monetary policy with asset backed money we study the use of asset backed money in a neoclassical growth model with illiquid capital a mechanism is delegated control of productive capital and issues claims against the revenue it earns these claims constitute a form of asset backed money the mechanism determines i the number of claims outstanding ii the dividends paid to claim holders and iii the structure of redemption fees we find that for capital rich economies the first best allocation can be implemented and price stability is optimal however for sufficiently capital poor economies achieving the first best allocation requires a strictly positive rate of inflation in general the minimum inflation necessary to implement the first best allocation is decreasing in capital wealth

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

monetary policy with interest on reserves abstract i analyze monetary policy with interest on reserves and a large balance sheet i show that conventional theories do not determine inflation in this regime so i base the analysis on the fiscal theory of the price level i find that monetary policy can peg the nominal rate and determine expected inflation with sticky prices monetary policy can also affect real interest rates and output though higher interest rates raise output and then inflation the conventional sign requires a coordinated fiscal monetary policy contraction i show how conventional new keynesian models also imply strong monetary fiscal policy coordination to obtain the usual signs i address theoretical controversies a concluding section places our current regime in a broader historical context and opines on how optimal fiscal and monetary policy will evolve in the new regime

money and growth an alternative approach this paper takes an alternative approach to the topic of money and growth by developing a model in which the effects of sustained capital accumulation on an evolving system of payments in addition to the conventional effects of sustained inflation on growth are examined while the effects of inflation on growth are small the effects of growth on the monetary system are substantial the results are consistent with ideas about money and growth contained in work that predates that of james tobin and miguel sidrauski as well as with evidence that money and asset demands vary systematically within economies as they develop copyright 1994 by american economic association

the market valuation effects of reserve regulation abstract we demonstrate that the financial market s reaction to changes in reserve regulation implies that reserve requirements are an excise tax on banking activities changes in reserve requirements do not influence yields on treasury securities or returns on broad based portfolios of nonfinancial stocks and thus do not impound new information about monetary policy moreover changes in reserve requirements have an impact on nonbank financial firms that is opposite in sign to that of banks this suggests that reserve requirements shift the locus of some financial activities from the banking sector to the nonbank sector of the financial system

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

the evolution of a free banking system the institutional features of models of unregulated monetary systems have often been arbitrarily and implausibly assumed this paper instead provides realistic grounding for important features by constructing a logical evolutionary account of free banking sophisticated and orderly arrangements are shown to emerge from competition and the pursuit of less costly methods of payment the emergence of standardized commodity money is followed by the development in turn of basic money transfer banking easily transferable bank liubilities and clearinghouses the features of an evolved free banking system differ from those assumed in recent models of competitive payments systems

money a market microstructure approach the current discussion about the future of the financial system draws heavily on a set of theories known as the new monetary economics the new monetary economics predicts that deregulation and financial innovation will lead to a moneyless world this paper uses a market microstructure approach to show that a common medium of exchange that serves as unit of account will remain a necessary instrument to reduce transaction costs this finding is supported by empirical evidence from foreign exchange markets

can we improve the structure of financial systems 1993 the main theme of this paper is that several of the characteristics of our present western monetary and banking systems have been crucially dependent on the particular temporal process of historical development and are not an essential feature of more fundamental preferences or technological conditions they exist in part because we take them for granted it is the purpose of this paper to examine what might change in both theory and practice if some of these inessential characteristics were to be changed

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

business cycles indicators and forecasting acknowledgments introduction james h stock and mark w watson 1 twenty two years of the nber asa quarterly economic outlook surveys aspects and comparisons of forecasting performance victor zarnowitz and phillip braun comment allen sinai 2 a procedure for predicting recessions with leading indicators econometric issues and recent experience james h stock and mark w watson comment kenneth f wallis 3 estimating event probabilities from macroeconometric models using stochastic simulation ray c fair comment james d hamilton 4 a nine variable probabilistic macroeconomic forecasting model christopher a sims comment pierre perron 5 why does the paper bill spread predict real economic activity benjamin m friedman and kenneth n kuttner comment ben s bernanke 6 further evidence on business cycle duration dependence francis x diebold glenn d rudebusch and daniel e sichel comment bruce e hansen 7 dynamic index models for large cross sections danny quah and thomas j sargent comment john geweke 8 modelling non linearity over the business cycle clive w j granger timo terdsvirta and heather anderson comment andrew harvey contributors author index subject index

common pool resource appropriation under costly cooperation abstract in addition to the usual fixed costs we introduce variable costs in a community s effort to cooperate in extracting from a common pool resource using a standard supervision mechanism these variable costs are shown to be an increasing function of individual members incentives to default the model explains why we frequently observe communities that all cooperate and have relatively similar resource endowments and yet achieve very different levels of extraction

interest on reserves abstract in a general equilibrium setting we study versions of the proposal to pay interest on reserves at the market rate we argue that the proposal makes the demand for total reserves indeterminate whether interest is paid on total reserves or on required reserves only one consequence is that tax financing of the proposal gives rise to a continuum of equilibria equilibria which differ in real returns and consumption allocations another consequence is that financing through earnings on the central bank s portfolio either gives rise to an equilibrium with a zero nominal interest rate or to no equilibrium

are reserve requirements relevant for economic stabilization abstract the level of the required reserve ratio and the payment of interest on required reserves are irrelevant for economic stability 1 when the central bank appropriately adjusts its interest elasticity of supply of reserves or currency to offset changes in the required reserve ratio or in the interest rate paid on required reserves or 2 when economic agents form their price level expectations rationally conditional on the current interest rate

inflation output and money this paper uses money demand theory and a rational expectations version of the quantity theory of money to study inflation in the united states during the post korean war period the major results are as follows 1 the theory and tests explain the phenomenon of stagflation that is the negative relation between inflation and real activity observed during the post 1953 period the analysis calls into question the many variants of the phillips curve which presume that inflation real activity relations are positive 2 consistent with the models of patinkin 1961 and fama 1980 monthly quarterly and annual data indicate that the base currency plus reserves held against deposits is the relevant monetary variable in the inflation process and that demand deposits are irrelevant the direct policy implication is that the base is the key monetary variable in the control of inflation 3 the most convincing evidence for the simple quantity theory view of inflation proposed here comes from the comparison of the conditional exmoney demand theory and the quantity theory of money are used to study the inflation process as predicted by the model monthly quarterly and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity the theoretical and empirical origins of stagflation are explained and changes in monetary arrangements to simplify the control of inflation are prescribed

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

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

monetary policy and bank regulations in an economy with financial innovations this is a study of financial innovations and moves towards the cashless society in a general equilibrium cash in advance model it is assumed that a subset of goods cash goods and check goods

sources of disagreement in inflation forecasts an international empirical investigation abstract central to the conduct of monetary policy are inflation forecasts inflation forecasts are not unique central banks and professional organizations generate inflation forecasts while households are surveyed about their inflation outlook this paper estimates inflation forecast disagreement for nine economies over the 1999 2009 period five of which target inflation i find that central bank transparency tends to increase forecast disagreement to the extent this reflects the attention paid to inflation performance the implication is that transparency is beneficial moreover this finding does not appear to be a feature that applies only to central banks that must adhere to an inflation target

financial intermediation and price level control abstract because currency and deposits are not perfect substitutes in all transactions there are simplified financial systems in which control of the supply of currency is sufficient to control the price level most important in a currency supply approach price level control does not imply control of financial intermediation thus price level goals never have to be weighed against the availability of credit to finance real activity

housing and the great depression this article considers the structural stability of the relationship between the real housing price and real gdp per capita for an annual sample that includes the great depression we test for structural change in parameter values using a sample of annual us data from 1890 to 1952 the article examines the long run and short run dynamic relationships between the real housing price and real gdp per capita to determine whether these relationships experienced structural change over the sample period we find that temporal granger causality exists between these two variables only for subsamples that include the great depression for the other subsample periods as well as for the entire sample period no relationship exists between these variables

consensus and uncertainty in economic prediction we define consensus as the degree of agreement among point predictions aimed at the same target by different individuals and uncertainty as the diffuseness of the corresponding probability distributions this distinction is made operational with the aid of the nber asa survey data on matched point and probabilistic forecasts of inflation and the rate of change in gross national product the means of the two sets of forecasts agree closely standard deviations of point forecasts tend to understate uncertainty as measured by standard deviations of the predictive probability distributions however these measures of consensus and uncertainty are on the whole positively correlated there is evidence that expectations of higher inflation generate greater uncertainty about inflation tests also favor the hypothesis that a rise in inflation uncertainty has adverse effects on real growth

money and banking in a cash in advance economy this paper studies banking and financial innovations in a stochasti c general equilibrium model assuming the existence of two distinct types of goods cash goods which can only be purchased by cash and check goods which can also be purchased by checks drawn against interest bearing bank accounts the authors analyze the effects of changes in the payment s structure i e the share of check goods reserve requirements on banks and changes in the supply of reserves the authors find e g that an increased share of check goods and a decrease of the bank reserve ratio in general both lead to a decrease in the variance of the price level copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

do the oecd 24 month horizon growth forecasts for the g7 countries contain information the oecd produces two year ahead growth forecasts for the g7 countries since 1987 these forecasts have never been evaluated a regression is developed that tests for the information content of the forecasts the idea is that this content is the added value forecasters incorporate in their forecasts the information content is defined relative to the forecast for the previous year in the end the added value contained in the current year forecast is calculated relative to the last observation the test consists in checking whether the information content reduces the forecasts error 1 the authors of the present study refer to mincer and zarnowitz 1969 mcnees 1988 stekler 1991 and fildes and stekler 2002 for a discussion of the evaluation techniques of forecasts the study begins with a calculation of the usual accuracy statistics these indicate an extreme low quality for the forecasts the regression tests support this conclusion although the forecasts for japan do possess some information al