budget deficits stability and the monetary dynamics of hyperinflation hyperinflationary processes usually occur in countries with extremely large budget deficits in models of inflationary finance with rational expectations e g buiter 1987 large budget deficits cannot lead to hyperinflation the purpose of this paper is to reconcile the standard theoretical model with the stylized facts it shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model large budget deficits are indeed the main reason for hyperinflation the paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing copyright 1989 by ohio state university press

money demand amid financial sector developments in malaysia both long and short run real money demand functions of malaysia with money variously defined as m0 m1 and m2 have been estimated using the johansen cointegration technique and the general to specific approach respectively the period under review is 1973q1 1991q4 while liberalization and innovation in the malaysian financial system have not ruled out the existence of stable long run money demand relationships as attested to by the presence of cointegrating vectors they have rendered short run relationships unstable hence it may not be appropriate for one to conclude that monetary policy efficacies have been sacrosanct to the financial liberalization and innovation process on the basis of cointegrating relationships this is especially true as monetary policy is essentially a short run stabilization policy aimed at ironing out undue macroeconomic fluctuations this prompted us to re estimate short run money demand functions over more recent periods in order to boost the policy relevance of the estimat

interpreting an error correction model partial adjustment forward looking behaviour and dynamic international money demand an error correction model is derived from a stochastic dynamic programming problem incorporating rational expectations a parametric restriction is derived that allows a test for the theoretical proposition that the optimal strategy behind the error correction from entails the failure to asymptotically close the gap between the choice variable and the growing target this is accomplished by nesting a partial adjustment model with forward looking expectations within the error correction paradigm the counterintuitive behaviour embodied in the error correction model is not supported by the data in the context of a cross country comparison of cash balances relationships

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

instability of the u s money demand function this paper surveys the two major episodes of instability of the u s money demand function known respectively as the mystery of missing money and the great velocity decline it also assesses the recent literature on open economy money demand models and their usefulness in explaining the puzzling behavior of money demand manifested shortly after the transition to floating exchange rates copyright 1991 by blackwell publishers ltd

currency substitution and western european monetary unification the recent history of european monetary affairs may be interpreted as a slow movement towards the establishment of a european currency union characterized by fixed exchange rates and perhaps eventually a common european currency until very recently the desirability of european monetary union was analysed in terms of the traditional optimum currency area framework in that analysis the incentive for currency union comes from the potential improvements in efficiency in resource allocation from the use of a single money in a trade area recently however the question of the independence of monetary policy under flexible exchange rates has spawned a growing literature on currency substitution which includes implications for currency 2 union the earlier work suggested that a major benefit of flexible rates would be the liberation of domestic monetary policy from external balance concerns so that policy could be aimed singularly at internal balance 3 the currency substitution cs literature has demonstrated that if the currencies of two countries are close substitutes to money demanders then the central banks of these countries cannot follow independent monetary policies even under flexible exchange rates 4 the degree of currency substitution is an important empirical question and the analysis that follows should prove informative in determining the incentive for european monetary union is the european monetary system ems goal of reducing exchange rate fluctuations necessarily indicative of a european sensitivity to disturbances with a substantial part of the problem coming from substitution between monies girton and roper 1980 p 157 or rather a result of the traditional drive towards integration as envisioned by optimum currency area theory the following sections will suggest an answer

the long and short of money short run dynamics within a structural model empirical examinations into aggregate money demand functions generally incorporate a monetary aggregate as the dependent variable while this custom may be inefficient it does not create any new difficulties for estimating the demand function s long run parameters as money supply would equal money demand the short run estimates however are not as fortunate as the monetary aggregate is a measure of supply and not demand one needs to tease out the short run responses associated with money demand changes with those which are associated with monetary supply shocks the present article therefore proposes a more complete representation of monetary sector behaviour and in doing so finds significant support for the so called buffer stock money demand models

monetary anticipations and the demand for money reply to mackinnon and milbourne abstract mackinnon and milbourne 1984 in an extended comment on carr and darby 1981 claim that money supply shocks do not enter the money demand function for the united states this reply discusses the economic and econometric errors which led to this conclusion and presents further empirical evidence in support of our approach

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

the demand for money in secular perspective abstract this paper presents some evidence from norwegian data on some of the long standing empirical issues of money demand the choice of a scale variable and the issue of simultaneous equations bias is subjected to some recently developed statistical tests the outcome favours a permanent income model of money demand no significant simultaneity bias was detected various specifications of explanatory variables like the own yield on money interest rates and price expectations as well as the issues of price level homogeneity and stability between subperiods are also considered in the paper

measuring the opportunity cost of holding money more evidence on the term structure of interest rates abstract this paper tests the statistical importance and forecasting performance of a term structure money demand equation relative to two competing specifications the evidence indicates that the term structure specification is preferred to one using a long term interest rate but not a short term rate forecasts for 1981 1982 reveal that the term structure model is preferable to both alternatives

an operational measure of liquidity embedding the process of selling an asset in a search environment enables one to provide an exact definition of liquidity an asset s liquidity is the expected time until it is sold while pursuing an optimal in the sense of maximization of expected discounted net proceeds policy this analysis reveals that this definition is compatible with most other notions of liquidity and in particular with those of john maynard keynes impatience the discount associatedwith a quick sale predictability and flexibility copyright 1986 by american economic association

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

the effects of new public projects to expand urban rail transit abstract many us cities invest in large public transit projects in order to reduce private vehicle dependence and to reverse the downward trend in public transit use using a unique panel data set for five major cities that upgraded their rail transit systems in the 1980s we estimate new rail transit s impact on usage and housing values using distance as a proxy for transit access new rail transit has a small impact on usage and housing values this impact is enough to represent tangible benefits of new transit to nearby residents new transit s benefits are not uniformly distributed we document which demographic groups are over represented in transit growth areas and the changes in transit usage by different demographic groups

the appropriate interest rate and scale variable in money demand results from non nested tests the views expressed are those of the individual authors and do not necessarily reflect official positions of the federal reserve bank of st louis the federal reserve system or the board of governors federal reserve bank of st louis working papers are preliminary materials circulated to stimulate discussion and critical comment references in publications to federal reserve bank of st louis working papers other than an acknowledgment that the writer has had access to unpublished material should be cleared with the author or authors photo courtesy of the gateway arch st louis mo www gatewayarch com

car buyers and fuel economy abstract this research is designed to help researchers and policy makers ground their work in the reality of how us consumers are thinking and behaving with respect to automotive fuel economy our data are from semi structured interviews with 57 households across nine lifestyle sectors we found no household that analyzed their fuel costs in a systematic way in their automobile or gasoline purchases almost none of these households track gasoline costs over time or consider them explicitly in household budgets these households may know the cost of their last tank of gasoline and the unit price of gasoline on that day but this accurate information is rapidly forgotten and replaced by typical information one effect of this lack of knowledge and information is that when consumers buy a vehicle they do not have the basic building blocks of knowledge assumed by the model of economically rational decision making and they make large errors estimating gasoline costs and savings over time moreover we find that consumer value for fuel economy is not only about private cost savings fuel economy can be a symbolic value as well for example among drivers who view resource conservation or thrift as important values to communicate consumers also assign non monetary meaning to fuel prices for example seeing rising prices as evidence of conspiracy this research suggests that consumer responses to fuel economy technology and changes in fuel prices are more complex than economic assumptions suggest the us department of energy and the energy foundation supported this research the authors are solely responsible for the content and conclusions presented

the specification and stability of the demand for money in the united kingdom this article reports a dynamic demand for money function specified in differences plus disequilibrium form with direct estimates of the static long run coefficients and their t statistics unit elasticity assumptions on prices and income are tested the recursive residuals form the basis of tests of the temporal stability of the coefficients and the results are contrasted with previous work the article concludes that there is evidence that lags in monetary relations have become shorter in the 1970s copyright 1987 by the review of economic studies limited

the demand for money a rational expectations approach the authors derive a model of money demand for an optimizing consumer with rational expectations in a discrete time infinte hortizon framework under uncertainty mone y demand responds to unanticipated changes in income one period expe ctations of future bond and money interest rates unanticipated curre nt interest rates and past anticipations of current rates the deriv ed consumption function mirrors money demand behavior joint estimati on of the consumption and money demand equations by weighted nonlinea r least squares corroborates the predicted effects particularly inco me neutrality this money demand model substantially outperforms a co nventional specification in post sample simulation over 1975 85 copyright 1988 by mit press

on measuring the relative size of the unregulated to the regulated money market over time abstract this paper develops a method based on the recent theories of index number monetary aggregation and money supply by which changes can be measured in the size of the unregulated money market umm relative to that of the regulated money market in developing countries while the method requires some knowledge of the initial umm assets and the growth rate of the monetary multiplier it is virtually parameter free in measuring the effects of asset substitution on the relative size of the umm for illustrative purpose it is applied to korea which appears to provide satisfactory results indicating the usefulness of the method

parking transit and employment in a central business district abstract in this paper we present a general equilibrium model to examine the role of parking and transit subsidy policy on the size of a central business district cbd cbd land values and the market shares of cars and transit the three main features of the model are 1 agglomeration economies increase continuously with labor market size 2 congestion arises from auto use only transit is noncongestible and 3 locational equilibrium is maintained in the sense that firms and individuals cannot reduce costs or increase utility by moving given equilibrium prices and city size we derive the conditions under which parking taxes can be levied and used to subsidize transit and increase equilibrium cbd size and land values we compute an optimal parking tax that maximizes cbd size and land values and derive relationships among parking taxes transit use and congestion we find nonmonotonic relationships among parking taxes land values and transit use

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

a temporal and spatial equilibrium analysis of commuter parking abstract this paper examines the effects of parking availability on morning rush hour congestion and assesses the relative efficiency of road tolls and parking fees without pricing drivers occupy parking in order of increasing distance from the cbd a time varying toll can prevent queueing but does not affect the order in which parking spots are taken optimal location dependent parking fees may be superior they do not eliminate queueing but induce drivers to park in order of decreasing distance from the cbd thereby concentrating arrival times closer to work start times competitively set parking fees do nothing to reduce queueing and are relatively inefficient

currency substitution and the demand for money some evidence for canada recently the possibility that foreign and domestic currencies are substitutes has received considerable attention see 1 2 3 10 19 21 currency substitution has important implications for the working of flexible exchange rates if the degree of currency substitution is high small changes in the money supply would induce large changes in the exchange rate furthermore currency substitution would transmit the effect of monetary disturbances from one country to another indeed significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence this paper examines the empirical importance of currency substitution in the framework of the demand function for money if currency substitution is important the expected change in the exchange rate should be a significant determinant of the demand for home currency in section 2 we undertake such a test for the canadian demand for money during the recent flexible exchange rate period there is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate our own tests confirm these results for canadian data since 1970

does britain or the united states have the right gasoline tax this paper develops an analytical framework to assess the second best optimal level of gasoline taxation taking into account unpriced pollution congestion and accident externalities as well as interactions with the broader fiscal system we provide calculations of the optimal taxes for the us and the uk under a variety of parameter scenarios under our central parameter values the second best optimal gasoline tax is 1 01 gal for the us and 1 34 gal for the uk current tax rates are much lower than this in the us and higher in the uk the calculations are moderately sensitive to alternative parameter assumptions the congestion externality is the largest component in both nations revenue raising needs also play a significant role as do accident externalities and local air pollution potential welfare gains from reducing the current uk tax rate are estimated at nearly one fourth the production cost of all gasoline used in the uk even larger gains could be achieved by switching to a tax on vehicle miles with equal revenue yield for the us the welfare gains from optimizing the gasoline tax are smaller but those from switching to an optimal tax on vehicle miles are very large

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

poverty among women and children what accounts for the change over the past few decades there has been a phenomenal increase in the number of households that are headed by women this fundamental change in family structure has been accompanied by increases in the number of women in poverty relative to the number of men in poverty for instance in 1959 women were 23 percent more likely to be poor than were men but by 1985 they were 51 percent more likely to be poor 1 at the same time the ratio of children s poverty relative to that of men s has skyrocketed while children were 53 percent more likely to be poor than were men in 1959 by 1985 they were 121 percent more likely to be poor the feminization of poverty has become shorthand for describing the disproportionate percentage of poverty that is borne by women living alone or with their children this paper analyzes the forces behind these changes a framework is developed that allows changes in poverty rates to be decomposed into component parts using a timeseries of independent cross sections covering the period from 1967 to 1985 this framework is then used to examine the empirical significance of a variety of factors that contribute to poverty the first set of factors examined includes women s wage rates and hours of work men s earnings and afdc guarantee levels the effects that these variables have had on poverty rates are twofold they have affected poverty directly holding marital status constant and have affected poverty indirectly through their effects on marital status both of these effects are considered in addition the direct but not the indirect poverty effects of changes in the number of children and changes in income from child support and alimony are examined

energy policy in transport and transport policy explanations for and indirect evidence of imperfections in the market for private passenger vehicle fuel economy suggest there is a reasonable case for combining fuel economy standards and fuel or carbon taxes to contribute to an energy policy that aims to reduce greenhouse gas emissions and improve energy security estimates of key elasticities including the rebound effect indicate that the positive and negative side effects of fuel economy measures on transport activities and external costs are limited however an energy policy for transport does not replace a transport policy that aims to manage the main transport externalities including congestion and local pollution conventional marginal cost estimates and standard cost benefit reasoning suggest that policies that address congestion and local pollution likely bring benefits at least as large as those from fuel economy measures but the large uncertainty on the possible effects of greenhouse gas emissions constitutes a strong challenge for standard cost benefit reasoning emerging results from methods to cope with this uncertainty suggest that policies to stimulate the widespread adoption of low carbon technologies in transport are justified

deficits and the demand for money in recent years the large budget deficits of the federal government have renewed interest in the effects of government debt on private sector behavior to date empirical research has focused on the relationship between debt and two key variables consumption and interest rates by contrast empirical research on the effects of government debt on other variables of interest to macroeconomists is limited this paper examines the relationship between government debt and one such variable real money balances the neglect of government debt as a determinant of money demand is surprising many traditional macroeconomic models such as blinder and solow s 9 influential work include government debt as an argument to the money demand function moreover macroeconomic theorists have long been aware that a government debt money demand relationship has important implications for the efficacy of fiscal policy 2 this paper examines the relationship between government debt and real money holdings over the 1950 1990 period a positive money debt relationship was previously noted by butkiewicz 12 and deravi hegji and moberly 15 hereafter referred to as dhm our work improves upon this research in two ways first in contrast to butkiewicz 12 and dhm 15 we investigate the time series properties stationarity cointegration of relevant variables second we distinguish between supply side and demand side explanations of the debt money relationship the explanation advanced by butkiewicz 12 and dhm 15 is that an increase government debt is perceived by the private sector as an increase in net wealth and hence should increase money demand 3 this explanation ignores a potentially important connection between government debt and money supply if the federal reserve monetizes debt and if the private sector s adjustment to this monetization is lagged then debt and real money balances will exhibit a positive correla

new estimates of quality of life in urban areas implicit markets capture compensation for intraurban and interregional differe nces in amenities and yield differences in housing prices and wages these pecuniary differences become preference based weights in a qual ity of life index hedonic equations are estimated using microdata fr om the 1980 census and assembled county based amenity data on climati c environmental and urban conditions ranking of 253 urban counties reveals substantial variation within as well as among the 185 urba n areas the quality of life differences across counties within one s msa is almost one half of the difference between the top and bottom ranked counties in the nation copyright 1988 by american economic association

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

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

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

testing for financial buffer stocks in sectoral portfolio models empirical implementation of the buffer stock money notion tends to concentrate either on the shock absorber aspects or the spillover disequilibrium money aspects but rarely combines both moreover a potential buffer role for nonmoney assets is usually precluded without explicit empirical testing this paper examines the role of financial buffers in an ex ante sectoral model of expenditure and portfolio behavior incorporating both the shock absorber and spillover aspects in terms of cross equation parameter restrictions these are tested for a range of different assets and liabilities using quarterly data for the u k personal sector copyright 1990 by mit press

econometric issues in macroeconomic models with generated regressors the paper critically reviews the literature on the econometric issues raised by the use of generated regressors gr in empirical models the economic rationale for the use of gr is considered with examples being drawn from several macroeconomic examples including new classical macroeconomic ncm models which postulate monetary neutrality various estimation methods are discussed for models which include surprise or unexpected terms and the strengths and weaknesses of each approach are investigated drawing upon the work of mcaleer and mckenzie 1991 situations where the typically inefficient two step estimation 2se method will be efficient are highlighted problems of model misspecification and measurement errors are also investigated an empirical section highlights some of the dangers of using uncorrected 2se estimation results through a careful consideration of many recent attempts to test the ncm monetary neutrality hypothesis copyright 1993 by blackwell publishers ltd

the general equilibrium effects of congestion externalities abstract this is the second in a series of three articles on the topic of congestion externalities we use an urban general equilibrium model to compute two types of cities the market equilibrium city in which congestion externalities occur and the optimum city the optimum city has a more dispersed distribution of employment and a more concentrated distribution of residence if the population of the city is fixed the optimum pricing of transportation generates a per capita welfare gain of 3 78 per week if the population of the city is endogenous the internalization of congestion externalities causes the city to grow

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

policy regime changes and monetary expectations testing for super exogeneity abstract the super exogeneity status for weekly u s monetary expectations structure is examined the incomplete structure of the proposed model requires the use of an incidental parameter which is approximated by a linear function of certain instruments a super exogeneity test within the instrumental variables framework examines whether distributional changes stemming from the regime shifts affect the error correction parameter in the expectations structure under the assumption that the variance of the error correction term is constant the data evidence is found to reject super exogeneity

the long run stability of the demand for money italy 1861 1996 this paper examines the stability of the demand for money in italy using a newly extended data set for the period 1861 1996 we examine how the evolution of the financial system in italy and policy shifts have affected the behavior of the long run demand for money and present tests of structural stability we find the demand for broad money to be remarkably stable despite periods of considerable economic turbulence in addition we present evidence on the monetary transmission mechanism our results shed light on attempts to model long run relationships in other countries such as the uk and the us

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

are the costs of reducing greenhouse gases from passenger vehicles negative energy models suggest that the costs of reducing carbon emissions from transportation are high relative to those for other sectors this paper discusses why taxes or equivalent permit systems to reduce passenger vehicle emissions produce large net benefits rather than costs when account is taken of a their impact on reducing other highway externalities besides carbon and b interactions with the broader fiscal system both of these considerations also strengthen the case for a tax based approach over fuel economy regulation while fiscal considerations strengthen the case for taxes over grandfathered emissions permits the paper also comments on the practical relevance of automobile fuel taxes or their policy equivalents to broader legislation intended to mitigate climate change

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

employer paid parking mode choice and suburbanization abstract this paper constructs a theoretical model that facilitates analysis of the effects of employer paid parking on mode choice road investment and suburbanization the model simplifies urban space by dividing it into two zones islands center and suburbs which are connected by a congested road and a public transit line each road commuter requires an allotment of cbd land for parking and because the central zone s area is fixed parking land reduces the amount available for central residences and cbd production the model characterizes optimal resource allocation from the perspective of a social planner the planning solution can be decentralized which requires employee rather than employer paid parking congestion tolls and a tax subsidy to offset the road capacity deficit surplus the analysis then considers the effect of switching to employer paid parking with the burden of parking costs shifting from road users to employers thus reducing the wage for all workers this switch inefficiently increases road usage and capacity investment while spurring an inefficient increase in suburbanization

monetary anticipation and the demand for money in the u k testing rationality in the shock absorber hypothesis the carr darby shock absorber hypothesis that unanticipated changes in the money supply cause changes in real balances but anticipated changes have a unit impact on the price level and therefore leave real balances unchanged is tested using two step and joint estimation techniques for the u k two step methods appear to support the shock absorber hypothesis but the superior joint estimation technique decisively rejects the hypothesis particularly the implicit rational expectations cross equation restrictions

a clarification of the excess demand for or excess supply of money i introduction this article focuses on many economists neglect and even denial of monetary disequilibrium i am convinced that one of the most misunderstood and neglected concepts in all of economics is the notion that money may indeed be in excess supply or excess demand for example mccallum 1989 84 argues since it does not take long to alter the amount of currency that one holds either by purchasing interest bearing bonds or consumption goods it is reasonable to assume that actual holdings correspond very closely to desired demanded holdings for each household thus in the aggregate we have m sup d m sup s that is the quantity of money demanded equals the quantity supplied mccallum then goes on to argue that given the above equality there should be no loss in content if we simply use the symbol mathematical expression omitted to denote both m sup d and m sup s accordingly mccallum assumes money demand and money supply coincide although his book is about monetary theory mccallum completely overlooks the importance of monetary disequilibrium dornbusch and fischer 1990 137 also commit this oversight when they argue for many purposes it is useful to restrict the dynamics by the reasonable assumption that the money market adjusts very quickly and the goods market adjusts relatively slowly since the money market can adjust merely through the buying and selling of bonds the interest rate adjusts rapidly and the money market effectively is always in equilibrium such an assumption implies that we are always on the lm curve any departure from the equilibrium in the money market is almost instantaneously eliminated by an appropriate change in the interest rate in disequilibrium we therefore move along the lm curve if one is going to discuss the dynamics of macroeconomic adjustment then surely one should not disregard monetary disequilibrium similarly other economists as in serfaty 1979 kaldor 1982 and moore 1988 argue that money can never be in excess supply much of what this article says has been written elsewhere while this repetition may be tedious to some only by varied iteration can alien conceptions be forced on reluctant minds 1 ii monetary disequilibrium by money is meant narrow money the medium of exchange that is currency plus demand deposits some economists seem to imply that money demand and money supply are almost conceptually the same since they are always equal for example kohn 1991 678 argues since all of the money in existence must be held by someone the aggregate demand for money must equal the total amount in existence one of the critical errors in such assertions is the assumption that newly accepted cash balances are fully demanded because of money s role as a medium of exchange people are always willing to accept newly created money however that does not mean that they are actually demanding these additions to their money holdings rather they may try to dispose of these acquired but excess money balances with appropriate speed yeager 1968 51 52 discusses this crucial distinction for a closed economy a person accepts money not necessarily because he chooses to continue holding it but precisely because it is the routine intermediary between his sales and his purchases or investments and because he knows he can get rid of it whenever he wants people s initial unwillingness to hold all newly created actual money would not keep them from accepting it and would not prevent its creation yeager 1968 50 51 further elaborates on the process by which these excess money balances eventually become desired a holder of unwanted money exchanges it directly for whatever he does want without first cashing it in for something else nothing is more ultimate than money instead of going out of existence unwanted money gets passed around until it ceases to be unwanted

partial adjustment in the demand for money theory and empirics central to the notion of money as the medium of exchange is the concept that all transactions are conducted using money balances this notion expounded most explicitly by robert clower 1967 1970 has led to the development over the past decade of interesting models of the transactions and precautionary demand for money these have examined optimal behavior of the economic agent in steady state although there has been much gained by examining money balance behavior in this way money demand models so far have ignored the behavior of money during periods of disequilibrium an adequate understanding of total money balances is possible only by incorporating both equilibrium and disequilibrium behavior into an overall view in this regard michael darby 1972 is exceptional in explicitly treating disequilibrium money demand behavior darby s paper is mainly empirical but it contains an interesting intuitive discussion of money s role as a shock absorber during periods of disequilibrium in the present study we address both the theoretical foundation and empirical importance of the shock absorber effect we construct a model of optimal behavior by the economic agent showing the necessary conditions for the existence of partial adjustment and indicating how the intensity of adjustment behaves over time and in response to changes in economic variables this appears to be the first such attempt in the money demand literature although there is related work in the investment literature on the flexible accelerator we test the model on u s quarterly data to estimate the existence and magnitude of partial adjustment we find a significant but small effect for both ml and m2 furthermore the effect dies out within one and two quarters for the respective definitions of money the results thus support but disagree in magnitude with those of darby 1972 who found a larger and longer lasting partial adjustment effect our finding of so short an effect is especially important in light of robert barro s 1978 paper which relies on darby s long lasting effect to explain price behavior

asymmetric monetary effects on interest rates across monetary policy stances this paper provides new evidence that the interest rates response to a money supply shock varies across the state of the monetary policy stance the state is assigned to one of the tight neutral and loose regimes based on an estimated policy stance index the results of threshold vector autoregression analysis imply that pure liquidity and expected inflation effects vary across regimes with agents reactions to policy the results exhibit a persistent dominating liquidity effect under the neutral and loose regimes but a reversed liquidity effect after a short lag under the tight regime

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

a meta analysis of the price elasticity of gasoline demand a sur approach abstract automobile gasoline demand can be expressed as a multiplicative function of fuel efficiency mileage per car and car ownership this implies a linear relationship between the price elasticity of total fuel demand and the price elasticities of fuel efficiency mileage per car and car ownership in this meta analytical study we aim to investigate and explain the variation in empirical estimates of the price elasticity of gasoline demand a methodological novelty is that we use the linear relationship between the elasticities to develop a meta analytical estimation approach based on a seemingly unrelated regression sur model with cross equation restrictions this approach enables us to combine observations of different elasticities and thus increase our sample size furthermore it allows for a more detailed interpretation of our meta regression results the empirical results of the study demonstrate that the sur approach leads to more precise results i e lower standard errors than a standard meta analytical approach we find that with mean short run and long run price elasticities of 0 34 and 0 84 respectively the demand for gasoline is not very price sensitive both in the short and the long run the impact of a change in the gasoline price on demand is mainly driven by responses in fuel efficiency and mileage per car and to a slightly lesser degree by changes in car ownership furthermore we find that study characteristics relating to the geographic area studied the year of the study the type of data used the time horizon and the functional specification of the demand equation have a significant impact on the estimated value of the price elasticity of gasoline demand

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

disequilibrium buffer stock models a survey abstract this paper surveys the growing literature on buffer stock models of the monetary transmission process the first part indicates the basic issue of how assumed exogenous changes in the money supply work their way through the economic system via disequilibrium in the money market after a brief historical development buffer stock models are divided into four types depending upon whether the disequilibrium arises in stocks and or flows and to whether changes in the money stock are purely exogenous the empirical implications including how buffer stock models explain the recent behaviour of money demand functions are given theoretical and empirical criticisms of the models are presented in terms of the classification system the survey concludes that whilst the buffer stock notion is an interesting idea the current models do not lend themselves to empirical testing and those models which do have performed poorly

monetary anticipations and the demand for money in the u s further results a flourishing debate has arisen in the literature concerning both the interpretation of the original carr darby 1 c d shock absorber approach to the demand for money and the choice of an appropriate estimation technique for empirical tests of the hypothesis the c d shock absorber hypothesis holds that unanticipated shocks to the money supply are partially accommodated by a temporary increase in short run real money balances whilst anticipated monetary movements are reflected in the current price level and so are neutral with respect to the level of real money holdings c d test this proposition by generating monetary anticipations series by fitting univariate arima processes which are then substituted into fairly standard partial adjustment money demand equations using this two step technique they find empirical support for the shock absorber hypothesis for a number of countries mackinnon and milbourne 13 m m argue that the c d method may be subject to a simultaneity bias which can be corrected by an appropriate reparameterisation they then produce empirical evidence using their reparameterisation which appears to overturn the c d results at least for u s data in a rejoinder to m m carr darby and thornton 2 c d t argue that standard monetary economics and indeed the logic of the c d shock absorber hypothesis suggests that the money stock should be taken as exogenous at the aggregate level and that the aggregate money demand equation is in fact a price equation if this is the case then the money variable appears on the left hand side of the aggregate money demand equation merely to impose price level homogeneity and in particular the augmented or shock absorber money demand equation can be consistently estimated by ordinary least squares ols assuming the exogeneity of other regressors we argue below that the shock absorber hypothesis does not make sense unless money is taken as exogenous

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

hoarding in general equilibrium hoarding of money supply increases can explain long and variable lags from money supply changes to changes in aggregate expenditure and average prices the archibald lipsey model relies upon differences in income elasticities of demand for real money balances to explain aggregate hoarding of money supply changes consequently there is no presumption that average prices and aggregate expenditure will lag behind money supply increases this paper presents a general equilibrium model where money supply increases are partially hoarded in the short run lagged adjustment results from intertemporal substitution rather than income effects and the adjustment of aggregate expenditure and average prices is monotonic copyright 1990 by the london school of economics and political science

income class modal choice and urban spatial structure abstract this paper analyzes the impacts of urban transportation system changes and income changes on the welfare of people and on the urban spatial structure in a setting where the income level differs between two groups and two transportation modes compete with each other in a city it is demonstrated that an improvement in some transport facility will not necessarily increase the welfare level of every household and at times decreases the welfare of some households it also is argued that under particular situations an improvement in a particular transport mode may produce a contraction in the city size rather than an expansion similarly an increase in income of one group might have an adverse effect on the welfare of another income group as a result of competition in the land market

automobile externalities and policies this paper discusses the nature and magnitude of externalities associated with automobile use including local and global pollution oil dependence traffic congestion and traffic accidents it then discusses current federal policies affecting these externalities including fuel taxes fuel economy and emissions standards and alternative fuel policies summarizing insofar as possible the welfare effects of those policies finally we discuss emerging pricing policies including congestion tolls and insurance reform and summarize the appropriate combination of policies to address automobile externalities

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

the buffer stock notion in monetary economics not the least of harry johnson s contributions to our discipline was the series of survey papers on aspects of monetary economics which he produced during the 1960s and 1970s it is no exaggeration to say that the way in which the literature of monetary economics is organised even now follows the design which johnson first set out in 1962 and built on in the subsequent decade nevertheless the subject has not stood still and one of the more interesting developments of the last few years has involved the introduction of what has been variously described as the disequilibrium money shock absorber or as i prefer to call it the buffer stock notion into monetary economics the development of this line of thought was getting underway before johnson s untimely death much of it indeed under the auspices of his own research programme at the lse even so this did not happen early enough for the relevant ideas to be put in their proper niche by johnson himself and the buffer stock approach is not yet fully integrated into the mainstream of monetary economics much of the relevant literature is empirical concerned with modelling particular aspects of the monetary experience of specific countries hence it is fragmented and contains few papers which attempt a coherent account of just what this approach is and how it relates to other approaches to monetary analysis although essays by goodhart 1982a b and judd and scadding 1982a contain important discussions of these issues to the best of my knowledge only jonson 1976a and knoester 1979a have devoted entire papers solely to this central issue and these are relatively inaccessible and hence less widely known than they deserve to be in this lecture i shall attempt to give a brief account of the essentials of this approach first i shall sketch out its microeconomic background and then i shall discuss those theoretical characteristics which differentiate it from the neo austrian analysis of robert e lucas jr and his associates as well as from the conventional keynesian approach to monetary economics last but by no means least i shall argue that it yields simple theoretical insights into important empirical and policy related issues which are troublesome for alternative approaches in short my tribute to harry

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

price and income elasticities of demand for passenger transport fuels in spain implications for public policies abstract the significant increase in passenger transport activity cars experienced by spain and its associated increase in energy consumption have several associated negative aspects including a greater dependence on foreign energy sources and higher ghg emissions therefore reducing the level of transport activity would bring important socioeconomic and environmental benefits the aim of this paper which focuses on energy consumption in the passenger transport is fourfold 1 to provide a diagnostic of energy consumption in the spanish passenger transport system and the related problems 2 to develop a model to calculate price and income elasticities of demand for transport fuel 3 to apply this model to the spanish passenger transport sector 4 to infer policy recommendations derived from the results of the diagnostic and the model it is claimed that in view of those low price elasticities and high income elasticities and if a reduction in the scale of transport activity is deemed socially desirable a combination of instruments is necessary fuel taxes play an important role within this combination apart from their long term effects the low price elasticity of demand for transport fuel would allow the collection of a significant amount of revenues which could eventually be earmarked to encourage reductions in private transport demand and modal shifts with other instruments

maximum likelihood estimates of a partial adjustment adaptive expectations model of the demand for money now predicted correctly with respect to the win for carter it is not clear however that much confidence should be placed on this result each election has special features and without too much work one could rig the equation to predict most of the observations perfectly within sample third the editor3 has expressed concern about the number of coefficient estimates in say equation 6 that are insignificant by conventional standards given the small number of observations this is not necessarily surprising and my general procedure is to retain insignificant vafiables if their coefficient estimates are of the right sign i would rather risk the loss of some efficiency by incorrectly including a variable than risk the loss of consistency by incorrectly excluding it in the present case there is no question that the likelihood function is fairly flat in the vicinity of the estimate of x although the size of the estimate seems reasonable the only observations that really matter for the estimate of x are those in which at least one of the candidates has run before and so the number of observations involved in estimating a is very small there is also considerable collinearity among the estimates of a and the coefficients of dpert and i the coefficient of 1 is merely the constant term in the definition of the measure of performance see fair 1978 p 164 and it is not very important there is also some collinearity between the time trend and the inflation variable equation 9 is the same as equation 6 except that the time trend i and x have been excluded the main change is that the estimate of the coefficient of dper has increased from 0 0493 to 0 0637 the results are otherwise quite similar the 0 0637 estimate of the coefficient of dper in equation 9 seems somewhat high to me and i am inclined to stay with equation 6 even though there are insignificant estimates tastes differ on this however and there is clearly no right answer as a final exercise equation 6 was used to predict the 1984 election for alternative values of g and p2 j the results are in table 2 for an inflation rate of say 8 0 the break even point 0 5 corresponds to a growth rate of about 0 0 one standard deviation 0 0352 below 0 5 corresponds to a growth rate of slightly more than 3 0 for an inflation rate of 8 0 if reagan does not run the republicans do not have the person advantage and the break even points are less fivunrnhk1 for the m