simultaneity and the demand for money in canada comments and extensions a recent paper by poloz 1980 examined the interesting issue of simultaneity with respect to the demand for money in canada the purpose of his paper was twofold 1 to demonstrate theoretically that the magnitude and direction of simultaneous equations se bias in the demand for money equation is variable depending upon the current economic environment and 2 to provide empirical support for this hypothesis using recursive ordinary least squares ols and instrumental variable iv estimation while arguing correctly that different economic environments may call forth different monetary policy instruments poloz presumed that his model and its error structure would remain constant under the different policy regimes consequently he did not consider how the endogenous and exogenous variables and hence the model itself might be affected in this paper we examine the issue of simultaneity by referring to appropriate policy variables which might be considered in different exchange rate regimes together with an analysis of the different systems of equations which might subsequently arise we argue that the direction and magnitude of bias where it does occur are empirical

finite horizons and the non neutrality of money abstract this note re examines the issue of monetary super neutrality in an optimizing model with finite horizons mortality makes agents less patient and thus affects negatively the process of capital accumulation this distortion can be reduced by increases in monetary growth

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

money capital and real liquidity effects with habit formation the money in utility model is reconsidered in the presence of endogenous labour and habits with standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money the model exhibits superneutrality in the steady state nevertheless habits give rise to real liquidity effects in the short run after an increase in the nominal interest rate employment falls resulting in a fall in capital accumulation and in the short and long term real interest rates the adjustment of the capital stock is non monotonic employment and the short and long term real interest rates may also adjust non monotonically jel classification e22 e52 e58 monnaie capital et effets reels de liquidite quand il y a formation d habitudes on re examine le role de la monnaie dans un modele d utilite quand travail et formation d habitudes sont endogenes dans le cadre des postulats usuels a propos des preferences et d une regle de politique qui definit le taux d interet en ajustant le rythme de croissance de la monnaie le modele fait preuve de super neutralite en regime permanent neanmoins les habitudes entrainent des effets reels de liquiditea court terme apres un accroissement dans le taux d interet nominal l emploi chute ce qui entraine un ralentissement dans l accumulation du capital et une chute des taux d interet reels a court et a long terme l ajustement dans le stock de capital n est pas monotone l emploi et les taux d interet reels a court et a long terme peuvent aussi ne pas s ajuster de facon monotone

borrowing constraints and complex dynamics in an olg framework abstract in this paper we model an olg economy a la kiyotaki and moore whose novel feature is the role of money as a store of value and of bequest as a source of funds to be invested in landholding the dynamics generated by the model are generally characterized by irregular cyclical trajectories and under special configuration of the parameters a strange attractor appears in this setting an expansionary monetary policy may have a stabilizing role due to the interaction between money holding and the accumulation of borrowers net worth

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

non concavity problems in the dynamic macroeconomic models a note abstract this note provides a method to convert the dynamic models in cysne cysne rubens p 2006 a note on the non convexity problem in some shopping time and human capital models journal of banking and finance 30 10 2737 2745 and in cysne cysne rubens p 2008 a note on inflation and welfare journal of banking and finance 32 9 1984 1987 to concave optimization problems we do this by introducing new control and state variables in the models cysne 2006 2008 restrict attention to continuous time models and derive parametric conditions to use arrow s sufficiency theorem when the sufficient conditions presented in cysne 2006 are satisfied but not under the sharper sufficient conditions presented in cysne 2008 we can rewrite these models as concave optimization problems even if time is discrete

political bias and war we examine the incentives for countries to go to war as they depend on the comparison between how much their pivotal decision makers have at risk and how much they stand to gain from a war how this ratio compares to the country at large is what we term political bias if there is no political bias then there are always payments that one country would like to make to the other that will avoid a war in the presence of commitment or enforceability of peace treaties if there is a bias on the part of one or both countries then war can result and in some cases cannot be prevented by any transfer payments we examine how war technology and relative wealth levels interact with political bias in determining whether countries make transfers go to war and form alliances our results shed some new light on the uneven contender paradox and the interpretation of the democratic peace

inflation and growth impatience and a qualitative equivalence this paper studies the role of an endogenous time preference on the relationship between inflation and growth in the long run in both the money in utility function miuf and transactions costs tc models we establish a qualitative equivalence between the two models in a setup without a labor leisure tradeoff when the time preference is decreasing or increasing in consumption and real balances both the miuf and tc models are qualitatively equivalent in terms of predicting a negative or positive relationship between inflation and growth in a steady state both a decreasing and an increasing time preference in consumption are consistent with the arguments found within the literature while a decreasing time preference in real balances corroborates with empirical evidence there is no evidence in support of an increasing time preference in real balances

is money net wealth this paper develops a simple monetary model a hybrid of the sidrauski and overlapping generation frameworks in which new dynasties of infinitely lived agents continuously enter the economy it is shown that the long run nonsuperneutrality of money in life cycle models is a modality of the violation of the ricardian debt neutrality proposition the very same intergenerational redistribution effects which on the fiscal side are the source of debt nonneutrality are at work on the monetary side to create monetary wealth effects and make money nonsuperneutral in the long run copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

monetary and fiscal policy in an optimising model with capital accumulation and finite lives this paper considers the effects of monetary and fiscal policies in an optimizing model with capital accumulation and a pos itive birth rate an increase in monetary growth leads to a reduction in the real interest rate and a boost of capital and total consumpti on however the superneutrality result still prevails when open mark et operations are used to increase monetary growth and preferences ar e separable a tax financed fiscal expansion reduces capital and crow ds out consumption by more than 100 percent a bond financed fiscal e xpansion increases capital by less and crowds out consumption by more than a money financed fiscal expansion copyright 1988 by royal economic society

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

money and endogenous growth the ramsey romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non interconnected generations of households tax financed increases in government consumption and debt depress growth prospects and boost inflation as long as a positive birth rate ensures that future taxes are shouldered by future yet unborn generations debt financed increases in government consumption depress growth and boost inflation even more money financed increases in government consumption depress growth less but increase inflation by more giving subsidies through an increase in monetary growth is non neutral since this increases real growth and thus inflation increases by a lesser amount than monetary growth bond financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation if there are cost adjustment for investment cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate copyright 1994 by ohio state university press

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

a framework for the analysis of moderate inflations abstract optimal monetary policy is studied in a model with no contractual restrictions or physical costs of changing prices nevertheless the price level is sticky in a range of mark up indeterminacy and inflation occurs only when employment presses against capacity under full information the monetary authority can exploit price level stickiness to minimize the mark up and keep employment at a constrained optimum without inflation under uncertainty negative aggregate demand shocks produce real contractions and positive shocks raise the price level the monetary authority can raise the likelihood that aggregate demand will maximize employment but at the cost of higher expected inflation

deterrence in contests this paper explores the role of deterrence in contests as a general rule we show that for a deterrence strategy to be played by rational agents it is necessary that the contest be destructive we show for a very general class of functions that pure strategy deterrence equilibria where contestants deter one another do not exist a corollary of this finding is that under fairly general conditions agents should always be expected to engage in contests applied to international relations our results imply that war is always a potential outcome despite deterrence attempts

money supply and capital accumulation on the transition path revisited fischer 1979 and asako 1983 analyze the sign of the correlation between the growth rate of money and the rate of capital accumulation on the transition path both plug a constant relative risk aversion utility based on a cobb douglas and a leontief function respectively into sidrauski s model yet return contrasting results the present analysis by using a more general ces utility presents both of those settings and conclusions as limiting cases and generates economic figures more consistent with reality e g the interest rate elasticity of the money demands derived from those previous works is necessarily 1 and 0 respectively

a note on the integrability of partial equilibrium measures of the welfare costs of inflation multidimensional measures of the welfare costs of inflation have been employed in the literature without an explicit concern of how the demand for the respective monetary assets are generated and without an investigation of the respective integrability conditions this note establishes conditions under which such welfare measures are well defined

the complete complementarity of consumption and real balances and the strong superneutrality of money abstract in the representative agent model with money in the utility function if consumption and real balances are perfect complements steady state capital intensity and real balance holdings are both invariant to monetary growth regardless of the nature of time preferences

dynamic behavior of capital accumulation in a cash in advance model abstract this paper analyzes the dynamic behavior of capital accumulation in stockman s cash in advance model if the cash in advance constraint applies only to consumption then money is superneutral along the transition path as well as in the long run alternatively if the cash in advance constraint applies to gross investment as well as consumption then a permanent increase in the rate of monetary growth reduces the steady state capital stock the effect on the speed of adjustment depends on the sign of a certain simple function of the parameters of preferences and technology

on the integrability of money demand functions by the sidrauski and the shopping time models abstract this paper investigates which properties money demand functions must satisfy so that they are consistent with lucas s lucas jr r e 2000 inflation and welfare econometrica 68 247 274 versions of the sidrauski and the shopping time models we conclude that shopping time integrable money demand functions are necessarily also sidrauski integrable but that the converse is not necessarily true unless a boundedness assumption on the nominal interest rate is made both the log log with an interest rate elasticity greater than or equal to one and the semi log money demands may serve as counterexamples all the models and results are also extended to the case in which there are several assets in the economy performing monetary functions

the transmission of monetary policy through redistributions and durable purchases this paper studies a redistribution channel for the transmission of monetary policy using a tractable olg setting in which the government is a net debtor we show that standard open market operations omo conducted by central banks have signi cant revaluation eects that alter the level and distribution of wealth in the economy and the real interest rate expansionary omo generate a negative wealth eect the private sector as a whole is a net creditor to the government increasing households incen tives to save for retirement and pushing down the real interest rate this in turn leads to a substitution towards durables generating a temporary boom in the durable good sector with search and matching frictions a form of productive investment is added to the model and the fall in interest rates causes an increase in labour demand raising aggregate employment the mechanism can mimic the empirical responses of key macroeconomic variables to monetary policy interventions the model shows that dierent monetary interventions e g omo versus helicopter drops can have sharply dierent eects on activity

comparing bargaining solutions in the shadow of conflict how norms against threats can have real effects abstract in many economic environments agents make costly and irreversible investments in guns that may enhance their respective threat payoffs but also shrink the utility possibilities set in such settings with variable threats and a variable utility possibilities set it becomes possible to rank different bargaining solutions in terms of efficiency we compare bargaining solutions within a class in which the influence of the threat point on the bargaining outcome varies across solutions under symmetry we find that the solution in which the threat point is least influential the equal sacrifice solution pareto dominates the other solutions since the equal sacrifice solution puts the least weight on the threat point norms against threats that can be seen in many seemingly rhetorical pronouncements in adversarial relations can mitigate some of the costs of conflict and therefore have efficiency enhancing effects journal of economic literature classification numbers c72 c78 d30 d70 d72 k42

real balance effects and monetary policy i introduction modern literature on monetary policy rules employs new keynesian optimizing models that do not explicitly include monetary aggregates see e g rotemberg and woodford 1997 clarida et al 1999 taylor 1999 in these models the demand for output derives from the log linearization of the standard euler equation characterizing household s saving decisions the real money stock does not enter the is relation and therefore monetary policy affects output and inflation only through its effect on the real interest rate when the nominal interest rate is the policy instrument it is not necessary to specify a money market equilibrium condition see romer 2000 the practice of neglecting monetary aggregates in monetary policy analysis has recently been questioned by meltzer 1999 mccallum 2001 and nelson 2002 2003 in particular mccallum 2001 points out that although no explicit term involving money appears in the standard new keynesian setup long run inflation can still be pinned down by the economy steady state nominal money growth rate moreover mccallum 2000 2001 andres et al 2001 kremer et al 2003 woodford 2003 ireland 2004a and collard and dellas 2005 analyze the case in which the resources used by consumers in conducting transactions are modeled by a nonseparable function of consumption and real money balances meltzer 1999 2001 argues that changes in real monetary base generate effects on real aggregate demand not summarized by the real interest rate on short term securities nelson 2003 emphasizes the role of money in the transmission mechanism both as a proxy for a whole spectrum of rates of return and as an indicator variable which contains information about the state of the economy the main aim of the present article is to provide additional microfoundations for an explicit role for money in the current macroeconomic debate in particular i derive a real balance effect that explicitly enters the is relation within an optimizing general equilibrium framework of the new keynesian type according to de scitovszky 1941 haberler 1946 pigou 1943 and patinkin 1965 a change in real money balances has an impact on the real financial wealth of consumers and therefore affects consumption and output notably this effect is not considered in traditional models there is in fact empirical evidence showing that real monetary base growth is a significant determinant of consumption and output gap in both the united states and in the united kingdom see chari et al 1995 meltzer 1999 nelson 2002 the present article extends the dynamic stochastic new keynesian setup with money in the utility function by introducing overlapping generations as modeled by yaari 1965 and blanchard 1985 there are good reasons to base the demand side of the economy on a discrete time stochastic monetary version of the yaari blanchard model first this kind of extension allows one to maintain the main characteristics of the so called new neoclassical synthesis that is forward looking behavior of optimizing agents and incomplete nominal adjustment of prices featured in new keynesian theories goodfriend and king 1997 second the derivation of the real balance effect does not require nonseparability in the utility function thus the implications are analytically more tractable 1 third my framework is more general because it includes the immortal representative agent setup as a particular case my analysis attempts to examine whether the presence of an explicit real balance effect in the is relation helps evaluate the role for money in designing monetary policy rules i focus on basic issues concerning the design of monetary policy rules specifically i investigate whether it is necessary for monetary policy to overreact to inflation by raising the nominal interest rate by more than the observed increase in inflation to rule out equilibrium multiplicity

rationalist explanations for war realist and other scholars commonly hold that rationally led states can and sometimes do fight when no peaceful bargains exist that both would prefer to war against this view i show that under very broad conditions there will exist negotiated settlements that genuinely rational states would mutually prefer to a risky and costly fight popular rationalist and realist explanations for war fail either to address or to explain adequately what would prevent leaders from locating a less costly bargain essentially just two mechanisms can resolve this puzzle on strictly rationalist terms the first turns on the fact that states have both private information about capabilities and resolve and the incentive to misrepresent it the second turns on the fact that in specific strategic contexts states may be unable credibly to commit to uphold a mutually preferable bargain historical examples suggest that both mechanisms are empirically plausible

monetary policy and asset prices with belief driven fluctuations abstract we present a heterogeneous agents new keynesian model subject to a cost channel of monetary policy transmission constant turnover between long time traders and newcomers in market activities combined with restricted trading opportunities introduces a feedback from the stock market to real activity making stock prices non redundant for the business cycle we show that strict inflation targeting can lead to equilibrium indeterminacy even if the policy rule satisfies the taylor principle a belief driven shock to stock price generates relative volatilities of key financial variables which are very close to what is observed in u s data this result hints to the possibility that the financial instability witnessed since the mid to late 1990s was the result of waves of rational exuberance and pessimism in financial markets our analysis suggests that a mild response to stock prices in the central bank s policy rule can restore equilibrium determinacy and therefore rule out non fundamental volatility

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

technological change and the superneutrality of money note the study of the effect of the supply of money on real economic variables has had a long history in economic research sidrauski 8 was the first to demonstrate that in the context of an intertemporal maximizing model with real money balances in the utility function the rate of monetary expansion did not influence the steady state capital stock or the real rate of interest this result termed the superneutrality of money contrasted sharply with previous models which did not use such an optimizing framework 1 subsequent studies have shown that the superneutrality result can be altered if some of the assumptions of the sisrauski model are modified if money is a productive input 3 5 or if the labor supply is endogenous 1 then the real rate of interest or the capital labor ratio is not invariant to the monetary growth 2 however no one has yet examined the effect of differing money growth when technological change is present this omission seems especially serious since superneutrality properties apply to the comparative steady state behavior of the economy 3 4 this note attempts to fill this gap by demonstrating that even the simple forms of technological change will in general nullify the superneutrality result and that the real rate of interest and the capital labor intensity will depend on the parameters of the utility function in particular it is shown that only if the utility function is of the class exhibiting constant relative risk aversion in all arguments will the superneutrality of money be valid

inequality and conflict burning resources to support peace abstract we consider a simple guns versus butter model in which agents choose between war and peace to study the implications of inequality in resource ownership for equilibrium outcomes provided war is destructive peace can emerge as the stable equilibrium but only if the distribution of resource ownership is sufficiently even we establish that when this condition fails the richer agent can destroy a portion of its resource endowment to even out the ex post distribution and thereby support peace we also examine the importance of ex ante resource transfers and show that they are pareto superior to burning resources

ricardian equivalence and the intertemporal keynesian multiplier abstract we show that keynesian multiplier effects can be obtained in dynamic optimizing models if one combines both price rigidities and a non ricardian framework where due for example to the birth of new agents ricardian equivalence does not hold

gmm estimation of a money in the utility function model the implications of functional forms this paper studies consumer demand for real balances by allowing money to enter directly into an aggregate utility function as an asset that provides liquidity services the essay extends existing literature by investigating a money in the utility function model under a variety of specifications of the representative agent s objective function the empirical analysis employs the generalized method of moments technique to estimate the coefficients of the euler equations derived from the structural model the parameter estimates are compared across specifications of the utility function and across data sets the results provide some support for the view that the liquidity services provided by real balances contribute to utility

monetary policy and economic fluctuations in a sticky price model abstract this paper examines a simple monetary optimizing model with sticky prices two types of monetary policy rules are considered constant money growth rules and interest rate feedback taylor type rules in the case of constant money growth rules we show the existence of limit cycles through the hopf bifurcation theorem on the other hand in the case of the interest rate feedback rules we show that active monetary policy leads to the determinacy of equilibrium path while passive monetary policy induces economic fluctuations

welfare costs of inflation when interest bearing deposits are disregarded a calculation of the bias abstract most estimates of the welfare costs of inflation are devised considering only noninterest bearing assets ignoring that since the 1980s technological innovations and new regulations have increased the liquidity of interest bearing deposits we investigate the resulting bias sufficient and necessary conditions on its sign are presented along with closed form expressions for its magnitude two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest bearing monies may lead to a non negligible overestimation of the welfare costs of inflation an intuitive explanation is that such assets may partially make up for the decreased demand of noninterest bearing assets due to higher inflation

a note on inflation and welfare abstract this note provides an analytical confirmation and a refinement of lucas jr r e 2000 inflation and welfare econometrica 68 62 247 274 march numerical findings regarding the characterization of optimality in the shopping time model presented in that paper the original numerical analysis concludes that a coefficient of risk aversion greater than 0 01 is sufficient for optimality here we use arrow s sufficiency theorem to confirm this result and more importantly to show without more calculations how changes in parameters can affect it

new developments in monetary economics two ghosts two eccentricities a fallacy a mirage and a mythos monetary theory and policy are part of intertemporal public finance the two ghosts are the liquidity trap and the real balance effect the eccentricities are negative nominal interest rates and the helicopter drop of money the fallacy is the fiscal theory of the price level a logically inconsistent theory of the link between the government s intertemporal budget constraint and the general price level the mirage is the prediction that financial deregulation and technical change in the payments and settlements technology will cause monetary policy to lose its capacity to influence even nominal economic variables mythos refers to the independent central bank

money capital and the pigou effect abstract the effect of inflation on the capital stock is considered in an overlapping generations framework with a cash in advance constraint on consumption expenditures the adjustment mechanism underlying the model is that of a traditional model with the real balance effect on savings

the speed of convergence and alternative government financing abstract in this paper we are concerned with the speed of convergence in the sidrauski monetary optimizing model sidrauski am econ rev 57 1967 534 in which the steady state capital stock is not influenced by a change in public spending the paper studies how different the speed of convergence to the steady state is affected by a change in government spending under the various ways of financing in exploring the transitional adjustment to the public policy shock it will be convenient to focus upon the degree of relative risk averse

the role of monetary policy in eliminating nonconvergent dynamic paths this paper investigates the effects of money growth on nonconvergent dynamic paths in a money in utility model when relative risk aversion is decreasing in money period two cycle and sunspot equilibria are always associated with a high rate of money supply growth however when relative risk aversion is increasing in money it is ambiguous whether they are associated with either high or low rate of money supply growth the paper also investigates the same problem in a transaction cost model the author shows that the results essentially depend on the form of the transaction cost function copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association