velocity and the variability of money growth evidence from granger causality tests note economists and policy makers were caught off guard by the behavior of the income velocity of money in 1982 the velocity of m1 which had grown at a 3 3 percent average annual rate from 1970 1981 fezl by 4 4 percent in 1982 in the fourth quarter of 1982 the decline was 12 6 percent at an annual rate the 1982 decline in velocity significantly reduced nominal gnp growth and may have helped cause the fall in real gnp the 1982 episode has generated quite a bit of controversy the decline in velocity is important not only for its possible relation to real gnp but also because it has led some economists to seriously question monetarism monetarists believe that there is a predictable link between money growth and nominal gnp growth when velocity declined in 1982 that link appeared to have weakened seemingly undermining the monetarist beliefs in fact robert gordon 1983 has called the 1982 episode the velocity recession and the demise of monetarism milton friedman 1984 has stated that the decline in velocity does not undermine monetarism at all he believes that velocity fell because of the extreme volatility of money growth following the announced change in federal reserve operating procedures in october 1979 figure 1 shows the income velocity of m1 v and the standard deviation of current and seven lags of m1 growth s a large increase in the volatility of money growth in 1980 precedes the decline in velocity in 1982 based on this friedman states that the 1982 episode strengthens not weakens the case for the monetarist proposition of a constant growth rule of the money supply this paper uses the granger causality method to test friedman s hypothesis that the volatility of money growth causes velocity to change we conclude that friedman is correct i e the volatility of money measured by the standard deviation of money growth causes velocity in the granger sense in the next section we review some of the recent explanations offered by economists for the 1982 decline in velocity the concluding section presents our results of the granger tests of friedman s hypothesis

the determinants of the treasury security yield curve investors security demands and two points on the yield curve are jointly determined using a disaggregated structural model of the u s treasury securities market the empirical results indicate that the structural model is capable of accurately explaining treasury yields and that changes in a variety of nonyield variables affect the yield curve among these nonyield variables are treasury security supplies which are found to have significant but somewhat volatile impacts depending on investors wealth flows the within sample predictions from the structural model are also compared to those of a naive model most empirical studies of the term structure of interest rates have relied on single equation models of interest rate determination to identify the underlying determinants of long term bond yields the methodologies used in these studies may be grouped into two broad classifications first researchers have frequently specified yield curve relationships based predominately on the expectations hypothesis associated with hicks 23 and lutz 26 and found that current and past short term interest rates provide accurate within sample forecasts of longterm interest rates see for example meiselman 28 wood 54 and dobson sutch and vanderford 8 within this framework modigliani and sutch 33 34 and modigliani and shiller 32 have additionally examined the potential effects resulting from changes in relative asset supplies due to the market segmentation effects suggested by culbertson 7 and risk premiums as a whole the empirical research using the expectations hypothesis as a starting point indicates that nonyield variables are not significant determinants of longterm bond yields furthermore in tests involving the significance of lagged changes in short term interest rates hamburger and latta 21 and elliott and baier 11 among others have found that only contemporaneous changes in shortterm interest rates significantly influence changes in long term bond yields second other researchers have used unrestricted reduced form equations based on loanable funds or liquidity preference theories of interest rate determination see for example okun 35 scott 48 sargent 46 pierson 39 feldstein and

bundling decisions by a multiproduct monopolist with incomplete information this paper analyzes bundling decisions of a rnultiproduct monopolist facing uncertain demand the monopolist sells his products using an auction mechanism and the market is analyzed as a game with incomplete information in which the buyers as well as the seller are strategic agents with a small number of buyers a profit maximizing seller will bundle all his output this makes buyers uniformly worse off compared to the case where the same monopolist does not bundle in the sense that any buyer is worse off regardless of his demand for the monopolist s outputs with a larger number of buyers the seller will have a tendency to unbundle his output and high demand buyers are worse off than they would be if the monopolist bundled his output low demand buyers on the other hand are always better off when the monopolist unbundles his output regardless of the number of competing buyers despite the fact that high demand buyers are the typical purchasers of the monopolist s output the net effect of increasing the number of buyers is greater market efficiency since bundling creates market inefficiencies both ex post and ex ante

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

an industry equilibrium analysis of downstream vertical integration this paper investigates the effect of product substitutability on nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer which may be either a franchised outlet or a factory store static linear demand and cost functions are assumed and a number of rules about players expectations of competitors behavior are examined it is found that for most specifications product substitutability does influence the equilibrium distribution structure for low degrees of substitutability each manufacturer will distribute its product through a company store for more highly competitive goods manufacturers will be more likely to use a decentralized distribution system this article was originally published in marketing science volume 2 issue 2 pages 161 191 in 1983

a constitution for solving asymmetric externality games externalities such as pollution represent an important class of social problems that can be resolved by political institutions this work investigated two key questions raised by these situations what is the effect of using a given political institution such as simple majority rule to resolve externalities more important are there constitutionally prescribed institutions that will generate appropriate outcomes we developed a model in which citizens benefit asymmetrically from producing an externality any one citizen s production however imposes an equal cost on all citizens in this technology a pollution charge chosen by majority rule generally leads to suboptimal outcomes we show that an alternative institution is optimal a citizen whom we call the setter volunteers to select the charge if his choice is approved unanimously the charge is enacted otherwise everyone produces the constitutional mechanism is such that the correct setter is induced to volunteer the resulting allocation maximizes net social benefits as a result of the uniform and linear nature of the externality cost this optimal allocation is obtained without making strong assumptions about the information held by citizens specifically attaining the optimal allocation is not dependent on citizens knowing the production benefits or actions of others

determining the scale of r d investment for renewable energy in korea using a comparative analogy approach abstract the rising price of fossil energy due to increasing global energy consumption has stimulated investment in renewable energy despite korea s high dependence on foreign energy sources it is well behind other developed countries with regard to renewable energy production this study attempts to develop a reasonable r d investment plan based on the forecasted diffusion of renewable energy in the korean market by analyzing the experiences of other developed countries the german market is selected as the reference case on the basis of its similarity to the korean market the realized data indicate that the growth of technology is proportional to cumulative r d investment a final investment schedule is established based on the goal of meeting the target penetration level the suggested investment plan which differs substantially from the plan recently announced indicates the necessity of more active investment in early stage and supportive policies for r d into renewable energy

domestic and international financial market responses to federal deficit announcements abstract this study examines the response of domestic and international financial variables to announced changes in federal deficit projections over the 1981 1994 period as observed in earlier studies rates on us treasury securities responded positively to announced increases in federal deficit projections new evidence shows that deficit effects are transmitted internationally with foreign long term interest rates also increasing in response to announced increases in us deficit projections the exchange value of the dollar tends to be positively related to announced changes in deficit projections but that result appears to be related to the degree of insulation of foreign financial markets from us financial markets finally the price of gold responded positively to announced changes in deficit projections taken together the results suggest that higher projected deficits raise real interest rates in part because of an increase in an inflation risk premium

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

the structure of sunspot equilibria the role of multiplicity this paper examines the structure of sunspot equilibria in a standard two period exchange economy with real assets we show that for a generic choice of utility functions and endowments there exists an open set of real asset structures whose payoffs are independent of sunspots such that the economy with this asset structure has a regular sunspot equilibrium an important implication of our result is that the multiplicity of non sunspot equilibria is not necessary for the existence of sunspot equilibria our technique is general and can be applied to show the existence of sunspot equilibria in other frameworks this paper analyses the structure of sunspot equilibria in a standard two period competitive exchange economy with more than one consumption good in each period and a real asset which pays a bundle of commodities there is no uncertainty except for sunspots we show that for an open and dense subset of the set of utility functions and endowments there exists an open set of real asset structures with payoffs independent of sunspots such that the resulting economy with an asset structure in this set has a regular sunspot equilibrium we also show that this result is tight in the space of utility functions endowments and asset structures there is in fact an open set of economies for which sunspot equilibria do not exist moreover our argument provides a systematic method which allows us to find generically all the sunspot equilibria of a given economy thus it can be used as a tool for studying the global structure of the set of sunspot equilibria not just the existence of a sunspot equilibrium the dependence of the existence of sunspot equilibria on the particular specification of the payoff of the asset provides an interesting contrast with the fact that the set of equilibrium allocations of the underlying certainty economy does not depend on the asset structure recall that when markets are complete preferences and endowments completely determine the set of competitive equilibria in our setting markets are complete in the underlying certainty economy so if payoffs change the price of the asset will change accordingly but there is no effect on the equilibrium consumption of the certainty economy thus the fundamentals of the certainty economy are the distribution of endowments and preferences among consumers and our result implies that the existence of sunspot

informational diversity over time and the optimality of monetary equilibria abstract the temporal realizations of a random state variable in an overlapping generations model create an informational diversity between members of different generations and require a reexamination of the optimality that competitive equilibria might display in such an environment using an optimality criterion that reflects this informational diversity we prove the optimality of competitive equilibrium in a model with a fixed stock of fiat money a single spot market and good endowments that follow a markov process the need for an optimality criterion that incorporates informational diversity is further motivated by studying the same model with the operation of complete contingent commodities markets

adoption externalities as public goods abstract a public good problem arises naturally in situations characterized by positive externalities or negative externalities for positive externalities agents furnish a public good by taking an action similarly for negative externalities agents furnish a public good by not taking an action we examine these externalities in a binary choice problem i e adoption externalities in each case there is a potential role for government intervention even when equilibrium transfers are not allowed since one equilibrium pareto dominates all others we analyze the positive and normative features of equilibria in these models and we explore the possibility of useful government intervention

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

long and short term interest rates in a risky world abstract the paper develops and tests a general equilibrium model in which variability or risk affects the choice of portfolios our measures of variability include only the variability of unanticipated growth in monetary and non monetary aggregates and our tests use data ending with the change in federal reserve procedures in october 1979 we find that increased variability of unanticipated money growth raises demands for debt and money and reduces the demand for real capital interest rates on both short and long term debt rise by a risk premium we estimate the size of the risk premium before and after the october 1979 change and we show that the change in federal reserve procedures moved the economy to a less efficient point

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977