merger policy with merger choice we analyze the optimal policy of an antitrust authority towards horizontal mergers when merger proposals are endogenous and firms choose which of several mutually exclusive mergers to propose in our model the optimal policy of an antitrust authority that seeks to maximize expected consumer surplus imposes a tougher standard on larger mergers i e those involving firms with a larger pre merger market share or equivalently leading to a larger naively computed post merger herfindahl index the optimal policy is a response to a bias in firms proposal incentives firms always propose a larger merger when it is better for consumers than a smaller one but sometimes will propose the larger one even when it is worse for consumers

competition and corporate performance are people right to think that competition improves corporate performance my investigations indicate first that there are some theoretical reasons for believing this hypothesis to be correct but they are not overwhelming furthermore the existing empirical evidence on this question is weak however the results reported here based on an analysis of around 670 u k companies do provide some support for this view most important i present evidence that competition as measured by increased numbers of competitors or by lower levels of rents is associated with a significantly higher rate of total factor productivity growth

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

are contributions to public pension programmes a tax on employment many studies describe the potentially adverse impact on employment of the payroll costs of financing public pension programmes conventionally empirical studies treat contributions to public pension programmes as a pure tax in for example calculations of the tax wedge by oecd but this approach ignores any future rights to benefits that are perceived by contributors in fact public pension programmes contain both an actuarial and a redistributive component the former closer to saving the latter a tax the paper constructs indicators of the tax component of pension programmes both between and within generations across a range of oecd countries and time periods it uses these measures in a cross country panel analysis of the determinants of age and gender specific economic activity rates the results reveal robust evidence that when public pension programme contributions are broken down into a tax component and a savings component the tax component of the payroll contribution reduces economic activity rates among women while a higher retirement saving component has the opposite effect there is little evidence that average tax rates however constructed have any adverse impact on the economic activity rates of men richard disney

survey measures of risk aversion and prudence this paper utilizes a thought experiment conducted by the bank of italy to estimate absolute and relative risk aversion along with absolute and relative prudence for a broad cross section of italian households upper and lower bounds are calculated for each parameter and comparisons are made across socio demographic groups evidence is found of decreasing absolute risk aversion decreasing absolute prudence increasing relative risk aversion and increasing relative prudence

patent policy imitation incentives and the rate of cumulative innovation abstract we study an infinite horizon cumulative innovation model in which patents are characterized by their length and the likelihood of being ruled valid in a patent infringement litigation strengthening patent protection via a greater validity or length has two opposing effects on innovation 1 a negative litigation effect due to increasing the litigation threat for future innovators and 2 a positive competition effect due to reducing profit eroding imitation by competitive firms without innovation capacity the optimal innovation maximizing patent policy balances these two opposing effects for moderate patent validity longer remaining lifetime increases innovation due to the competition effect the opposite is true for higher validity for which the litigation effect dominates moderate validity and infinite patent length maximizes innovation when future profits are subject to greater discounting and r d costs are low while strong validity and finite length stimulates more innovation under lower discounting and higher r d costs

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 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

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

pareto improving social security reform when financial markets are incomplete this paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a pareto improvement when returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations our quantitative analysis shows that abstracting from the capital crowding out effect the introduction of social security represents a pareto improving reform even when the economy is dynamically efficient however the severity of the crowding out effect in general equilibrium tends to overturn these gains

funded pensions and intergenerational and international risk sharing in general equilibrium we explore intergenerational and international risk sharing in a general equilibrium multiple country model with two tier pensions systems the exact design of the pension system is key for the way in which risks are shared over generations the laissez faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks however the existence of wage indexed bonds combined with a pension system with a fully funded second tier that pays defined wage indexed benefits can reproduce the first best if wage indexed bonds are not available mimicking the first best is not possible except under special circumstances we also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings with wage indexed bonds this incentive is absent while there is indeed such an incentive when wage indexed bonds do not exist

patentability r d direction and cumulative innovation we present a model of cumulative innovation where firms can conduct r d in both a safe and a risky direction innovations in the risky direction produce quality improvements with higher expected sizes and variances as patentability standards rise an innovation in the risky direction is less likely to receive a patent that replaces the current technology which decreases the static incentive for new entrants to conduct risky r d but increases their dynamic incentive because of the longer duration and hence higher reward for incumbency these together with a strategic substitution and a market structure effect result in an inverted u shape in the risky direction but a u shape in the safe direction for the relationship between r d intensity and patentability standards there exists a patentability standard that induces the efficient innovation direction whereas r d is biased towards against the risky direction under lower higher standards the optimal patentability standard may distort the r d direction to increase the industry innovation rate that is socially deficient

growth and trustified capitalism abstract previous models of quality improvements focus on what schumpeter called competitive capitalism innovating firms drive their rivals out of business in this paper a model which captures important aspects of schumpeter s notion of trustified capitalism is developed innovating firms capture market share from their rivals but do not drive them out of business most of the results of earlier models carry over for example the determinants of the growth rate of quality are exactly the same as in previous models however two differences do arise in contrast to previous models quality growth is guaranteed by diminishing returns to scale in r d also in contrast to previous models the laissez faire growth rate is unambiguously below the socially optimal growth rate the lack of ambiguity occurs because the negative profit destruction externality is weakened when innovating firms capture only part of their rivals s market share

a model of the evolution of duopoly does the asymmetry between firms tend to increase or decrease this paper is an attempt to identify some of the factors that affect the evolution of market structure in a model of dynamic competition between two firms the stochastic evolution of the state of competition depends on the respective effort rates of the firms the question is whether the current leader works harder than the laggard does the gap between firms tend to increase or decrease we show that several effects are at work the state tends to evolve in the direction where joint payoffs are greater since joint payoffs are related to joint product market profits less joint effort costs there are two classes of effect the joint profit effect and various joint cost effects the latter result in part from the pattern of profits and in part from endpoint effects that give relief from efforts asymptotic expansions illuminate these influences moreover we show by numerical simulation that there is another kind of joint cost effect the pattern of joint effort costs can influence the pattern of evolution of market structure and the evolution of the pattern of market structure can influence the pattern of efforts in a mutually self reinforcing manner in particular there may be equilibria in which this last effect means that the laggard works harder than the leader even though all the other effects work in favour of the leader

buffer stock money interpreting short run dynamics using long run restrictions time series techniques are used to assess the quantitative importance of buffer stock money the short run response of real money holdings to nominal money supply shocks the empirical model a vector autoregression of real and nominal money balances captures general dynamic properties of the time series but requires theoretical restrictions for sensible interpretation the authors just identify the system by imposing a long run neutrality restriction nominal money shocks have no permanent effects on real money they find that buffer stock effects play an important role in the evolution of real m1 in the short run the evidence for m2 is less conclusive copyright 1994 by ohio state university press

intergenerational risk sharing and risk taking of a pension fund abstract by using their financial reserves efficiently pension funds can smooth shocks on their asset returns and can thus facilitate intergenerational risk sharing in addition to the primary benefit of improved time diversification this form of risk allocation affords the additional benefit of allowing these funds to take better advantage of the equity premium which also favors the consumers in this paper our aim is twofold first we characterize the socially efficient policy rules of a collective pension plan in terms of portfolio management capital payments to retirees and dividend payments to shareholders we examine both the first best rules and the second best rules where in the latter case the fund is constrained by a solvency constraint and by a guaranteed minimum return to workers contributions second we measure the social surplus of the system compared to a situation in which each generation would save and invest in isolation for its own retirement we estimate that the certainty equivalent return of the pension saving scheme goes from 3 23 per year to 3 76 when intergenerational risk sharing is introduced one of the main results of the paper is that better intergenerational risk sharing does not reduce the risk born by each generation rather it increases the expected return to the workers contributions

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

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

designing social security a portfolio choice approach public social security systems may provide diversification of risks to individuals life time income capturing that a pay as you go program paygo may be considered as a quasiasset we study the optimal size of the social security program as well as the optimal split between a funded part and a paygo part by means of a theoretical portfolio choice approach a low yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources moreover a funded part of the social security system can be justified by potential imperfections to the individuals free access to the stock market numerical calculations for sweden norway the us and the uk demonstrate that the optimal size of paygo part of the pension program varies considerably in response to differences in projected growth rates and the correlation between stock returns and growth our calculations suggest that a paygo program has an important role in the three former countries but not in the u k

intergenerational risk sharing abstract in this paper we examine government debt and tax transfer policies that can be improve the allocation of risk between generations markets cannot allocate risk efficiently between two generations whenever the two generations are not both alive prior to the occurence of a stochastic event this implies that government policies transferring risk between generations have the potential to create first order welfare improvements our model provides a non keynesian justification for the debt finance of wars and recessions as well as an added rationale for social security type tax transfer schemes which aid unlucky generations e g the depression generation at the expense of luckier generations

intellectual property rights and foreign direct investment abstract this paper develops a product cycle model with endogenous innovation imitation and foreign direct investment fdi we use this model to determine how stronger intellectual property rights ipr protection in the south affects innovation imitation and fdi we find that stronger ipr protection keeps multinationals safer from imitation but no more so than northern firms instead the increased difficulty of imitation generates resource wasting and imitation disincentive effects that reduce both fdi and innovation the greater resources absorbed in imitation crowd out fdi reduced fdi then transmits resource scarcity in the south back to the north and consequently contracts innovation

antitrust in innovative industries we study the effects of antitrust policy in industries with continual innovation antitrust policies that restrict incumbent behavior toward new entrants may have conflicting effects on innovation incentives raising the profits of new entrants but lowering those of continuing incumbents we show that the direction of the net effect can be determined by analyzing shifts in innovation benefit and supply holding the innovation rate fixed we apply this framework to analyze several specific antitrust policies we also show that in some cases the tension does not arise and policies that protect entrants necessarily raise the rate of innovation

market competition r d and firm profits in asymmetric oligopoly we investigate a cournot model with strategic r d investments wherein efficient low cost firms compete against less efficient high cost firms we findthat an increase in the number of high cost firms can stimulate r d by the low cost firms while it always reduces r d by the high cost firms more importantly this force can be strong enough to compensate for the loss that arises from more intense market competition the low cost firms profits may indeed increase with the number of high cost firms an implication of this result is far reaching as it gives low cost firms an incentive to help rather than harm high cost competitors we relate this implication to a practice known as open knowledge disclosure especially ford s strategy of disclosing its know how publicly and extensively at the beginning of the 20th century

competition and growth with step by step innovation an example this paper develops a simple example to analyse the relationship between product market competition and growth in a model with step by step innovations where laggards can never leapfrog the current industry leaders but instead must first catch up with the leaders before battling for technological leadership in the future unlike in existing schumpeterian models of growth more intense product market competition and or imitations may be growth enhancing

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

a rational economic model of paygo tax rates abstract we argue that paygo rates are determined by a representative agent and a benevolent government jointly maximizing the expected life time utility of the agent the distributions of labor and capital income are calculated from national data on real gdp real wages and the real return to capital since 1950 with uniform risk aversion predicted rates explain 83 of the variance of observed rates the globalization of capital markets would lead to convergence of paygo rates our results are immune to crises like 2008

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

social security and risk sharing abstract in this paper we identify conditions under which the introduction of a pay as you go social security system is ex ante pareto improving in a stochastic olg economy with capital accumulation and land we argue that these conditions are consistent with realistic specifications of the parameters of the economy in our model financial markets are complete and competitive equilibria interim pareto efficient therefore a welfare improvement can only be obtained if agents welfare is evaluated ex ante and arises from an improvement in intergenerational risk sharing we also examine the optimal size of a given social security system as well as its optimal reform

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

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

on the competitive pressure created by the diffusion of innovations abstract we consider the decision of a dominant firm to adopt a sequence of potential cost reducing innovations where the latest technology adopted diffuses to a competitive fringe at an exogenous rate with price competition on the product market the leader optimally spaces apart the adoption dates of successive innovations so the industry is characterized by schumpetarian cycles of alternating innovation and diffusion an increase in the rate of diffusion has ambiguous effects on innovative activity and up to a point hastens the pace of innovation these results may however be reversed in the case of quantity competition

a dynamic game of r and d patent protection and competitive behavior a theory of dynamic optimal resource allocation to r and d in an n firm industry is developed using differential games this technique represents a synthesis of the analytic methods previously applied to the problem static game theory and optimal control the use of particular functional forms allows the computation and detailed discussion of the nash equilibrium in investment rules this paper addresses the problem of resource allocation to research and development among the important issues that a firm engaging in r and d must evaluate are uncertainty regarding the feasibility and profitability of a particular innovation the possibility of a protracted development period the possibility that a rival firm may innovate first capturing either a patent or a significant share of the new market the possibility that a rival firm may imitate the innovation and appropriate some of the profits in the new market in what follows we will develop a theory of optimal resource allocation to research and development which incorporates the aspects of r and d enumerated above we will use a dynamic game theoretic analysis determining the nash equilibrium strategies for n identical firms the availability of perfect patent protection is shown to accelerate development of the innovation and the effect of increasing rivalry is addressed the impact of increasing rivalry on nash equilibrium investment in r and d depends upon the degree of appropriability of rewards if patent protection is perfect then increasing the number of nash rivals results in increased r and d effort however when imitation is rewarded the opposite may be true finally some notions of competitive and perfectly competitive equilibrium are examined in the context of the model developed below

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

rare disasters asset prices and welfare costs a representative consumer model with epstein zin weil preferences and i i d shocks including rare disasters accords with observed equity premia and risk free rates if the coefficient of relative risk aversion equals 3 4 if the intertemporal elasticity of substitution exceeds one an increase in uncertainty lowers the price dividend ratio for equity and a rise in the expected growth rate raises this ratio calibrations indicate that society would willingly reduce gdp by around 20 percent each year to eliminate rare disasters the welfare cost from usual economic fluctuations is much smaller though still important corresponding to lowering gdp by about 1 5 percent each year

does social security privatization produce efficiency gains while privatizing social security can improve labor supply incentives it can also reduce risk sharing we analyze a 50 privatization using an overlapping generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty when wage shocks are insurable privatization produces about 18 100 of extra resources for each future household after all transitional losses have been compensated for with lump sum taxes when wages are not insurable privatization reduces efficiency by about 2 400 per future household we check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions first privatization performs better in a closed economy where interest rates decline with capital accumulation than in an open economy second privatization also performs better when an actuarially fair private annuity market does not exist third government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually cause harm

intergenerational risk sharing and fiscal policy abstract risk sharing implications of alternative fiscal policies are compared in a stochastic production economy with overlapping generations ex ante efficiency is shown to be achievable with optimal transfers regardless of distributional concerns for crra preferences stylized real world policies notably safe debt and safe pensions are found inefficient in the direction of imposing not enough productivity risk on retirees and too much on future generations safe transfers can be rationalized as efficient if preferences display age increasing risk aversion such as habit formation the ubiquity of safe transfers suggests that governments treat the young as more risk tolerant than older cohorts

competition imitation and growth with step by step innovation is more intense product market competition and imitation good or bad for growth this question is addressed in the context of an endogenous growth model with step by step innovations in which technological laggards must first catch up with the leading edge technology before battling for technological leadership in the future in contrast to earlier schumpeterian models in which innovations are always made by outsider firms who earn no rents if they fail to innovate and become monopolies if they do innovate here we find first that the usual schumpeterian effect of more intense product market competition pmc is almost always outweighed by the increased incentive for firms to innovate in order to escape competition so that pmc has a positive effect on growth second that a little imitation is almost always growth enhancing as it promotes more frequent neck and neck competition but too much imitation is unambiguously growth reducing the model thus points to complementary roles for competition anti trust policy and patent policy

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

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

horizontal mergers and product innovation abstract we set up a stylized oligopoly model of uncertain product innovation to analyze the effects of a merger on innovation incentives and on consumer surplus the model incorporates two competitive channels for merger effects the price coordination channel and the internalization of the innovation externality we solve the model numerically and find that price coordination between the two products of the merged firm tends to stimulate innovation while internalization of the innovation externality depresses it the latter effect is stronger in our simulations and as a result the merger leads to lower innovation incentives for the merged entity absent cost efficiencies and knowledge spillovers in our numerical analysis both overall innovation and consumer welfare fall after a merger

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

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

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

the federal reserve s operating procedure nonborrowed reserves borrowed reserves and the liquidity effect abstract recently a number of researchers christiano and eichenbaum 1992 christiano et al 1996a b 1997 evans and marshall 1998 strongin 1995 pagan and robertson 1995 brunner 1994 claim to have found evidence of a statistically significant liquidity effect in a recursive structural var using nonborrowed reserves nbr it is claimed that innovations to nbr reflect the exogenous policy actions of the fed this paper argues that the opposite is true specifically i show that the fed has an incentive to offset bank initiated discount window borrowing when it implements the federal open market committee s policy directive and that it has done so since the late 1950s this practice has created a negative contemporaneous covariance between nbr and the funds rate that has been incorrectly attributed to the liquidity effect by showing that these models capture the endogenous response of the fed to bank borrowing on nbr rather than the effect of exogenous policy actions on the funds rate this paper also resolves the puzzle of the vanishing liquidity effect noted by pagan and robertson 1995 and christiano 1995

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

innovation and competition the role of the product market abstract we study how competition impacts innovation and welfare when firms compete both in the product market and in innovation development this relationship is complex and may lead to scenarios in which a lessening of competition increases r d and consumer welfare in the long run we provide conditions for when competition increases or decreases industry innovation and welfare these conditions are based on properties of the product market payoffs implications for applied work and policy are discussed

social security and demographic shocks an overlapping generations model of social security with shocks to the productivity of labor and capital and demographic shocks is studied we focus attention on stationary long run allocations an allocation is interim optimal if there does not exist another feasible allocation that improves the expected welfare of all generations computed conditionally on the state of the world when they are born we characterize the set of interim optimal allocations and study the equilibria associated with various institutional forms of social security from the point of view of this optimality criterion we obtain the analogs of the two traditional welfare theorems of microeconomic theory assume that there exists a financial asset in fixed quantity which supports some non null intergenerational transfers then the rational expectations equilibrium allocation of this economy is interim optimal conversely any stationary interim optimal allocation can be supported by such an equilibrium with adequate lump sum transfers

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 portfolio approach to the optimal funding of pensions abstract fully funded pension systems are advocated for their higher rate of return but this return is typically risky using a simple mean variance model we find that mixed funded unfunded systems are desirable in this setting because they enable risk diversification

measuring risk attitudes in a natural experiment data from the television game show lingo we use data from a television game show involving elementary lotteries as a natural experiment to measure risk attitudes unique features of our data set are the substantial monetary stakes and the large sample size crra and cara utility specifications perform approximately equally well we find robust evidence of substantial risk aversion extensions of the basic model which allow for a separate utility flow purely from playing the game or for decisions based on decision weights instead of actual probabilities raise the estimated degree of risk aversion