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

interest rate expectations and interest parity abstract this paper examines an hypothesis for explaining divergences from interest parity that is based on interest rate expectations if interest rates are expected to rise significantly within the arbitrage oppurtunity implies riskless profit waiting in ths way has been noted in the historical literature seems to make sense theoritically if portfolio adjusment cost in the capital market outweigh any costs of being out of long term equilibrium and explains a significant portion of us uk interest parity divergences using onshore assets in a recent floating preiod

the effect of regime shifts on the long run relationships for swedish money demand when the possibility of an unknown structural break is allowed and it is taken into account we find a significant long run relationship between swedish money demand and its determinants that is not found when no break is considered the estimated elasticities show that money demand is more responsive to its determinants in the period after the break than before possible underlying reasons for the occurrence of this break and its implications are explained

the dynamic behavior of wages and prices cointegration tests within a large macroeconomic system the dynamic relationship between wages and prices has long held a central place within the economic literature most macroeconomic models make assumptions as to the causal relationship between the two variables unfortunately empirical investigations have produced widely divergent results in particular the present paper examines the results of time series studies and argues that the lack of a consensus is due to improperly specified models once the wage price relationship is embedded within a multiple vector system identification of a wage price cointegrating relationship is significantly improved in addition the increased efficiency yields evidence in favor of the dual feedback between wages and prices

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

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

institutional change and the velocity of money a century of evidence we study common features in the income velocity of money income and interest rates for canada the u s the u k sweden and norway using annual data from 1870 the recently developed and refined techniques of testing for cointegration are employed the evidence suggests there is a unique long run relationship in velocity but not in income and interest rates moreover we find that only a model which includes institutional change proxies is properly specified we argue that the evidence is best interpreted in the context of common historical developments in the respective countries financial systems

an empirical test of the effects of government deficits on money demand there is a great deal of interest in how govenment deficits affect macroeconomic variables accordingly there is a large body of theoretical and empirical work on the topic this paper examines the relationship between deficits and interest rates among the difficulties in exploring this relationship is that when conducting monetary policy the federal reserve often targets interest rates such a policy can cloud any relationship between deficits and interest rates a way to avoid this problem among others is to estimate money demand functions that contain a measure of the market value of government debt no evidence is found to support a positive relationship between government debt and money demand this finding implies budget deficits do not affect interest rates through money demand

natural gas consumption and economic growth the role of foreign direct investment capital formation and trade openness in malaysia the objective of this paper is to reinvestigate the relationship between natural gas consumption and economic growth by including foreign direct investment capital and trade openness in malaysia for the period of 1971 2012 the structural break unit root test is employed to investigate the stationary properties of the series we have applied combined cointegration test to examine the relationship between the variables in the long run for robustness sake the ardl bounds testing method is also employed to test for a possible long run relationship in the presence of structural breaks we note the validity of cointegration between the variables natural gas consumption foreign direct investment capital formation and trade openness have positive influence on economic growth in malaysia the results support the presence of feedback hypothesis between natural gas consumption and economic growth foreign direct investment and economic growth and natural gas consumption and foreign direct investment the policy implications of these results are provided

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

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

the demand for money a structural econometric investigation this study empirically investigates dynamic microfoundations for the conventional static money demand equation an intertemporal substitution model with the addilog utility function yields a money demand relationship that closely approximates the double log specification results from previous empirical studies largely support the derived equation estimations with quarterly u s data support cointegration among real per capita m1 and consumption and an after tax long term interest rate for the post 1980 period estimated short run intertemporal interest rate elasticities of consumption vary from 0 26 to 0 93 estimated long run elasticities of substitution between consumption and money range from 0 26 to 0 41

the demand for money in eec countries abstract this paper examines the demand for money in the eec countries and is focussed on five issues first it starts form a common economic framework which allows for shifts from m 2 to non money assets and vice versa second special attention is given to the dynamic structure of the statistical model in order to obtain meaningful conclusions on e g the speed of adjustment of actual to optimal money holdings third the study is entirely based on a uniform set of quarterly data for the eight countries concerned fourth the paper presents a careful examination of the residuals and finally analyses the predictive behaviour of the estimated models for all countries we found long run income elasticities greater than unity and interest rate elasticities clustered around 0 20 the impact of inflation and the business cycle variable appeared to be significant in the majority of countries considered

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

co integration and error correction models the temporal causality between government taxes and spending several interesting papers have recently considered whether government taxes granger cause government spending or vice versa the findings based on standard granger 6 causality tests are not consistent manage and marlow 10 conclude that when evidence of one way causality exists federal taxes granger cause federal spending while anderson wallace and warner 1 conclude that the evidence supports one way causality in the opposite direction ram 11 reexamining the issue concludes that taxes granger cause spending at the federal level but that spending granger causes taxes at the state and local level von furstenberg green and jeong 13 in another related article examine the tax and spend spend and tax causality issue using a more general vector autoregressive var model they introduce in addition to federal taxes and spending two economic variables the gnp gap and the inflation rate decompose federal spending into several categories and remove the effects of automatic stabilizers when appropriate they find little evidence that taxes granger cause spending and limited evidence that spending causes taxes a finding which corresponds most closely to that of anderson wallace and warner 1 our purpose is to reconsider the causality issue with the aid of co integration and errorcorrection modeling our analysis illustrates with a specific example how sources of causality can be neglected in standard granger causality tests moreover addressing the question of temporal causality between government taxes and spending provides insight as to how different policies might or might not help control the growth of government the results of our estimating various co integration and error correction models with quarterly data suggest bi directional causality between government taxes and spending both for the federal and state and local sectors this finding counters the conclusions of previous studies when annual data are used however our

the demand for nominal and real money balances in a large macroeconomic system cointegration has become a popular empirical technique used to estimate the existence and stability of money demand relationships a common approach has been to estimate a single equation system with real money balances ml real income and an interest rate although hafer and jansen 13 friedman and kuttner 10 and stock and watson 29 find only minimal support for this specification baba hendry and starr 6 estimate a more complicated ml relation by including specific opportunity cost variables and find stronger support for the ml relation using post wwii data there have been four reasons put forth to explain the lack of a cointegrating relation between ml real income and the interest rate stock and watson 29 conclude that a stable money demand relation exists in data from 1900 89 but not for the post war period alone their explanation is that sufficient variation exists in the longer sample to identify money demand but excessive multicollinearity among variables during the post war period prevents unique identification baba hendry and starr 6 bhs maintain that misspecification of the ml relation is the reason for poor results they augment the money demand function with inflation a measure of long term bond yield and risk and learning curve weighted yields on newly introduced ml and m2 assets bhs claim their specification is able to account for the missing money period of 1975 76 the velocity decline of 1982 83 and the ml explosion of 1985 86 while standard ml models cannot friedman and kuttner 10 offer a third reason why the simple money demand equation fails they estimate a single equation model for several periods and conclude that a money demand vector exists over the 1960 2 79 4 period for ml however when data is included

exchange rate sensitivity of the demand for money in spain 1998 exchange rate sensitivity of the demand for money in spain applied economics vol 30 no 5 pp 607 612

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

wage growth and the inflationary process a reexamination the nature of the relationship between wage growth and inflation has long been the subject of ongoing debate the expectations augmented phillips curve theory contends that the two variables are mutually causal however the original wage type phillips curve model argues it is inflation that causes wage growth rather than vice versa the price markup scheme holds an opposite view and asserts that wage growth plays an independent causal role in the inflationary process of course other theories e g the monetarist deny the presence of any reliable linkage between wages and prices researchers have also expended enormous effort attempting to investigate empirically the relationship between wage growth and inflation but with mixed results for example mehra 24 and ashenfelter and card 1 report results suggesting a bidirectional causality barth and bennett 2 and stein 37 38 find causality running from prices to wages without feedback while shannon and wallace 34 and hill and robinson 19 report results showing causality only in the reverse direction from wages to prices still gordon 11 bazdarich 4 batten 3 and mehra 27 find no causal linkage between the two variables clearly such remarkably mixed evidence is unfortunate in light of the profound implications that the precise wage price relationship may have for economic and public policy a more recent and quite interesting study is that of mehra 28 mehra employed the technique of cointegration and error correction modelling on u s quarterly data for the period 1959 1 1989 3 he concluded that inflation and wage growth are cointegrated implying that their long run movements are correlated as the expectations augmented phillips curve theory predicts however contrary to this theory and in accordance with the original wage type phillips curve view mehra argued that the inflation wage growth long run correlation is primarily the outcome of the former causing the latter mehra s model encompasses three basic variables namely prices p productivity adjusted wages w and an output gap proxy g he tested each of the three variables in logs for the presence of unit roots finding evidence of two unit roots in p and w but a single unit root in g mehra then examined cointegration of the two variables having two unit roots p w his re

generalized functional forms and demand for money in an open economy the case of the united kingdom the purpose of this paper are twofold first to apply a box cox model to the uk money demand relationship within an open economy framework in order to empirically investigate the proper functional form supported by the data in this general setting secondly to test for the porper scale variable in the uk money demand function within the open economy box cox specification these improvements enhance the accuracy of our measures of monetary and fiscal policy effects and our understanding of the interdependence between different economies the empirical results derived here reject the restrictive linear and log specifications in favour of the general box cox model under both income and consumption based money demand specifications the traditional income based model however escaps unharmed from the challenge put forward by mankiw and summers 1986

curbing agricultural exceptionalism the eu s response to external challenge from 1948 to 1994 the agricultural sector was afforded special treatment in the gatt we analyse the extent to which this agricultural exceptionalism was curbed as a result of the gatt uruguay round agreement on agriculture discuss why it was curbed and finally explore the implication of this for eu policy making we argue that in particular two major changes in gatt institutions brought about restrictions on agricultural exceptionalism first the uruguay round was a single undertaking in which progress on other dossiers was contingent upon an outcome on agriculture the eu had keenly supported this new decision rule in the gatt within the eu this led to the macsharry reforms of the common agricultural policy cap in 1992 paving the way for a trade agreement on agriculture within the gatt second under the new quasi judicial dispute settlement procedure countries are expected to bring their policies into conformity with wto rules or face retaliatory trade sanctions this has brought about a greater willingness on the part of the eu to submit its farm policy to wto disciplines

interest rates risk and imperfect markets puzzles and policies traditional theory emphasizes the key role that monetary policy can play through the manipulation of interest rates but there are several puzzles that cannot be reconciled with standard models these include the apparent constancy in interest rates over extended periods and changes at other times which appear unrelated to changes in technology and demography the cyclical pattern of movements in real interest rates the impact of nominal not real interest rate changes on real variables and the cyclical pattern of movements in interest rate spreads this paper reaches beyond the standard competitive equilibrium perfect information model of credit markets towards imperfect information models particularly those that focus on the determinants of bank behaviour of the standard models the money demand model is most deficient in understanding these puzzles the loanable funds theory and a generalized version of real productivity theory can be reconciled with imperfect information and markets and the consequent credit and equity rationing regimes help to explain the puzzles specifically banks may be insensitive to changes in monetary stance owing to risk aversion there are strong policy implications it is argued for instance that in east asia raising interest rates exacerbated economic decline and rather than contributing to exchange rate stability may have induced capital flight as default risk increased lowering risk adjusted expected returns

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

what does the bundesbank target abstract although its primary ultimate objective is price stability the bundesbank has drawn a distinction between its money focused strategy and the inflation targeting approach recently adopted by a number of central banks we show that holding constant the current forecast of inflation german monetary policy responds very little to changes in forecasted money growth we conclude that the bundesbank is much better described as an inflation targeter than as a money targeter an additional contribution of the paper is to apply the structural var methods of b bernanke and i mihov measuring monetary policy working paper no 5145 national bureau of economic research cambridge ma june 1995 to determine the optimal indicator of german monetary policy we find that the lombard rate has historically been a good policy indicator although the use of the call rate as an indicator cannot be statistically rejected

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

crucial issues concerning central bank independence abstract this paper argues first that it is inappropriate to presume that central banks will in the absence of any tangible precommitment technology inevitably behave in a discretionary fashion that implies an inflationary bias furthermore there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it several implications are discussed

modelling nominal debt contracts and fixed rate debt we provide a simple model of sticky nominal debt contracts and fixed rate debt that can easily be embedded in a dynamic general equilibrium framework once linearized the debt process increases the order of autoregressive dynamics in the system by one thus potentially introducing more complex adjustment processes

the added worker effect abstract this paper uses the gross change data and cointegration error correction modeling to test the hypothesis of added worker effect in the u s labor market it is shown that prime age males unemployment u m and flows from unemployment to out of the labor force un m cause an increase in prime age and young females flows from not in the labor force keeping house to employment and decrease their flows into unemployment

a theory of the consumption function with and without liquidity constraints fifteen years ago milton friedman s 1957 treatise a theory of the consumption function seemed badly dated dynamic optimization theory had not been employed much in economics when friedman wrote and utility theory was still comparatively primitive so his statement of the permanent income hypothesis never actually specified a formal mathematical model of behavior derived explicitly from utility maximization instead friedman relied at crucial points on intuition and verbal descriptions of behavior although these descriptions sounded plausible when other economists subsequently found multiperiod maximizing models that could be solved explicitly the implications of those models differed sharply from friedman s intuitive description of his model furthermore empirical tests in the 1970s and 1980s often rejected these rigorous versions of the permanent income hypothesis in favor of an alternative hypothesis that many households simply spent all of their current income today with the benefit of a further round of mathematical and computational advances friedman s 1957 original analysis looks more prescient than primitive it turns out that when there is meaningful uncertainty in future labor income the optimal behavior of moderately impatient consumers is much better described by friedman s original statement of the permanent income hypothesis than by the later explicit maximizing versions furthermore in a remarkable irony much of the empirical evidence that rejected the permanent income hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with friedman s original description of the model and with the new version with serious uncertainty there are four key differences between the explicit maximizing models

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

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

tax and spend or spend and tax an inquiry into the turkish budgetary process for resolving the budget deficit problem some economists have advocated spending cuts while others support either tax increases or tax cuts this paper investigates the interrelationship between the two fiscal variables for turkey using bivariate and multivariate cointegrating models the engle granger and johansen tests consistently support the existence of one nonzero cointegrating vector representing a stable long run relationship between government spending and revenues in turkey furthermore the multivariate error correction model suggests that taxes unidirectionally granger cause negative changes in spending in accordance with the buchananwagner hypothesis thus from the perspective of policy making and the deficit solution debate raising taxes in turkey is perhaps the optimal solution to the current budget deficit predicament contemporary economies perhaps without exception have been plagued with huge and escalating government budget deficits these deficits are expected to have adverse economic consequences including high real interest rates slow capital formation and high unemployment rates moreover to the extent that the deficit is financed through the issuance of government bonds the recurrent large deficits have further worsened the public debt problem which threatens the well being of numerous countries both developed and developing therefore researchers and policymakers have expended enormous efforts attempting to analyze the deficit problem and to suggest ways to resolve it some for example advocate cuts in government spending rather than tax increases as the optimal solution to the deficit dilemma they reason that governments often spend all that they receive in taxes and perhaps much more under this line of reasoning raising taxes would simply induce more spending leaving the deficit unchanged or even higher others however deny this implied tax and spend nexus and argue that it is taxes that adjust gradually to spending under this latter scenario tax increases will not lead to higher spending and thus could be used as an effective deficit cutting measure along with spending cuts still other researchers posit that changes in spending and taxes could occur simultaneously therefore focusing on one component of the government budget while ignoring the interdependence with the other component would have an ambiguous overall effect on the deficit

distinguished lecture on economics in government what central bankers could learn from academics and vice versa academic writing about monetary policy has been useful to practical central bankers but more of certain aspects of the economists way of thinking could profitably be imported on the other hand academics could improve their analysis and make it more useful to policymakers if they would pay more attention to certain real world aspects of monetary policy the author draws on his experience at the federal reserve board to point out a number of specific lessons for each side

recent trends in the size distribution of household wealth based on the survey of consumer finances the distribution of wealth in the united states became much more unequal in the 1980s and that trend continued albeit at a slower pace in the 1990s the only households that saw their mean net worth rise in absolute terms between 1983 and 1995 were those in the top 20 percent and the gains were particularly strong for the top one percent all other groups were particularly strong for the top one percent all other groups suffered real wealth losses including the median household and declines were particularly precipitous at the bottom racial disparities widened and young households also lost out over this period

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

implications of 1992 for eec farm and food policies abstract three broad issues are first discussed article 8a of the eec treaty does not in itself ensure that a single market will be effected on 1 january 1993 the protocol on german internal trade raises particular difficulties and third countries particularly in the context of the gatt talks must not be neglected green money and monetary compensatory amounts mutual recognition irradiation and non returnables in denmark are four particular policy issues discussed before the question is raised whether 1992 will bring benefits few studies of the impact of 1992 have been published and none can be said to have definitively answered this question

the relationship between budget deficits and money demand evidence from a small economy a considerable number of empirical studies exploring the links between budget deficits and the demand for money have led to mixed results by using annual data of the greek economy and previous empirical studies this paper empirically evaluates the sensitivity and validity of the keynesian proposition and the ricardian equivalence hypothesis the paper employs cointegration ecm methodology and several diagnostic and specification tests the empirical findings show a significant and positive relationship between budget deficits and the demand for money supporting the keynesian model

monetary dynamics a market approach the behaviour of the short run responses implied by the identification of a long run money demand relationship is examined these responses have recently been interpreted as representing the policy stance of the monetary authority however as movements in the monetary aggregate reflect both demand and supply adjustments estimating the short run dynamics solely within the money demand relationship may produce biased results in order to address this issue the paper explicitly acknowledges the importance of the supply of money function by including the function alongside the demand for money function while the interaction of the two equations continues to produce the long run quantity theory result the additional detail provides more accurate estimates of the individual short run adjustments within the two equations

measuring global money market interrelationships an investigation of five major world currencies abstract this paper extends the study of global money market integration in two primary directions first a technique which combines stationarity and cointegration tests as a basis for constructing an error correction model is applied to assess the existence of long run equilibrium relationships between money market series second analysis for the increasingly significant asian offshore markets of singapore and hong kong is added to traditional european and national markets analysis major findings are 1 the error correction model is an appropriate technique for identifying causality relationships and 2 major domestic markets and included offshore markets are partially segmented

the equilibrium relationship among money income prices and interest rates evidence from a threshold cointegration test the long run equilibrium relationship among money income prices and interest rates in japan is investigated by the threshold cointegration test which allows for asymmetric adjustment introduced by enders and siklos 2001 the threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment by allowing for asymmetric adjustment results are obtained showing the stability of the money demand function similar to lucas 1988 who pointed out that the money demand function is stable if unit income elasticity is imposed in particular the estimated results show that the adjustment process toward equilibrium is highly persistent above an appropriately estimated threshold whereas the adjustment process toward equilibrium quickly converges below it this finding indicates that deviations from equilibrium resulting from increases in money or decreases in income and prices are highly persistent

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

real stock prices and the long run money demand function evidence from canada and the usa abstract this paper investigates the relationship between stock prices and the long run money demand function in canada and the usa during the post wwii period 1955 1989 the empirical investigation is conducted by means of the johansen method of cointegration and the error correction modelling strategy results show that stock prices play a significant role in the determination of stationary long run real m1 and real m2 demand functions in both countries the direction and magnitude of the role of stock prices depends upon the definition of the money and the country error correction results provide evidence of causality between the real money stock and the determinants of the money demand including real stock prices

the dilemma of cheap food and self sufficiency the case of wheat in iran self sufficiency in wheat has been one of the major goals of iranian agricultural policies since the revolution of 1979 even so the country failed to achieve this goal by the early 2000s despite a satisfactory growth in wheat production this paper addresses this failure and the political difficulties in introducing reforms that would reduce the need for import first the production and consumption of wheat are examined the conclusion is that the cheap bread policy has mainly been responsible for the imbalances between domestic supply and demand and the continued reliance on wheat imports moreover the paper argues that the subsidy program is an expensive safety net for the needy and shows that the iranian government has intended to reform the program since the early 1990s however subsidy reforms are politically sensitive especially in developing countries where subsidies are considered very important both for supporting the poor and for political stability an analysis of the iranian attempts at subsidy reform suggests that they have not yet succeeded mainly due to such political considerations

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

monetary stabilisation with nominal asymmetries optimal monetary stabilisation in the standard new keynesian framework usually assumes a policy loss function from outside the model in this paper in contrast the objective arises directly from the model credit constraints and sticky nominal debt contracts imply that monetary stabilisation has asymmetric impacts depending on whether consumers are credit constrained the policy problem is to maximise some weighting of the expected utility of the different types of consumer features of optimal stabilisation are derived that do not appear to be far out of line with empirical evidence for many countries but that clearly conflict with standard loss function results

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

long run money demand function in argentina during 1935 1962 evidence from cointegration and error correction models this paper provides a study of argentina s money demand function during 1935 62 and 1946 62 these priods not only involved several important changes in argentina s economy and banking system but also included high and volatile inflation using cointegration tests and error correction moderlling results shows that even in periods of large variability there exists a stationary long run demand function for real m1 and real m2 in argentina error correction models show that there is biddirectional causality between real money stock m1 and m2 and the rate of inflation in both periods real income is found to be exogenous in all relationships thus results presented in this paper provide merit to cagan s form of money demand function during high inflation periods

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

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

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

dynamic specifications in optimizing trend deviation macro models abstract as noted in surveys by goodfriend and king in b bernanke j rotemberg eds nber macroeconomics annual mit press cambridge ma 1997 pp 231 283 and walsh monetary theory and policy mit press cambridge ma and exemplified by models analyzed in taylor 1999 there is encouraging progress in developing optimizing trend deviation macro models that provide useful insights into the transmission and design of monetary policy several controversial features of a minimalist trend deviation model with optimizing households firms and bond traders are examined dynamic specifications are suggested to improve the data based realism while preserving the simplicity of the minimalist model

financial sector weakness and the m2 velocity puzzle i introduction there has been a long running debate over the usefulness of monetary aggregates as intermediate targets or information variables in the conduct of monetary policy in the mid1970s the missing money episode associated with m1 money demand was documented by goldfeld 1976 and judd and scadding 1982 passage of the depository institutions deregulation and monetary control act in 1980 and the garn st germain act in 1982 ushered in a period of financial deregulation including interest bearing checking accounts and money market deposit accounts these innovations affected depositor behavior to such an extent as to make m1 unreliable as a target or indicator of policy as a result research efforts focused on m2 demand with initial evidence of stable short run specifications for this aggregate as in small and porter 1989 this issue remains timely with the recent example of the european central bank debating whether to target a monetary aggregate or inflation in its implementation of monetary policy as svensson 1999 points out in the united states feldstein and stock 1994 argue that the federal reserve should use the m2 monetary aggregate as an intermediate target on the other hand a fair amount of work suggests that m2 is not reliable as either a target or an indicator of monetary policy friedman and kuttner 1992 show that by the early 1990s the relationship between m2 and gross domestic producct gdp had weakened and estrella and mishkin s 1997 work provides further support for this finding miyao 1996 presents evidence that a cointegrating m2 demand relationship broke down in the 1990s as the link between m2 and gdp deteriorated the forecasting ability of m2 money demand equations also suffered the difficulties in forecasting m2 spurred a number of publications examining whether the deterioration in the m2 equation s forecasting ability was temporary or whether more fundamental factors such as flaws in the construction of the m2 aggregate the opportunity cost or both were at work carlson and parrott 1991 and duca 1992 first argued that the existence of troubled thrifts and the length of time it took the resolution trust corporation to resolve the thrifts difficulties helped explain the weakness in m2 in particular duca found that the change in the volume of cumulated deposits at resolved thrift institutions accounted for a large part of the m2 weakness although he suggested his findings be viewed cautiously because of the short time period of the analysis in the same article as well as in one subsequent to it duca 1995 also examined whether some of the weakness in m2 reflected substitution by households away from m2 type deposits and into bond and equity mutual funds he found that adding a bond fund series to m2 reduced estimated m2 growth shortfalls orphanides et al 1994 carlson and keen 1996 feldstein and stock 1996 and mehra 1997 also present evidence that the unusual behavior of m2 was related to growth in stock and bond mutual funds koenig 1996a 1996b focused on the competitiveness problems of financial intermediaries in the face of tighter regulations and stricter capital standards he proposed an alternative strategy for empirically modeling m2 by altering the opportunity cost measure to include a long term treasury bond rate this addition substantially improved forecasts of m2 until 1995 when large prediction errors once again appear feinman and porter 1992 and mehra 1997 also attempted to explain recent m2 instability through alternative measures of the opportunity cost rather than refine the opportunity cost or redefine the m2 monetary aggregate carlson et al 2000b present consistent evidence of a cointegrating relationship through the 1990s between real m2 various scale measures and an opportunity cost measure this result is obtained after adjusting for periods of financial restructuring in the early 1990s characterized by a sharp increase in bond and equity funds and a steep decline in small time deposits

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

the eec s policies and its food abstract this article examines four interrelated aspects of the european community s policy as they affect food supply the customs union the adoption of a common agricultural policy the move towards a single market and the recent extension of the ec s competence to embrace environmental matters ec intervention has certainly affected the range quality composition and price of food in europe s stores and that involvement is likely to grow but the cap does not have the dominant role in determining the food europeans eat europe s international buying power and the ready availability of foods on world markets are more potent considerations

beyond the purchasing power parity testing for cointegration and causality between exchange rates prices and interest rates abstract this paper reexamines the causality between the dollar and the yen in a multivariate framework with the aid of cointegration and error correcting modeling for the 1951 94 period the phillips perron tests and johansen s tests are performed while causality from interest rates to exchange rates is found in the short run no causality between prices and exchange rates is found in the short run however causality is found running from relative prices to exchange rates along with interest rates between the u s and japan in the long run which supports the long run ppp hypothesis

the appropriate scale variable in the u s money demand an application of nonnested tests of consumption versus income measures the purpose of this article is to employ several nonnested procedures to empirically test the proposition put forward by mankiw and summers that consumption rather than income is the appropriate scale measure in the money demand function real income real disposable income consumer spending on nondurables personal consumption expenditures and total private spending are tested as candidates for the scale variable tests are carried out for both m1 and m2 concepts of money the results based on both m1 and m2 support the mankiw summers position but the results based on m2 are not as strong as those based on m1 implications for fiscal and monetary policies are discussed

the value of time and recent u s money demand instability much controversy has surrounded the u s money demand relationship or more precisely its stability this is rather disappointing in light of the central importance of money demand estimates for the formulation and implementation of effective monetary policy and for almost all theories of aggregate economic activity to date the vast majority of alternative money demand specifications have generally failed to produce a stable money demand function throughout the 1970s and 1980s

the predictive performance of the time series model and the regression model of the income velocity of money this paper provides a comparative study of the relative performance of two models of the income velocity of money a time series model and a regression model using quarterly data from five eec countries our empirical results show that the regression model provides more accurate in sample prediction than the time series model out of sample however the regression model does not consistently outperform the time series model instead a linear composite perdiction combining the predictions from the time series and the regression models appears to perform the best two other results of this paper are 1 the stochastic structure of the income velocity of money can be adequately represented by a random walk with drift model after seasonality is properly accounted for 2 the regression model is temporally unstable for four of the five eec countries

new evidence from the misery index in the crime function abstract we propose a parsimony model which is clear from multicollinearity and specification problems in the standard crime function this study examines the relationship between the misery index and the crime rate in the unites states from 1960 to 2005

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

breaks in money demand during the last twenty years beginning with the provocative paper by goldfeld 5 that revealed the case of the missing money the question of whether money demand the relationship between money income and an interest rate is stable has been intensively investigated using a variety of econometric techniques currently the most popular framework for examining the behavior of money demand is the cointegration framework in this framework the stationarity of money demand instead of the stability of money demand is evaluated earlier tests of the stability of money demand typically centered on whether the coefficient estimates were stable i e not subject to a structural break these tests did not consider the underlying time series aspects of the variables in money demand or the time series properties of their joint relationship prior to estimation as is now common given the seminal work of engle and granger 1 since then newer tests have focussed on the time series properties of the money demand variables and whether the joint relationship between the variables is stationary i e whether the variables are cointegrated engle and granger 1 and johansen and juselius 10 offer cointegration estimation procedures that have been applied by numerous researchers to the money incomeinterest rate relationship the pervasive finding is that money demand is non stationary see section ii below structural stability has not typically been a facet of investigation however the issues of stationarity and stability should not necessarily be treated independently failure to take account of structural change may bias the results in favor of non stationarity as shown in perron 16 1 history suggests that the economic environment and monetary institutions regulations and operating procedures have changed over time in the early 1970s the fixed exchange rate system collapsed when the gold exchange standard was abandoned and the u s dollar became a fiat currency during that same time the u s suffered an oil price shock that produced accelerating inflation and stagnant gdp growth an outcome that had never before been experienced in

another visit to the cagan model of money demand the latest russian experience abstract this paper investigates empirically the cagan style money demand function for russia during the recent hyperinflation era 1992 1994 using the johansen multivariate cointegration test results indicate that rate of change of exchange rate currency depreciation is required in the demand function for real m2 and real currency in order to obtain a stationary long run relationship error correction model results show that there exists a bidirectional causality between real money balances and determinants of real money demand including currency depreciation exchange rate sensitivity of the demand for money indicates currency substitution

the role of countercyclical monetary policy when firms set nominal prices in advance optimal monetary policy insulates aggregate output against shocks to demand it can do so however by following the constant money growth rule advocated by milton friedman it need not respond to the shocks in an actively countercyclical way in addition to the extent that output fluctuations are driven by shocks to supply money growth should be procyclical

food law and the internal market taking stock abstract the history of community food law is briefly traced the changes in policy which followed the difficulties encountered in vertical harmonization and the cassis de dijon case are described 1989 is identified as a turning point since the legal framework for community food law has now been agreed the future legislative programme is described as is the need for cooperation between member states and the commission through all processes from scientific assessment to control

interest rate rules vs money growth rules a welfare comparison in a cash in advance economy abstract this paper considers the welfare consequences of two particularly simple rules for monetary policy an interest rate peg and a money growth peg the model economy consists of a real side that is the standard real business cycle model and a monetary side that amounts to imposing cash in advance constraints on certain market transactions the paper also considers the effect of assuming a rigidity in the typical household s cash savings choice the competitive equilibrium of the economy is not pareto efficient partly because of two distortions a distortion on the capital accumulation decision and a distortion on portfolio choice that arises from the assumed rigidity the principal result of the paper is that the interest rate rule but not the money growth rule entirely eliminates these two distortions and is thus the benevolent central banker s policy choice

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

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

exogeneity within the m2 demand function evidence from a large macroeconomic system a large body of literature investigates whether a stable and predictable long run association between money and its arguments exists one point of variation between models is whether to include an interest rate measure directly within the long run relationship several recent studies indicate that empirical findings are sensitive to the choice therefore the present article reexamines the empirical significance of the interest rate within a four equation macroeconomic system the results suggest that the interest rate 1 may be excluded from the m2 demand function 2 is strongly exogenous to most of the system s remaining variables and 3 may represent a common trend jel e41 e52 c32 i introduction much of recent macroeconomic literature has been dedicated to investigating whether long run relationships exist between macroeconomic variables 1 such preoccupation is understandable given the myriad models in which these relationships play a dominant role a significant portion of this literature has focused on whether a long run relationship exists between money demand and its arguments 2 of course the close association between the variables is an integral part of theories that suggest that the monetary authority may qualitatively influence the direction of the aggregate economy the estimation of long run money demand models have differed in their methodological approach and in countless other ways one specific way in which they may differ in whether the investigator s incorporates an interest rate measure directly within the long run relationship for example although fischer and nicholetti 1993 and baba et al 1992 incorporate various interest rate measures to identify the long run money demand function hendry and mizon 1998 and hendry and ericsson 1991 estimate the long run money demand function without an interest rate measure although the theoretical importance of the interest rate within the money demand function predates pigou s 1917 classic treatment and has been discussed at length elsewhere the importance empirically has recently been high lighted by sims 1980 in examining whether money granger causes output sims s results suggest that the tests are sensitive to whether a short term interest rate measure is included campbell and perron 1991 further argue that sims s findings are an outgrowth of whether the trivariate model of money prices and output are cointegrated that is i 0 or whether reduction to stationarity requires the introduction of a fourth variable the interest rate reduction to stationarity is important because estimating granger causality with nonstationary residuals may yield biased estimates due to nonstandard residual distributions the present article reexamines the significance of the interest rate within the long run money demand function specifically i examine two aspects of interest rate money behavior the initial examination is to test whether the interest rate measure three month treasury bill rate can be directly excluded from the long run m2 demand function following the methodology advanced by hendry and mizon 1993 johansen and juselius 1992 1994 and ericsson et al 1990 the test involves estimating the long run relationship with the interest rate measure and then impose the overidentifying zero restriction the associated log likelihood ratio statistics are distributed chi square n where n represents the number of overidentifying restrictions this approach however only examines whether the interest rate may be removed from the long run money demand vector a second area of interest is concerned with the short run responses of the interest rate more specifically the short run responses provide a test for granger causality within the cointegrated variables following ericsson et al 1998 granger causality is estimated where one or more cointegrated variables reject strong exogeneity

sectoral money demand a co integration approach the major emphasis in previous money demand studies has been at the aggregate level with little systematic attention paid to sectoral differences in money holding behavior this paper attempts to address the latter issue by focusing on more homogeneous subgroups to gauge money holding patterns we apply cointegration theory to identify long run money demand functions for the household and business sectors of the u s economy in general our results which are based on the 1960 1990 u s monetary experience suggest substantial sectoral divergences in long run relationships in particular the household sector reveals more stable relationships the business sector indicates strong interest elasticities which are found to be negligible for the household case these findings are invariant to alternative money definitions and for different sample periods copyright 1994 by mit press

money demand function estimation by nonlinear cointegration conventionally the money demand function is estimated using a regression of the logarithm of money demand on either the interest rate or the logarithm of the interest rate this equation is presumed to be a cointegrating regression in this paper we aim to combine the logarithmic specification which models the liquidity trap better than a linear model with the assumption that the interest rate itself is an integrated process the proposed technique is robust to serial correlation in the errors for the usa our new technique results in larger coefficient estimates than previous research suggested and produces superior out of sample prediction copyright 2007 john wiley sons ltd

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations