs as in other estimates of money demand we find with this nominal transactions cost specification that the real money demand function is more stable in terms of the stability of the coefficients and the accuracy of out of sample predictions than indicated by earlier studies

us business credit sources demand deposits and the missing money abstract this study accounts for much of the missing money in the us through compensating balances business lending by banks affects demand deposit growth standard money demand models include variables that likely pick up income and interest rate effects on the transactions demand for demand deposits and on compensating balance requirements provided that bank lending to firms is stable however during the missing money period business shifted toward nonbank sources of short term credit causing a decline in compensating balances empirical finding support this hypothesis as a partial explanation for the missing money using the federal reserve board s demand deposit model

neoclassical consumer demand theory and the demand for money m friedman 1956 suggests that the demand for money should be analyzed in terms of consumer demand theory although often the interpretation of empirical results from studies using aggregate data appears to be in terms of the motives approach i e transactions precautionary and speculative motives the authors develop friedman s ideas within an explicit model of consumer theory and find that they provide a consistent framework for analyzing portfolio choice and offer greater insights into results from aggregate studies of the demand for money than the motives approach in particular the authors provide a new interpretation of the role of nominal interest rates inflation and a hicksian measure of wealth in the demand for money function copyright 1991 by royal economic society

money demand instability has it ended abstract some researchers suggest that much of the seeming instability in the post 1973 money demand occurred because of financial innovation and deregulation money demand was in transition further unprecedented declines in the income velocity of circulation during 1985 and 1986 indicate that this hypothesized transition continues have the effects of financial innovation and deregulation run their course do additional unexpected shifts in velocity loom in the near future or has the transition come to a halt these questions are examined using the methodology of hafer and hein 1982 as modified by miller 1986 no evidence of structural shifts exists beyond 1986 m1 growth may have become a reliable monetary aggregate target again further the missing money has more than returned more money is held today than predicted by the pre 1973 money demand function since m1 now includes interest bearing transactions accounts and incorporates a saving motive the finding is not counterintuitive

costly portfolio adjustment and the short run demand for money in many empirical studies the short run demand for money includes a lagged dependent variable this is usually attributed to some cost of adjusting money balances toward their desired level this short run money demand equation is sometimes used as a structural equation in models in which market clearing is also assumed in the sense that money supply equals short run money demand in this paper a theoretical counterexample demonstrates that this use of a short run money demand equation is not generally valid this finding challenges the usual interpretation of the lagged dependent variable

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

structural changes and the us money demand function previous literature on the stability of the us money demand function suggests mixed results in this article we study the stability of the money demand function from the standpoint of structural changes in the function we first investigate if a stable money demand function can be found for the us for the period from the first quarter of 1959 to the fourth quarter of 2000 the results show that a stable long run money demand function does not exist for the sample period under consideration we then estimate unknown structural break points in the variables of the money demand function using bai and perron s 1998 method and test if there is a stable relationship in each sub sample period of the break points the results show that a stable relationship exists for each sub sample period the estimated income elasticity and interest rate semi elasticity are relatively smaller than ball s 2001 estimates but consistent with his argument

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

inflation hedging and the demand for money some empirical evidence this paper explores the role of nominal rate of return uncertainty and inflation hedging as potentially important factors explaining the pattern of money demand using u s quarterly data over the period 1952 2 1982 4 it is shown that in conformity with theoretical considerations the nominal rate of return uncertainty variable tends to have a significantly positive effect and the inflation hedging variable the covariance between nominal rate of return and inflation rate a significantly negative effect on the demand for money these findings seem to be reasonably robust in terms of various definitions of income interest rates inflation rate and money variables as well as in terms of different estimation methods

transaction services inflation and welfare this paper is motivated by empirical observations on the comovements of currency velocity inflation and the relative size of the credit services sector we document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money our model makes two new contributions first we show that direct evidence on the appropriately defined credit service sector for the united states is consistent with the welfare cost measured using an estimated money demand schedule second we provide estimates of the welfare cost of inflation that have some new features

the scourge of the monetarists kaldor on monetarism and on money nicolas kaldor s critique of monetarism from 1970 until his death is described and evaluated it is argued that subsequent events as well as empirical research vindicate his critique kaldor s critique of john maynard keynes s monetary theory is then seen as an extension of his radcliffe views and this paper argues that in this matter kaldor was mechanical in his modeling of the endogeneity of money supply it is suggested that the work of hyman minsky and victoria chick has the potential for further work in this area copyright 1989 by oxford university press

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

portfolio selection under strict uncertainty a multi criteria methodology and its application to the frankfurt and vienna stock exchanges abstract in modern portfolio theory it is common practice to first compute the risk reward efficient frontier and then to support an individual investor in selecting a portfolio that meets his her preferences for profitability and risk potential flaws include a the assumption that past data provide sufficient evidence for predicting the future performances of the securities under consideration and b the necessity to mathematically determine or approximate the investor s utility function in this paper we propose a methodology whose initial phase filters portfolios that are inefficient from a historical perspective while this is consistent with traditional approaches the second phase differs from the standard approach as it uses a decision table constructed by considering multiple scenarios assuming strict uncertainty the table cells measure consequences by a multi criteria linear performance index of simulated future returns which avoids difficulties with performance ratios the real world applicability is illustrated through two studies based on data from the stock exchanges in frankfurt and vienna

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

socially responsible investment a multicriteria approach to portfolio selection combining ethical and financial objectives abstract in a context of socially responsible investment sri this paper deals with portfolio selection for investors interested in ethical policies in the opportunity set there are ethical assets and other assets which are not characterized as ethical two goals are considered the traditional financial goal in the classical utility theory under uncertainty and an ethical goal in the same utility framework a new financial ethical bi criteria model is proposed with absolute risk aversion coefficients and targets depending on the investor s ethical profile this approach is relevant as an increasing number of mutual funds are becoming interested in sri strategies from the proposed model an actual case on green investment is developed concerning this case without generalizing to other contexts an analysis of the numerical results shows that efficient portfolios obtained by the traditional e v model outperform the strong green portfolios in terms of expected return and risk but this does not significantly occur with weak green investment

the demand for m1 in the united states a comment on baba hendry and starr a recent paper by y baba d hendry and r starr 1992 presents an error correction model of the demand for m1 in the united states which shows a dramatic improvement in both fit and stability over earlier models this note estimates an alternative model with the same data set and draws two conclusions that the improvements are due more to the use of complex dynamics than to the introduction of variables representing financial innovation and that some of the economic properties are not robust with respect to minor changes in specification copyright 1993 by royal economic society

the demand for money a variable adjustment model abstract standard models of the demand for money employ the partial adjustment framework in which the adjustment parameter is specified as a constant over the entire sample period this paper relaxes this assumption the adjustment parameter is specified as a function of the short term interest rate the variable adjustment model is estimated using us quarterly data spanning the 1959 iii 1983 iv period and is found to reject the constant partial adjustment model

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

the demand for m1 in the united states a reply to james m boughton using general to simple methods j m boughton 1993 develops an econometric model that fits almost as well as y baba d f hendry and r m starr bhs 1992 but differs in economic implications and dynamic adjustments he claims the new model is constant is not encompassed by bhs but does not encompass bhs he concludes that the new variables in bhs do not matter for fit or constancy the authors replicate boughton s findings but their simplification encompassing test confirms the importance of the novel variables in bhs and shows that bhs encompasses his model an explanation is offered for its constancy when previous studies suffered predictive failure

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

reinterpreting the dhsy 1978 consumption function with hindsight the justification for davidson hendry srba and yeo s dhsy s selection of their favoured equation is shown to be based upon contradicting assumptions about inflation the empirically supported model is argued not to have a theoretically justified error correction interpretation the exclusion of the intercept biases the error correction term such that it becomes significant and negative but undermines the theoretical plausibility of the long run target more generally the statistical need to include an intercept in any regression to avoid parameter bias is demonstrated the rise in inflation in the 1970s is not considered to be a credible explanation of the fall in the average propensity to consume apc from the 1950s and is shown to have questionable empirical support when a below unit income elasticity is allowed for the recent articles which have found support for dhsy s favoured formulation augmented by time varying parameters using the most contemporary uk data should be viewed with caution new interpretations for the dhsy model s persistent success are called for if it is not to be considered that dubious regressions have been resurrected

specification tests of the money demand function in an open economy this paper addresses empirically the issues of selecting the appropriate opportunity cost and scale variables of the money demand function in the presence of alternative nonnested hypotheses as part of the process of model specification the role of currency substitution in the demand for money function in an open economy is examined the tests are carried out with quarterly data from the open economy of greece over the floating exchange rate period 1975 82

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

finance capital in dynamic factor demand models the lagged partial adjusment money demand function has been studied theoretically and empirically for the aggregate economy this paper focuses on a sectoral analysis of two partial adjustment functions one for optimal money demand and another for optimal loans demand the two partial adjustment equations are derived employing a representive firm approach a dynamic factor demand model with internal costs of adjustment is utilized to generate euler equations for the demand for money and short term business loans these euler equations parallel the aggregate partial adjustment money demand equations typically employed in applied monetary research the significant difference between the ad hocderivation and the microtheoretic derivation employed here is that desired money and loan holdings are found by solving the euler equations these particular definition of desired money and loan holding are model consistent and depend upon the predetermined and exogeneous variables of the model empirical analysis ge

macroeconomic disequilibrium structural changes and the household savings and money demand in china abstract this paper presents an empirical study of the chinese personal money demand and savings in an economy of disequilibrium and structural changes we propose specifications capable of encompassing and testing the two competing hypotheses which have been advanced to explain the case of the chinese household money demand and savings based on the national and provincial data we find that both repressed inflation and structural changes are significant suggesting the need to capture both the possible disequilibrium and structural shifts further statistical evidence shows that there might have been multiple regime shifts during the post 1949 period which is at variance with the conventional approach of exclusive focus of the effects of the recent reforms nesting the competing hypotheses appears to be the key in providing an adequate account of the savings and money demand of the chinese household sector the evidence seems to favor the repressed inflation hypothesis

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

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

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

what will take the con out of econometrics the paper begins with the question of whether leamer s extreme bounds analysis eba really does take the con out of econometrics by analytically demonstrating that the extreme bounds are simply functions of the f statistic for the deletion of variables from a regression we conclude that the information provided by eba represents no advance over that available from traditional methods furthermore there is a degree of arbitrariness in eba which exactly parallels the selective reporting of regressions it was designed to supplant the last part of the paper attempts a positive response to its title by following a well defined series of modelling steps we maintain that cooley and le roy s eba derived conclusions concerning the interest elasticity of money demand owe more to a faulty methodology than to the data this abstract was borrowed from another version of this item

impulse response analysis of cointegrated systems abstract impulse response or dynamic multiplier analysis of vector autoregressive systems with cointegrated variables is considered the asymptotic distribution of the responses estimated with johansen s 1988 maximum likelihood procedure is derived the results are illustrated with an analysis of a west german money demand system the investigation shows that a direct interpretation of the cointegration relations may be difficult or misleading thereby the virtue of impulse response analysis for applied work is illustrated

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

monetary policy lessons of recent inflation and disinflation by 1975 most economists agreed that the money demand function in the united states was reasonably stable and could serve as a reliable basis for the formulation of monetary policy those suspicious of monetarism were on the defensive in the light of the apparently inexorable increase of m1 velocity of about three percent per year with deviations of only a few tenths of a percent experience with rising money growth and rising inflation through 1980 only confirmed monetarist views as figure 1 shows all this had changed by 1986 with disinflation in the 1980s m1 velocity departed convincingly from its 1953 79 trend the money demand function seems to have fallen apart and is apparently not a reliable basis for monetary policy after all consequently the first major section following this introduction is devoted to the decline of velocity after 1981 and the demise of the standard money demand function some authors including i believe benjamin friedman conclude that this evidence leaves us so uncertain about the nature of money demand that policymakers cannot rely at all on any presumed money demand regularities in contrast my working hypothesis is that the money demand continues to be a stable function of relatively few variables but that the interest elasticity of money demand is substantially higher than previously thought others have sought money demand explanations in terms of regime shifts but that literature will not be discussed here events have not been kind to keynesian monetary policy positions either keynesians tend to concentrate on interest rates especially real interest rates as the best guide to the effects of monetary policy on the economy the real rate is discussed

an error correction approach to money demand the case of sudan abstract an empirical analysis of money demand behavior in sudan is presented based on the dynamic error correction model a theoretical basis for the model is offered which allows an explicit parameterized division of effects into long run influences short term adjustments and proportional equilibrium conditions we refute previous claims that income and price effects may be abnormally high in sudan in part by accounting for both foreign exchange and inflationary influences

on the reinterpretation of money demand regressions a stylized fact concerning estimated money demand relationships is that lagged dependent variables have high explanatory power and large estimated coefficients which is hard to explain at a theoretical level marvin s goodfriend 1985 suggests that this may be due to the presence of serially correlated measurement errors in the independent variables the author demonstrates how consistent estimates of the short run demand function can be obtained even if the goodfriend hypothesis is accepted and also how the hypothesis might be tested application of the suggested test using the goldfeld 1973 data set leads to decisive rejection of the hypothesis copyright 1994 by ohio state university press

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

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

on cash in advance models of money demand and asset pricing this paper shows how a cash in advance model of money can be written in a way that combines a simple yet empirically defensible money demand function with an asset pricing equation that is similar to the standard barter economy euler equations return premia are determined as in the barter exchange model except that a short term risk free nominal interest rate enters into the first order conditions in special cases asset prices satisfy the barter economy euler equations exactly in the empirical analysis the interest rate factor adds some explanatory power but both the barter and the monetary asset pricing model perform rather poorly copyright 1991 by ohio state university press

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

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

sweep programs the fall of m1 and rebirth of the medium of exchange this paper investigates the effect of sweep programs on m1 using dynamic simulations of money demand over 1994 2000 the postsample period constitutes when sweep programs have been in effect all models generate predictions systematically above reported m1 using data on newly initiated programs test findings indicate that sweeps account for the overprediction within the conventional money demand model with a long term interest rate we construct a medium of exchange measure m1s equal to m1 plus estimated holdings of sweep balances m1s velocity compares favorably with that of broader aggregates evidence indicates cointegration within m1s money demand

u s money demand instability a flexible least squares approach this paper uses a jle rrhle leust squares fls time varying linear regression technique to investiaate coefficient stabilitv for the goldfeld u s money demand model over the period 1959 62 to 19x5 q3 time paths traced out by the fls coefficient estimates exhibit shifts in 1974 and 1983 but these shifts are small relative to a persistent downward trend in the estimated coefficient for the inflation rate indicating potential model misspecitication the fls estimates also indicate that the unit root nonstationarity problem reported by ols money demand studies disappears if the coefficient estimates are allowed to exhibit even small amounts of time variation

food prices and the multiplier effect of trade policy this work studies the relationship between trade policy and food prices we show that when individuals are loss averse governments may use trade policy to shield the domestic economy from large food price shocks this creates a complementarity between the price of food in international markets and trade policy specifically unilateral actions give rise to a multiplier effect when a shock drives up the price of food exporters respond by imposing restrictions while importers wind down protection thus exacerbating the initial shock and soliciting further trade policy activism we test the key prediction of the theory with a new dataset that comprises monthly information on trade measures across 77 countries and 32 food products for the period 2008 11 finding evidence of a multiplier effect in food trade policy these findings contribute to inform the broader debate on the proper regulation of food trade policy within the multilateral trading system

caution and conservatism in the making of monetary policy does society benefit from the delegation of monetary policy to cautious and conservative central bankers we offer a critical view on the delegation literature and relax seemingly innocuous assumptions about uncertainty and preferences first caution improves credibility but does not obviate the need for central bank conservatism second previous models of delegation have focused on suboptimal forms of conservatism we derive optimal concepts of conservatism that mitigate or eliminate any residual problem of credibility third we rationalize why credible monetary policy may be conducive to stable inflation and output

portfolio rebalancing model with transaction costs based on fuzzy decision theory the fuzzy set is one of the powerful tools used to describe an uncertain environment as well as quantifying any potential return and risk portfolio liquidity is taken into account and a linear programming model for portfolio rebalancing with transaction costs is proposed the level of return that an investor might aspire to the risk and the liquidity of portfolio are vague in an uncertain financial environment considering them as fuzzy numbers we propose a portfolio rebalancing model with transaction costs based on fuzzy decision theory an example is given to illustrate the behavior of the proposed model using real data from the shanghai stock exchange

a simple approach to arbitrage pricing theory the following sections are included introductionarbitrage pricingdiscussionreferencesdiscussion notes on the arbitrage pricing theorypure arbitrage pricing theoryapproximate arbitrage and the aptapproximate factor modelsthe competitive equilibrium version of the aptconclusionnotereferences this abstract was borrowed from another version of this item

sicken thy neighbour the initial trade policy response to covid 19 since the onset of the covid 19 pandemic many governments have limited exports of medical supplies and medicines pre pandemic barriers to imports of medical supplies and soap remain largely in place having characterised trade policy stance towards covid 19 related goods this study critically assesses the resort to export curbs and import taxes elements of an alternative positive trade policy contribution to surmount this pandemic are presented

selection of socially responsible portfolios using hedonic prices this research presents a novel framework for selecting socially responsible investment sri portfolios the hedonic price method hpm is applied to obtain an evaluation of sri criteria that is integrated into a multi objective mathematical programming model this approach allows us to obtain a portfolio whose financial performance is similar to which the investor would have reached if he or she had not taken into account social ethical and environmental see characteristics when making his or her investment decisions this methodology is applied to portfolios composed of socially responsible and conventional mutual funds domiciled in spain

are price equations really money demand equations on their heads it is often argued that the dependent variable in money demand functions is really the price level the money stock itself being exogenous a recent approach which stresses the theme is the buffer stock hypothesis in which money supply shocks explicitly appear in the demand for money function because prices and interest rates do not adjust rapidly enough to bring about short run equilibrium in the money market although this approach has been adopted by a number of authors it is not been subjected to much econometric testing in this paper we outline the economic and econometric issues involved in testing the exogenous money buffer stock hypothesis and subject it to a variety of tests using three different data sets none of our results supports the hypothesis fundamental restrictions are rejected at very high levels of significance and a reasonably good money demand equation is seen to be badly misspecified if interpreted as a price equation this abstract was borrowed from another version of this item

the persistence of interest rate effects on the demand for currency note since the end of world war ii there has been a trend decline in the demand for real currency balances part of the decrease is due to the rise in interest rates to unprecedented heights yet this is not the complete answer since a trend term included in a simple and conventional currency demand equation that already includes an interest rate still emerges with a significant negative coefficient for example using quarterly data from 1950 i to 1981 iii a demand for currency equation can be estimated as

a closer look at long run u s money demand linear or nonlinear error correction with m0 m1 or m2 i introduction the stability of money demand has been a long standing issue 1 lucas 1988 informally analyzes the stability of a log linear m1 money demand function and concludes that real money demand is a stable function and he supports earlier findings of meltzer 1963 with an income or wealth elasticity of around unity 2 with the development of cointegration methods engle and granger 1987 numerous empirical studies have applied these techniques to long run u s money demand examples are baba hendry and starr 1992 haferand jansen 1991 hoffman and rasche 1991 and miller 1991 who find support for a cointegrated money demand model with either m1 or m2 3 king et al 1991 also find support for cointegration with m2 and a short term interest rate in contrast to these studies others have argued against a stable u s money demand function in the postwar period for example friedman and kuttner 1992 do not find support for cointegration particularly when the period march 1970 to april 1990 is considered similarly miyao 1996 studies the behavior of the m2 money demand function over the period from 1959 to 1993 with quarterly data and various interest rates in levels and in logs miyao concludes that m2 is not a useful intermediate target for monetary policy in the 1990s 4 however carlson et al 2000 reach the conclusion that m2 does have predictive content for nominal economic activity and that the real m2 money demand function is stable but only after accounting for financial innovation in the first half of the 1990s two recent papers ball 2001 and stock and watson 1993 focus on especially long data sets for the united states and m1 stock and watson 1993 analyze various estimation methods for cointegrating relationships and illustrate their performance for money demand functions with annual data from 1900 to 1987 they pay particular attention to the postwar period and use monthly data in addition to annual data for this period they employ a semi log linear real m1 money demand model with real net national product and the level of the 6 mo commercial paper rate for the postwar period they also consider the 90 day treasury bill rate and the 10 yr treasury bond rate they compare and contrast their results to those of various others they also carry out recursive estimations to check their results for stability stock and watson 1993 conclude that a long span of data is needed to estimate long run money demand functions precisely their overall evidence is in favor of a stable long run money demand function with an income elasticity near one and an interest rate semielasticity near 0 10 however the postwar data are found to be not very informative a lack of low frequency variation in the postwar data as suggested by lucas 1988 does not allow a disentangling of the effects of output and interest rates on money demand for this time period estimates are imprecise and sensitive to subsample specifications due to substantial colinearity ball 2001 revisits the m1 money demand model of stock and watson 1993 using the same data set but extended through 1996 he applies the same array of estimation techniques as stock and watson did ball obtains precise estimates over the postwar period for his extended data set an income elasticity of approximately 0 5 and a semielasticity of 0 05 for the interest rate he does not find support for a velocity specification the m1 model is not stable over the period 1900 1996 lutkepohl terasvirta and wolters 1999 apply a nonlinear error correction model with smooth transition adjustment to capture instabilities in the linear cointegration model the long run equilibrium is described by a linear cointegrating relation and the adjustment to this long run equilibrium is nonlinear they analyze german m1 money demand granger and terisvirta 1993 terasvirta 1998 and van dijk terasvirta and franses 2002 provide details on the econometric theory for estimating and testing such nonlinear models

on the markov switching welfare cost of inflation abstract this paper uses the markov switching approach to account for instabilities in the long run money demand function and compute the welfare cost of inflation in the united states in doing so it circumvents the problem of data mining of some earlier seminal contributions on these issues allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function moreover it extends the sample period and investigates the robustness of results to alternative money demand specifications monetary aggregation procedures and assumptions regarding dynamics aspects of the money demand specification

econometrics and business cycle empirics business cycle empirics have long been a central arena for the debate about the roles of economic theory and econometrics in modelling economic time series data some famous historical examples are moore i9i4 keynes i939 and koopmans i947 sources for potential disagreements include that the entire economic system is involved and unobservable stochastic forces seem more than usually prominent in determining the outcome not only do these constitute two aspects about which it is hard to theorise they are equally difficult to model empirically there are both positive arguments for and negative arguments against according a dominant role to either theory or evidence not least because it is unclear what constitutes admissible instances of either in the absence of the other we first review what precludes a purely theoretical approach what prevents a purely empirical approach and hence why an interactive approach is imperative even so both the relative importance of the two ingredients and their substantive contents are likely to remain at issue first concerning the economy considerable empirical evidence suggests that it is a dynamic non linear high dimensional and evolving entity so studying it is difficult society and social systems alter over time laws change and technological innovations occur so establishing any invariants of an economic system is not easy such difficulties adversely afflict both theory and empirical modelling secondly concerning the observations time series data in economics are heterogeneous non stationary time dependent and interdependent so it is difficult to acquire knowledge from the available empirical information again such factors also make it hard to theorise about the properties of the underlying system a more direct critique of the empirical enterprise is that samples are short and highly aggregated economic magnitudes are inaccurately measured are subject to considerable revision and important variables are not measured or are unobservable so inferences are both imprecise and tentative combined with the simultaneity non constancy and high dimensionality of economic data a purely empirical approach seems to many to be precluded other criticisms of econometric approaches include worries about data mining pretest biases a lack of genuine identifiability and collinearity sometimes combined with a belief that theory can compensate an overemphasis on a

bank float mail float and the definition of money this paper argues that the true magnitude of voluntary holdings of money balances is actuallysmaller than the magnitude of conventional m1 preliminary calculations suggest that the discrepancy is quite substantial these findings force us to doubt the overall validity of traditional money demand studies that employ m1 data for empirical testing

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

value of information in portfolio selection with a taiwan stock market application illustration abstract despite many proposed alternatives the predominant model in portfolio selection is still mean variance however the main weakness of the mean variance model is in the specification of the expected returns of the individual securities involved if this process is not accurate the allocations of capital to the different securities will in almost all certainty be incorrect if however this process can be made accurate then correct allocations can be made and the additional expected return following from this is the value of information this paper thus proposes a methodology to calculate the value of information a related idea of a level of disappointment is also shown how value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a taiwan stock exchange illustrative application in which the value of information appears to be substantial heavy use is made of parametric quadratic programming to keep computation times down for the methodology

consumer theory and the demand for money the following sections are included introductionthe definition of moneythe microeconomic theory of a monetary economythe aggregation theoretic approach to money demandindex number theorythe links between aggregation theory index number theory and monetary theoryunderstanding the new divisia aggregatesthe optimal level of monetary subaggregationeconometric considerationsapproximating the monetary services subutility functionan exampleempirical dimensionsempirical comparisons of index numbersempirical results for the demand system approachextensionsconclusions this abstract was borrowed from another version of this item

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

an experimental test of the baumol tobin transactions demand for money historically generated data do not allow a clean test of any particular money dema nd theory by creating the artificial environment analyzed by william baumol and james tobin s work on the transactions demand for money one can observe how real people pursuing real rewards behave in that environment baumol and tobin assumed people were sufficiently rational to learn four axioms of rational behavior the authors subjects learned only three however trial and error methods plus subjects limited rationality did produce results similar to the baumol tobin predictions this supports the need to weaken the definition of rationality in the manner suggested by herbert simon copyright 1988 by ohio state university press

inter country distancing globalisation and the coronavirus pandemic originating in china the coronavirus has reached the world at different speeds and levels of strength this paper provides an initial understanding of some driving factors and their consequences since transmission requires people the human factor behind globalization is essential globalization a major force behind global wellbeing and equality is highly associated with this factor the analysis investigates the impact globalization has on the speed of initial transmission to a country and on the scale of initial infections in the context of other driving factors our cross country analysis finds that measures of globalization are positively related to the spread of the virus both in speed and scale however the study also finds that globalized countries are better equipped to keep fatality rates low the conclusion is not to reduce globalization to avoid pandemics but to better monitor the human factor at the outbreak and mobilize collaboration forces to curtail diseases

grading the performance of market indicators with utility benchmarks selected from footsie a 2000 case study the suitable choice of a benchmark portfolio is a critical problem prior to using the information ratio as the performance ranking of funds depends on this choice in this paper a method to optimize benchmark selection taking account of the investor s preferences is proposed and applied to a case study of performance for 29 market indicators on stock exchanges throughout the world the method that relies on recent results in optimization theory requires defining the opportunity set to select the benchmarks this set being footsie in the case study the computational process and numerical results are presented through tables and figures the accuracy of the method being also numerically tested