money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

iv quantile regression for group level treatments with an application to the distributional effects of trade we present a methodology for estimating the distributional effects of an endogenous treatment that varies at the group level when there are group level unobservables a quantile extension of hausman and taylor 1981 because of the presence of group level unobservables standard quantile regression techniques are inconsistent in our setting even if the treatment is independent of unobservables in contrast our estimation technique is consistent as well as computationally simple consisting of group by group quantile regression followed by two stage least squares using the bahadur representation of quantile estimators we derive weak conditions on the growth of the number of observations per group that are sufficient for consistency and asymptotic zero mean normality of our estimator as in hausman and taylor 1981 micro level covariates can be used as internal instruments for the endogenous group level treatment if they satisfy relevance and exogeneity conditions our approach applies to a broad range of settings including labor public finance industrial organization urban economics and development we illustrate its usefulness with several such examples finally an empirical application of our estimator finds that low wage earners in the united states from 1990 to 2007 were significantly more affected by increased chinese import competition than high wage earners

the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

welfare costs of inflation and interest bearing money this work extends the lucas analysis of the welfare cost of inflation to an economy with interest bearing deposits lower and upper bounds to lucas measure of the welfare cost of inflation are also provided the upper bound is shown to lie between lucas measure of the welfare cost of inflation and the area under the money demand curve starting with martin bailey in 1956 the literature on welfare costs of inflation has recently been enriched by contributions among others by lucas 1993 2000 dotsey and ireland 1996 and gillman 1993 1995 it remains yet to adequately integrate the banking sector in this process this work extends lucas analysis of the welfare cost of inflation developed in the mccallumgoodfriend 1987 framework to an economy with interest bearing deposits lower and upper bounds to lucas measure of the welfare cost of inflation are also provided the upper bound is shown to lie between lucas measure and the area under the money demand curve which characterizes bailey s method 1956 for calculating the welfare cost of inflation

competitive investment in higher education the need for policy coordination abstract when aggregate advanced skills determine an economy s capacity to attract external capital they function as an impure public good education subsidies are indicated but nash equilibrium in education policies yields excessive subsidies if the supply of capital is not elastic

the minimum wage in formal and informal sectors evidence from an inflation shock abstract i estimate the effect of the minimum wage on formal wages informal wages and employment in colombia i exploit an unexpected increase in the real minimum wage during 1999 my analysis combines unconditional quantile regressions with a differences in differences design i find evidence of wage responses for wages close to the minimum wage the increases are present in both the informal and formal sectors and are larger in the formal one wages around the minimum increase by around 3 percent in the formal sector for a 10 percentage points larger minimum wage incidence and by around 1 percent in the informal sector these increases are smaller than those implied by full compliance to minimum wage policy but positive for some unaffected workers this suggests employers partially comply with the minimum wage and use it as a reference i find slight negative employment effects on the informal sector but not on the formal sector the effects in the informal sector are not driven by cross sectoral effects the results suggest the minimum wage has a direct impact on the informal labor market although they may not apply to minimum wage changes in other countries or contexts or to larger minimum wage increases

money and crime in a cash in advance model a cash in advance model in which holding money is risky is constructed to study the coexistence of multiple means of payment and monetary policy implications in steady state equilibrium the marginal rate of substitution of cash goods for credit goods depends on the crime rate as well as the nominal interest rate credit may be in use although the return on money is not positive with theft a money injection reduces the crime rate and makes cash more preferable for a greater variety of goods inflation improves welfare however without theft inflation makes credit more preferable and decreases welfare in general the friedman rule is not optimal

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

financial crises and liquidity shocks a bank run perspective abstract in contrast with the financial multiplier literature this note explores a case in which the shock triggering a financial crisis stems from the financial sector itself it is not a shock stemming from the real sector which gets amplified by say agency problems the basic intuition is provided by the bank run literature of the diamond and dybvig 1983 variety financial development is modeled as a mechanism that endows real assets e g land and capital with liquidity however liquidity can be impaired by shocks that are equivalent to a bank run liquidity creation enhances real asset prices while a liquidity crunch generates asset price collapse this bubble looking episode is not driven by standard fundamentals although it is fully in line with rationality in this context devoid of other frictions like price stickiness the note examines the effect of monetary policy in the absence of nominal rigidities it shows that preventing price deflation is not enough to offset relative to output asset price meltdown but lower policy interest rates increase relative asset prices and steady state output moreover in the neighborhood of a first best capital allocation an increase in the liquidity of capital may lower the welfare of the representative individual even if the higher liquidity of capital is sustainable and hence not destroyed by future crash illustrating the possibility of excessive financial innovation an extension of the basic model supports the conjecture that low policy interest rates may have given further incentives to the development of shadow banking

endogenous corruption in a neoclassical growth model abstract the following paper presents a simple neoclassical growth model where corruption is an endogenous result of competition between a public agent and a private agent the model provides a simple theoretical framework in which the level of corruption as well as the effects of corruption on income consumption and growth are identifiable bureaucratic red tape is then added to the model the results suggest that a priori corruption is neither efficiency enhancing nor efficiency detracting with respect to growth but always results in some income redistribution

divisia index inflation and welfare this work addresses a usual criticism in the literature of the welfare costs of inflation related to the tact that some items in the relevant definition of money pay interest while others do not we show that the problem can be solved by using a divisia index of monetary services as the welfare measure

collateral constraints in a monetary economy this paper reviews the role of collateral constraints in transforming small monetary shocks into large persistent output fluctuations we do this by introducing money in the heterogeneous agent real economy of kiyotaki and moore 1997 money enters in a cash in advance constraint and money supply is managed via open market operations we find that a monetary shock generates persistent movements in aggregate output the amplitude of which depends upon whether or not debt contracts are indexed if only nominal contracts are traded money shocks can trigger large output fluctuations in this case a money expansion triggers a boom whereas money contractions generate recessions in contrast if contracts are indexed then amplification is not only smaller it can also generate the reverse results when the possibility of default and renegotiation is considered the model can generate asymmetric business cycles with recessions milder than booms finally monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation jel e32 e43 e44 e52

crises and human capital accumulation this paper studies the effects of crises on human capital formation theoretically a crisis undermines total factor productivity which reduces the return to working and to accumulating physical capital if the crisis is temporary young agents will study now and work later human capital rises to test our model we rely on inflation crises as our main empirical proxy using gmm panel procedures our analysis for 86 countries in 1970 2000 confirms the positive effects of crises on human capital our main findings survive several robustness tests jel classification e31 d90 ce memoire etudie les effets des crises sur la formation de capital humain theoriquement une crise mine la productivite totale des facteurs de production ce qui reduit le rendement sur le travail et l accumulation du capital physique si la crise est temporaire les jeunes agents vont alors se mettre aux etudes et decident de travailler plus tard le capital humain s accroit pour mettre au test ce modele on etudie les crises inflationnistes comme reference a l aide des procedures d analyse de donnees de panels a la gmm l etude de 86 pays pour la periode 1970 2000 confirme les effets positifs des crises sur le capital humain les principaux resultats survivent bien a divers tests de robustesse

transaction services inflation and welfare this paper is motivated by empirical observations on the comovements of currency velocity inflation and the relative size of the credit services sector we document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money our model makes two new contributions first we show that direct evidence on the appropriately defined credit service sector for the united states is consistent with the welfare cost measured using an estimated money demand schedule second we provide estimates of the welfare cost of inflation that have some new features

search financial market frictions and monetary transmission this paper evaluates the implications of search and matching frictions in the financial market for the bank lending channel of monetary policy borrowers and lenders participate in a decentralized loan market for the purpose of establishing long term credit relationships and the provision of loanable funds to productive firms locating credit relationships is costly in terms of time and real resources and the interest rate is negotiated via a bargaining mechanism this structure is incorporated into an otherwise standard monetary business cycle framework and used to study how such frictions in the credit market contribute to explaining the contemporaneous impact and propagation of monetary growth shocks and inflation while anticipated inflation negatively impacts real activity it can also increase loan market participation and the inflow of newly established credit relationships it is shown that i bargaining and costly search mitigates the traditional inflation tax effect of monetary injections and ii the existence of long term lending relations tends to dampen liquidity effects monetary shocks in this environment lead to larger liquidity effects relative to the frictionless case and are capable of generating persistence in the nominal interest rate labor consumption and output it can also explain the excess volatility of credit creation relative to output and the observation that overall credit creation can lead output over the business cycle

the form of money demand function and the welfare costs of inflation in this article we show that the marginal welfare costs of inflationary is progressively larger with the inflation rate in bailey s formulation but under baumol tobin treatment the opposite applies

monetary aggregates and the business cycle a monetary aggregate consisting predominantly of zero maturity deposits called mzm tends to systematically lead output in the us business cycle such fluctuations are observed both before and after the 1979 monetary policy change similar dynamics are obtained in a model with multi stage production and purchase size heterogeneity when agents optimally choose their mix of cash checkable and time deposits used in transactions the causality in the model runs from real activity to money rather than the other way around although the monetary base is endogenous through a taylor type rule the lead in mzm is primarily driven by deposit creation

deposit spreads and the welfare cost of inflation abstract high nominal interest rates are associated with high deposit spreads which is consistent with a model where banks have monopoly power and currency and deposits are substitutes therefore higher interest rates raise the implicit price of banking services increase bank profits and attract entry into the banking sector taking these effects into account a one percentage point increase in inflation has a welfare cost of 0 083 of gdp 6 7 times higher than traditional estimates

a matter of taste estimating import price inflation across u s income groups abstract we estimate import price inflation for different income deciles of u s consumers over the years 1998 through 2014 after structurally estimating the parameters of a model capturing non homotheticity across sectors we use price data from the universe of foreign establishments exporting goods to the u s as well as consumer expenditure information to construct import price indexes we find that lower income households experienced the most import price inflation while higher income households experienced the least over our time period

a quantitative analysis of inflation as a tax on the underground economy abstract inflation rates are more dispersed and are persistently higher in developing countries this paper quantifies the importance of the public finance motive for inflation in the presence of a tax evading sector the underground economy the approach is motivated by the observation that the underground economy is especially large in poor countries the analysis builds on a general equilibrium monetary model with two production sectors where income in one of the sectors cannot be taxed a benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate the model is first calibrated to the u s economy and is then used for a cross country simulation the resulting relationships between the size of an underground economy inflation rate income tax rate and the share of seigniorage in the government revenue rationalize the cross country data quantitatively well

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

monetary policy and the term structure of interest rates in japan this paper uses japanese data to investigate the relationship between monetary policy and the yield curve we find that the response of the yield curve depends in an important way on the maintained hypothesis about how monetary policy affects the economy under the liquidity effect maintained hypothesis monetary policy only has transient effects on the yield curve under the costly price adjustment maintained hypothesis however monetary policy has large and persistent effects on yields of all maturities

on inflation as a regressive consumption tax abstract evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed we build a monetary growth model consistent with key features of cross sectional household data and use this framework to study the distributional impact of inflation at the aggregate level our model economy behaves similar to standard monetary growth models within the representative agent abstraction inflation has however important distributional effects since it is effectively a regressive consumption tax thus neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy

monetary policy cooperation and multiple equilibria abstract we consider international monetary policy regimes in a world of two identical economies characterized by unemployment persistence in the non cooperative regime markov perfect nash equilibrium policies are generally not unique furthermore policies may be asymmetric in this otherwise symmetric model monetary policy cooperation also exhibits multiple equilibria but these are fewer and always symmetric cooperation may be counterproductive or beneficial for either country depending upon the initial non cooperative and resulting cooperative outcome

sustaining policy cooperation between economies of different size abstract i consider an example of a two country model featuring national heterogeneity and demonstrate that heterogeneity plays an important role for the countries gains from international policy cooperation and just as important for the incentives to break the cooperative agreement i find that national heterogeneity unambiguously reduces trigger strategies support for policy cooperation in other words the more countries differ the harder it is to sustain policy cooperation

interest rates and prices in an inventory model of money with credit abstract using a segmented market model that includes state dependent asset market decisions along with access to credit we analyze the impact that transactions credit has on interest rates and prices the availability of credit allows agents to significantly smooth consumption reduce the movements in velocity prices become quite flexible and liquidity effects are dampened as credit costs decline in the model so does the effectiveness of monetary policy we also investigate the recessionary consequences of a shock to the cost of credit and find that the model s predictions align well with the empirical evidence

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

the forward method as a solution refinement in rational expectations models this paper generalizes the standard forward method of recursive substitution to a general class of linear rational expectations models with potentially multiple fundamental solutions we propose a key property embedded in the forward solution the no bubble condition as an economically sensible solution renement in the class of fundamental solutions in the literature the no bubble condition has been assumed to rule out non fundamental bubble solutions however since the condition involves expectations of the future endogenous variables it must be veried for every rational expectations equilibrium we show that the forward solution is the only fundamental solution satisfying the no bubble condition and that it is hard to justify economically fundamental solutions violating this condition we provide several economic examples where the fundamental solutions obtained by other solution methods and rened by other solution selection criteria violate

contrasting models of the effect of inflation on growth the paper formulates a nesting model for studying the theoretical literature on inflation and endogenous growth it analyses different classes of endogenous growth models with different usage of physical and human capital with different exchange technologies first the paper shows that a broad array of models can all generate significant negative effects of inflation on growth second it shows that these models can be differentiated primarily by the fact whether there is a tobin type effect of inflation and also whether the inflation growth effect becomes weaker as the inflation rate rises a non linearity or stays essentially constant over the range of inflation rates the paper compares these features of the models to empirical evidence as a way to summarize the efficacy of the models

on the complementarity of money and credit i propose a model where agents choose to conduct their business using two payment instruments money and bilateral credit a friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit money and credit complement each other with anticipated inflation complementarity implies that the credit to money ratio decreases with inflation

inflation investment and growth a money and banking approach output growth investment and the real interest rate in long run evidence tend to be negatively affected by inflation theoretically inflation acts as a human capital tax that decreases output growth and the real interest rate but increases the investment rate opposing evidence this paper resolves this puzzle by requiring exchange for investment as well as consumption inflation then decreases the investment rate and still decreases both output growth and real interest up to some moderately high rate of inflation above which increasingly low investment finally causes capital to fall relative to labour and the real interest rate to rise

the welfare effect of access to credit i present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit aects welfare when credit markets feature limited participation allowing more agents to use credit has an ambiguous eect on welfare because it may make consumption risk sharing more ine cient i calibrate the model using u s data on credit card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare

fiscal centralization versus decentralization growth and welfare effects of spillovers leviathan taxation and capital mobility abstract this paper develops an endogenous growth model with spillovers of public goods leviathan taxation and mobile capital to examine the relative merits of centralized and decentralized fiscal systems for economic growth and social welfare we show that a decentralized system dominates a centralized system in terms of economic growth however the difference in social welfare between a decentralized and a centralized system is non monotonic and displays a hump shaped relationship with respect to capital mobility since higher capital mobility induces stronger tax competition this finding implies that there is an optimal degree of tax competition some tax competition is desirable but fierce tax competition may be harmful we also show that there is a critical level of spillovers of public goods above which centralization dominates decentralization in terms of social welfare as in previous studies however if spillovers are below this critical level capital mobility also matters in the welfare comparison between centralized and decentralized systems

fiscal federalism decentralization and economic growth a meta analysis the theoretical literature on fiscal federalism has identified several channels through which government decentralization could affect economic growth much of the literature focuses on the efficiency aspects of a decentralized provision of public services but decentralization may also increase growth by raising the ability of the political system to innovate and carry out reforms in contrast some authors argue that decentralization increases corruption and government inefficiency and thus may diminish growth given this theoretical ambiguity several studies have attempted to identify the effect of decentralization on economic growth empirically over the last two decades we review and conduct a meta analysis of this empirical literature based on our analysis we point out open questions and discuss possible ways to answer them jel h77 043 c52 i introduction building on various theoretical contributions an empirical literature analyzing the effect of fiscal decentralization on economic growth has emerged since the 1990s the relevant studies vary as to whether they use cross sectional time series or panel data as to whether they rely on cross country or single country samples and they vary in estimation methods decentralization measures and sample composition given the size and heterogeneity of the empirical literature it is useful to review the individual studies and summarize their main findings conducting a comprehensive search we identify 31 published and unpublished studies on the effect of fiscal decentralization on economic growth each of these studies estimates several models resulting in over 400 individual estimates while we first review these studies in a traditional manner our main aim is to analyze these estimates quantitatively specifically the main contribution of this article is to offer a meta analysis of the empirical findings on fiscal decentralization and economic growth a meta analysis is a useful methodology in our context as it is difficult to obtain clear cut conclusions with only a traditional survey of empirical literature the individual studies vary substantially in their characteristics and correspondingly in the findings they report by conducting a meta analysis however we can identify how the idiosyncratic characteristics of a particular study relate to its findings the meta analysis approach thus addresses model uncertainty with regard to each individual estimate in addition it can also serve as a partial response to the methodological critique of empirical research on fiscal decentralization by rodden 2004 as it helps to clarify the quantitative effects of different decentralization measures and estimation techniques finally as meta analytical techniques are rarely used in economics we also aim at contributing to the further establishment of this methodology stanley 2001 2008 the next section briefly discusses the various theoretical arguments as to why fiscal decentralization may affect economic growth we then provide a short traditional survey of the empirical studies in section iii we review this literature more systematically and quantitatively in section iv in section v we report the results of meta regressions and discuss how the idiosyncratic characteristics of a given study are related to its specific findings finally section vi provides a discussion of the results and some conclusions ii how could fiscal federalism affect economic growth theoretical approaches within the framework of the solow swan model solow 1956 swan 1956 fiscal federalism may be associated with a different level of efficiency in governance than unitary systems leading to a different value of solow s a the level of technology a regime change toward federalism would then be associated with temporarily different growth rates and eventually different levels of income but not with persistent growth differences

inflation and balanced path growth with alternative payment mechanisms the paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long run inflation experience a negative inflation growth relation is explained including a striking nonlinearity found re peatedly in empirical studies a set of tobin 1965 effects are also explained and further linked in magnitude to the growth effects through the interest elasticity of money demand undis closed previously this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism

public infrastructure non cooperative investments and endogenous growth two countries strategically invest in productive infrastructure within a general equilibrium model with endogenous growth these public investments generate externalities dynamic analysis reveals that 1 under constant returns the two countries growth rates differ during the transition but are identical on the balanced growth path 2 a country with decreasing returns can experience sustained growth provided that the other country grows at a positive constant rate 3 cooperation does not necessarily lead to higher growth for each country and it can increase or decrease the gap between countries growth rates depending on the countries consumption preferences regarding domestic and foreign goods comportements non cooperatifs en matiere d investissement dans les infrastructures publiques et croissance endogene deux pays investissent strategiquement dans des infrastructures productives au sein d un modele d equilibre general avec croissance endogene ces capitaux publics generent des externalites l analyse dynamique revele que 1 quand les rendements sont constants les taux de croissance des deux pays different au cours de la transition mais sont identiques sur le sentier de croissance equilibree 2 un pays avec des rendements decroissants peut connaitre une croissance soutenue a condition que l autre croisse a un rythme constant positif 3 la cooperation ne conduit pas necessairement a une croissance plus elevee pour chaque pays et elle peut augmenter ou diminuer l ecart des taux de croissance entre les pays en fonction des preferences

sticky prices and costly credit we develop a theory of money and credit as competing payment instruments then put it to work in applications agents use cash and credit because the former latter is subject to the inflation tax transaction costs frictions that make the choice of payment method interesting also imply equilibrium price dispersion we derive closed form solutions for money demand and show how to simultaneously account for the price change facts cash credit shares in micro data and money interest correlations in macro data the effects of inflation on welfare price dispersion and markups are discussed as are nonstationary equilibria with dynamics in the price distribution

the welfare cost of inflation in general equilibrium abstract this paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions although individually none of the distortions is very large they combine to yield substantial welfare cost estimates a sustained 4 percent inflation like that experienced in the us since 1983 costs the economy the equivalent of 0 41 percent of output per year when currency is identified as the relevant definition of money and over 1 percent of output per year when m1 is defined as money the results illustrate how the traditional partial equilibrium approach can seriously underestimate the true cost of inflation

international fiscal policy coordination and economic growth this paper examines the effects of policy coordination in a two country model of endogenous growth governments choose taxes to provide public inputs and public consumption goods tax rates affect the rewards to investment and rates of economic growth two regimes are examined one with independent policy making and one with policy coordination whatever the regime the choice of public inputs is always efficient without coordination however governments choose inefficient tax rates but taxes may be either higher or lower than under policy coordination as a consequence growth rates may be lower or higher than those under policy coordination copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

technology trade and factor prices abstract the view that recent changes in the distribution of income primarily reflect technology rather than trade may be the majority opinion but has been harshly criticized by some trade economists this paper will argue that the critique in fact misses the point essentially because the critics undertake the wrong thought experiments trade volumes are not irrelevant if one poses the question correctly one immediately realizes that small trade volumes are inconsistent with a story that attributes large distributional effects to trade the factor bias of technological change is not immaterial except in the case where such change takes place in a small open economy as opposed to one that can affect world prices and where technical change occurs only in that economy rather than occurring simultaneously in other economies as well since the real situation does not meet either criterion factor bias definitely does matter most surprisingly the much maligned use of a factor content approach to infer the effects of trade on factor prices turns out to be an entirely justified procedure when carefully applied

the use of electronic funds transfers to capture the effects of cash management practices on the demand for demand deposits a note the rapidly increasing use of more sophisticated cash management practices is a factor influencing the demand for money that is not considered in standard models of money demand within the framework of an inventory theoretic model of money demand this paper provides theoretical grounds for using the number of electronic funds transfers as an indication of increasing cash management sophistication specifically the demand for demand deposits is determined from the solution of a simultaneous equation system that also determines the optimal level of cash management therefore the level of cash management services influences transactions costs implying that transactions costs are endogenous the number of electronic funds transfers is closely linked to the level of cash management services and is therefore related to transactions costs models of money demand that treat transactions costs as exogenous and fixed are therefore misspecified and will not perform well when transactions costs are changing by explicitly incorporating the changing nature of transactions costs through the use of electronic funds transfers the problems of instability and poor predictive power associated with the demand for money in the 1970 s are overcome this paper analyzes the effects of cash management techniques on the demand for demand deposits these effects are derived from an inventory demand for money model in which cash management services are viewed as lowering transactions costs this derivation implies that the solution of the model results in a two equation system that simultaneously determines the optimal level of cash management services and the optimal average demand deposit balances since the number of electronic funds transfers is related to investment in cash management services modelling cash management in this way gives theoretical content to kimball s 20 contention that the number of electronic funds transfers is an important variable in explaining the demand for demand deposits the model of the demand for demand deposits presented in this paper implies that omitting cash management innovations will produce serious misspecification and will bias regression results these innovations allow deposit holders especially firms to economize on deposit balances therefore the desired amount of demand deposits for any given level of transactions income and interest rates will be lower than that implied by any historical relationship failure to incor