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

limited commitment and the demand for money understanding money demand is important for our comprehension of macroeconomics and monetary policy its instability has made this a challenge common explications for the instability are financial regulations and financial innovations that shift the money demand function we provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data limited commitment can also explain why the ratio of credit to m1 is currently so low despite that nominal interest rates are at their lowest recorded levels this article is protected by copyright all rights reserved

re examining the buffer stock model of money this paper critically examines recent papers in the buffer stock or supply side disequilibrium models of money the paper first investigates the assumptions at the m icroeconomic level and concludes that even with these assumptions aggregate behavior does not necessarily follow buffer stock models in which excess cash balances are held involuntarily in a simple model with uncertain cash flows it is shown that in the aggregate short run involuntary cash holdings are negligible if the buffer stock story is applicable it is to a broader definition of money than used in most empirical work the second part of the paper examines empirical work and argues that the buffer stock idea cannot be implemented using single equation techniques and that when viewed appropriately current empirical result s refute the buffer stock idea as it is currently modeled copyright 1987 by royal economic society

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

behavioural development economics lessons from field labs in the developing world abstract explanations of poverty growth and development depend on the assumptions made about individual preferences and the willingness to engage in strategic behaviour economic experiments especially those conducted in the field have begun to paint a picture of economic agents in developing communities that is at variance with the traditional portrait we review this growing literature with an eye towards preference related experiments conducted in the field we also offer lessons on what development economists might learn from experiments we conclude by sharing our thoughts on how to conduct experiments in the field and then offer a few ideas for future research

effects of financial innovations on the money demand function a canadian evidence a money demand function for the candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants two sets of estimation results have been analysed the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations the estimated equations have been used to generate ex post simulations and forecasts the results suggest that innovations have displaced the money demand function in the early 1980s it also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function

modelling money demand in open economies over the modern floating rate period the role of open economy factors in influencing domestic money demand in major industrial countries over the modern floating rate period is examined the theoretial model for the empirical analysis is derived from a general two country portfolio balance framework that determines the demand for domestic and foreign monetary and non monetary assets in each country the ecm estimates indicate that capital mobility plays an important role in the money demand function in all seven counteries considered currency substitution in contrast is not an important phenomenon

collective choice in the commons experimental results on proposed allocation rules and votes we analyse and empirically examine a multi level common pool resource cpr game consisting of a collective choice level game and an operational level game in the collective choice game participants anonymously propose allocation rules to be used in the operational game and vote anonymously on the proposed rules majority and unanimity rules are investigated our major finding is that both types of voting rules substantially increase efficiency relative to a baseline with no opportunity for collective choice but the distributional consequences of the rules differ to understand the process by which efficiency is improved better we examine four predictive theories related to proposals votes and outcomes

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

nominal costs and the demand for real transactions balances the standard specification of constant real transactions costs assumes that over the sample period transactions costs move in lock step with the gnp deflator our model assumes that transactions costs move negligibly compared to the gnp deflator that is nominal transactions costs are assumed constant here rather than real transactions costs as in other estimates of money demand we find with this nominal transactions cost specification that the real money demand function is more stable in terms of the stability of the coefficients and the accuracy of out of sample predictions than indicated by earlier studies

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

us business credit sources demand deposits and the missing money abstract this study accounts for much of the missing money in the us through compensating balances business lending by banks affects demand deposit growth standard money demand models include variables that likely pick up income and interest rate effects on the transactions demand for demand deposits and on compensating balance requirements provided that bank lending to firms is stable however during the missing money period business shifted toward nonbank sources of short term credit causing a decline in compensating balances empirical finding support this hypothesis as a partial explanation for the missing money using the federal reserve board s demand deposit model

exogenous degradation in the commons field experimental evidence abstract this article presents the results from framed field economic experiments in rural colombia that aim to explore the behavioral responses of resource users to exogenous changes in the availability of a common pool resource in the first 10 rounds of the experiment all subjects played at a baseline with the same initial resource availability in the subsequent rounds the experimenters exogenously changed the resource size including mild and strong reductions in the resource size and rebounds to original size results show that subjects react to strong reductions in resource availability by increasing appropriation from the resource this behavior holds for intense and persistent as well as for progressive reductions in resource availability in addition subjects that experience a reduction in the resource availability followed by a rebound to the initial resource size appropriate more than those subjects who did not experience any change in the resource availability

blessing or curse foreign and underground demand for euro notes public finance solutions to the european unemployment problem developing countries may hold as much as 25 30 of the 1 3 trillion oecd currency supply although dollar holdings appear to exceed dm holdings by a factor of four the advent of the euro may change this balance indeed by issuing large denomination notes of 100 200 and 500 the european central bank appears to be well poised to challenge the dominance of the ubiquitous us 100 note however large denomination notes are also extremely popular in the oecd underground economy which appears to hold at least 50 of the currency supply as a result the seigniorage revenues obtained by issuing large denomination notes may be an accounting illusion substantially or fully offset by losses due to increased tax evasion hence the new european central bank may wish to consider policies that discourage underground use of currency even at the expense of losing out on foreign demand kenneth rogoff

money demand instability has it ended abstract some researchers suggest that much of the seeming instability in the post 1973 money demand occurred because of financial innovation and deregulation money demand was in transition further unprecedented declines in the income velocity of circulation during 1985 and 1986 indicate that this hypothesized transition continues have the effects of financial innovation and deregulation run their course do additional unexpected shifts in velocity loom in the near future or has the transition come to a halt these questions are examined using the methodology of hafer and hein 1982 as modified by miller 1986 no evidence of structural shifts exists beyond 1986 m1 growth may have become a reliable monetary aggregate target again further the missing money has more than returned more money is held today than predicted by the pre 1973 money demand function since m1 now includes interest bearing transactions accounts and incorporates a saving motive the finding is not counterintuitive

structural changes and the us money demand function previous literature on the stability of the us money demand function suggests mixed results in this article we study the stability of the money demand function from the standpoint of structural changes in the function we first investigate if a stable money demand function can be found for the us for the period from the first quarter of 1959 to the fourth quarter of 2000 the results show that a stable long run money demand function does not exist for the sample period under consideration we then estimate unknown structural break points in the variables of the money demand function using bai and perron s 1998 method and test if there is a stable relationship in each sub sample period of the break points the results show that a stable relationship exists for each sub sample period the estimated income elasticity and interest rate semi elasticity are relatively smaller than ball s 2001 estimates but consistent with his argument

cross country estimates of the demand for money and its components the demand for money aggregates m1 m2 and their components currency demand deposits and time deposits are estimated using a sample of 103 countries at two time periods money demand is found to be affected by age literacy industrial development and political structure as well as income and inflation this expanded demand function helps to explain the considerable changes in money demand that have occurred over long periods and the large variation in money demand found across countries the knowledge thus gained is useful for understanding differences in monetary and taxation policies across countries

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

the scourge of the monetarists kaldor on monetarism and on money nicolas kaldor s critique of monetarism from 1970 until his death is described and evaluated it is argued that subsequent events as well as empirical research vindicate his critique kaldor s critique of john maynard keynes s monetary theory is then seen as an extension of his radcliffe views and this paper argues that in this matter kaldor was mechanical in his modeling of the endogeneity of money supply it is suggested that the work of hyman minsky and victoria chick has the potential for further work in this area copyright 1989 by oxford university press

new concepts of aggregated money the federal reserve board s recent redefinition of its monetary aggregates followed three years of intensive board staff research on monetary aggregation while the new aggregates ultimately were selected along conventional lines some of the staff s research was oriented towards more fundamental changes in monetary aggregation methods this paper reviews such proposals which are based upon the rigorous application of index number and aggregation theory and of principal components analysis in the construction of economic monetary aggregates the usefulness of aggregation and index number theory in acquiring price indices is widely known the theory of the true cost of living index is an application of aggregation theory examples of applied index number theory include the commerce department s implicit price deflator which is a paasche index and the labor department s consumer price index which is a laspeyres index somewhat less well known is the fact that dual to the theory of economic price aggregates and indices is a theory of economic quantity aggregates and indices an example of a highly reputable quantity index is the divisia quantity index the monetary aggregates traditionally are thought to measure the supplied quantity of an economic good called money whenever monetary aggregates are used in the context of economic theory rather than as simple accounting identities the theory of economic quantity aggregation is specifically applicable however published monetary aggregates in all countries have always been computed as simple sums but as fisher 1922 p 29 observed in the conclusion to his classic treatise on index number theory the simple arithmetic average produces one of the very worst of index numbers and if this book has no other effect than to lead to the total abandonment of the simple arithmetic type of index number it will have served a useful purpose with an example of the simple sum index fisher 1922 p 363 found that the bias alone reaches 36 percent although index number theory has not yet found its way into the monetary theory literature all of the literature on index number theory and aggregation theory for the past half century supports the result long ago deduced by fisher 1922 p 361 that the simple arithmetic index should not be used the views expressed herein are solely those of the authors and do not necessarily represent the views of the board of governors of the federal reserve system this research was partially supported by national science foundation grant soc 76 84459 we are deeply indebted to the conference session s discussant of this paper w erwin diewert for volunteering to cede his allocated journal space to us so that the paper could take its current extended form federal reserve board washington d c

the case of the missing currency in late 1992 currency in the hands of the public was close to 300 billion representing nearly 30 percent of m1 one would think that an economic variable of this magnitude would be well analyzed and well understood quite the contrary the last serious surveys of currency holdings commissioned by the federal reserve were in 1984 and 1986 these surveys indicate that currency demand is not at all understood probably the most intriguing and newsworthy result of these surveys was that about 80 percent of currency holdings simply could not be explained despite the stir of general interest that followed those studies economists have shown little lasting interest in considering the implications of these findings this paper is written in hopes of stimulating more interest in currency behavior

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

the demand for large bank notes in many countries the high share of the largest bank note denomination in the total currency circulation contrasts sharply with its limited use in payment transfers this somewhat puzzling phenomenon has been discussed more than once for the u s 100 bill which has a value share of nearly 50 percent see anderson 1977 kimball 1981 porter and bayer 1984 however the phenomenon is the more remarkable for countries like switzerland germany and the netherlands that issue a denomination at the upper end of the bank note range whose face value is five to fifteen times as high as the 100 note in the netherlands this is the fl 1 000 note with a face value at end 1990 of more than u s 500 1 the circulation of this fl 1 000 note has grown dramatically see table 1 at year end 1987 fl 1 000 notes accounted for almost 45 percent of the value of bank notes in circulation and this was thus the most important denomination in terms of value at that time there were approximately fifteen million fl 1 000 notes in circulation this works out at an average of one of these notes per head of the population and over 2 5 notes per household compared with less than one note per household just ten years earlier nevertheless fl 1 000 notes are seldom encountered in the course of everyday payment transactions analysis of the development of macroeconomic variables reveals that the remarkable increase in the importance of the fl 1 000 note since 1980 cannot be solely

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

finance capital in dynamic factor demand models the lagged partial adjusment money demand function has been studied theoretically and empirically for the aggregate economy this paper focuses on a sectoral analysis of two partial adjustment functions one for optimal money demand and another for optimal loans demand the two partial adjustment equations are derived employing a representive firm approach a dynamic factor demand model with internal costs of adjustment is utilized to generate euler equations for the demand for money and short term business loans these euler equations parallel the aggregate partial adjustment money demand equations typically employed in applied monetary research the significant difference between the ad hocderivation and the microtheoretic derivation employed here is that desired money and loan holdings are found by solving the euler equations these particular definition of desired money and loan holding are model consistent and depend upon the predetermined and exogeneous variables of the model empirical analysis ge

macroeconomic disequilibrium structural changes and the household savings and money demand in china abstract this paper presents an empirical study of the chinese personal money demand and savings in an economy of disequilibrium and structural changes we propose specifications capable of encompassing and testing the two competing hypotheses which have been advanced to explain the case of the chinese household money demand and savings based on the national and provincial data we find that both repressed inflation and structural changes are significant suggesting the need to capture both the possible disequilibrium and structural shifts further statistical evidence shows that there might have been multiple regime shifts during the post 1949 period which is at variance with the conventional approach of exclusive focus of the effects of the recent reforms nesting the competing hypotheses appears to be the key in providing an adequate account of the savings and money demand of the chinese household sector the evidence seems to favor the repressed inflation hypothesis

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

short run money demand abstract the conventional wisdom holds that the short run demand for money is unstable this paper challenges the conventional view by finding a stable demand for m1 in u s data from 1959 through 1993 the approach follows previous work in interpreting long run money demand as a cointegrating relation and it uses goldfeld s partial adjustment model to interpret short run dynamics the key innovation is the choice of the interest rate in the money demand function most previous work uses a short term market rate but this paper uses the average return on near monies the savings accounts and money market mutual funds that are close substitutes for m1 this choice helps rationalize the behavior of money demand in particular the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

socio ecological explanations for crowding out effects from economic field experiments in southern africa abstract economic and psychological literature mentions three conditions under which the crowding out effect of pro social behaviour is likely to occur and to crowd out citizens moral obligations to behave co operatively i use a framed field experiment on joint extraction from a common pool resource cpr where the crowding out effect has already been reported before in combination with the trust game carried out in farming communities of namibia and south africa to replicate these conditions the research design and the cross cultural setting enable to explicitly control for these effects the results of the experiments support that the crowding out effect depends on the nature of the external intervention controlling vs supportive external intervention the degree of participants self determination high vs low self determination in the group a society s norms of trust and reciprocity high vs low trust within the society the results imply that outside regulations aiming to conserve natural resources risk worsening the situation when neglecting democratic legitimization as well as local community norms

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

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

unstable money demand and the monetary model of the exchange rate in this paper the authors investigate the importance for the monetary model of exchange rate determination of j frankel 1979 of allowing unrestricted dynamics and of accounting for shifts in the demand for money due to financial innovation based on estimation and simulation results for the canada u s bilateral exchange rate over the 1970 85 period the aut hors find strong evidence in favor of a generalized approach to dynamic specification but find that the shif t adjustment of official money supply data has only minor implications for the empirical results moreover neither modification is sufficient to generate a monetary model that is well supported by the data

on cash in advance models of money demand and asset pricing this paper shows how a cash in advance model of money can be written in a way that combines a simple yet empirically defensible money demand function with an asset pricing equation that is similar to the standard barter economy euler equations return premia are determined as in the barter exchange model except that a short term risk free nominal interest rate enters into the first order conditions in special cases asset prices satisfy the barter economy euler equations exactly in the empirical analysis the interest rate factor adds some explanatory power but both the barter and the monetary asset pricing model perform rather poorly copyright 1991 by ohio state university press

sweep programs the fall of m1 and rebirth of the medium of exchange this paper investigates the effect of sweep programs on m1 using dynamic simulations of money demand over 1994 2000 the postsample period constitutes when sweep programs have been in effect all models generate predictions systematically above reported m1 using data on newly initiated programs test findings indicate that sweeps account for the overprediction within the conventional money demand model with a long term interest rate we construct a medium of exchange measure m1s equal to m1 plus estimated holdings of sweep balances m1s velocity compares favorably with that of broader aggregates evidence indicates cointegration within m1s money demand

institutions and behavior experimental evidence on the effects of democracy a novel experiment is used to show that the effect of a policy on the level of cooperation is greater when it is chosen democratically by the subjects than when it is exogenously imposed in contrast to the previous literature our experimental design allows us to control for selection effects e g those who choose the policy may be affected differently by it our finding implies that democratic institutions may affect behavior directly in addition to having effects through the choice of policies our findings have implications for the generalizability of the results of randomized policy interventions

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 persistence of interest rate effects on the demand for currency note since the end of world war ii there has been a trend decline in the demand for real currency balances part of the decrease is due to the rise in interest rates to unprecedented heights yet this is not the complete answer since a trend term included in a simple and conventional currency demand equation that already includes an interest rate still emerges with a significant negative coefficient for example using quarterly data from 1950 i to 1981 iii a demand for currency equation can be estimated as

decentralized management of common property resources experiments with a centuries old institution for centuries villages in the alps employed a special system for managing their common properties individual users could inspect other users at their own cost and impose a predetermined sanction a fine when a free rider was discovered the fine was paid to the user who found a violator experiments with the institutions demonstrate that this mechanism considerably improves efficiency of resource use the classical model of identical selfish agents does not capture the data as well as a model with heterogeneous and linear other regarding preferences altruism and especially potentially dysfunctional behavior such as spite and mistake play important positive roles

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

how should central banks determine and control their bank note inventory abstract this paper looks at a relatively unresearched but important area in money and banking namely the provision of currency by the central bank one of the most important functions of central banking is the provision of liquidity to the economy however in fulfilling this function central banks have to be prepared for unexpected money demand shocks as well as production transportation and cost of capital constraints the paper develops a dynamic cost minimizing note inventory model that solves for the central bank s optimal note order size and frequency as part of the modeling exercise a value at risk model is used to solve for an inventory cushion

on the markov switching welfare cost of inflation abstract this paper uses the markov switching approach to account for instabilities in the long run money demand function and compute the welfare cost of inflation in the united states in doing so it circumvents the problem of data mining of some earlier seminal contributions on these issues allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function moreover it extends the sample period and investigates the robustness of results to alternative money demand specifications monetary aggregation procedures and assumptions regarding dynamics aspects of the money demand specification

co managing common pool resources do formal rules have to be adapted to traditional ecological norms abstract we examine the effectiveness of three democratically chosen rules that alleviate the coordination and cooperation problems inherent in collectively managed common pool resources in particular we investigate how rule effectiveness and rule compliance depend on the prevailing local norms and ecological values held by resource users for this purpose we employ a framed field experiment that is based on a rangeland model for semi arid regions and carried out with communal farmers in namibia and south africa participants could vote for three best practice management rules found in many places around the world that are discussed for implementation in the study area temporary private property rights rotational grazing or limitation of livestock numbers all rules were designed in a way that facilitated cooperation or coordination of actions the focus of this study lies on the interactions between these rules and prevalent ecological norms exhibited in the rounds prior to rule implementation in contrast to previous lab experimental studies we find that democratic voting of rules is not sufficient for high rule compliance and an overall enhancement in cooperation rules turned out to be inefficient if they were in conflict with the prevalent ecological norm

a comparison among partial adjustment rational expectations and error correction estimates of the canadian demand for money starting from a dynamic optimization principle the currently most popular approaches to modelling money demand functions are derived the partial adjustment adaptive expectations rational expectations and error correction mechanism formulations are then estimated using a common data set the error correction mechanism equation is found to dominate the others either because their implicit restrictions are rejected rational expectations or by employing the encompassing principle partial adjustment adaptive expectations surprisingly all three forms have similar long run solutions since the short run dynamics differ substantially the results have important implications for the conduct of monetary policy

an experimental test of the baumol tobin transactions demand for money historically generated data do not allow a clean test of any particular money dema nd theory by creating the artificial environment analyzed by william baumol and james tobin s work on the transactions demand for money one can observe how real people pursuing real rewards behave in that environment baumol and tobin assumed people were sufficiently rational to learn four axioms of rational behavior the authors subjects learned only three however trial and error methods plus subjects limited rationality did produce results similar to the baumol tobin predictions this supports the need to weaken the definition of rationality in the manner suggested by herbert simon copyright 1988 by ohio state university press

international evidence on misspecification of the standard money demand equation abstract this paper tests the proposition that the interest rate in the standard money demand equation acts as a proxy for the expected change in interest rates if this is true the interest elasticity in the standard equation will depend on the expectations process for interest rates using cross country data we find that there does exist a relationship between the observed interest elasticity in the standard equation and the predictability of future interest rates from current interest rates