hume s specie flow mechanism and classical monetary theory an alternative interpretation abstract hume s celebrated essay on the international distribution of money has always been criticized for ignoring the law of one price contrary to the traditional interpretation however hume actually maintains that law and argues for the stability of long run equilibrium putting money market equilibrium in the foreground his analysis is essentially founded on the same hypothesis as the modern monetary approach albeit focusing on the supply rather than on the demand side of the money market

of a controversial passage in hume david hume s 1955 analysis of how a change in the quantity of money can have a temporary effect on real income has been variously interpreted and misinterpreted for over two hundred years a possible reason for some misinterpretation is hume s archaic use of the term labor with the correct interpretation which is consistent with hume s other theories and in particular his theory ofthe interest rate the reason for the temporary effect on real income is that prices lag behind money wages and a rise in real wages leads to an increased supply of effort copyright 1987 by university of chicago press

clearinghouse banks and banknote over issue abstract the paper presents a model of banks as clearinghouses of private debt where money is used as the means of payment implications of the model include i the private provision of banknotes or a discount window may be needed to avoid the insufficient debt clearing that results from an inflexible currency stock and ii an uncontrolled total money stock may result in a multiplicity of equilibria including an inflationary banknote over issue

farsighted coalitional stability abstract i define the largest consistent set a solution concept which applies to situations in which coalitions freely form but cannot make binding contracts act publicly and are fully farsighted in that a coalition considers the possibility that once it acts another coalition might react a third coalition might in turn react and so on without limit i establish weak nonemptiness conditions and apply it to strategic and coalitional form games and majority rule voting i argue that it improves on the von neumann morgenstern stable set as it is usually defined but is consistent with a generalization of the stable set as in the theory of social situations journal of economic literature classification numbers c70 c71

coalition stability in public goods provision testing an optimal allocation rule we test the canonical model of international environmental agreements ieas in a laboratory setting with asymmetric agents iea participation represents coalition formation and public good provision where there are gains to cooperation but an incentive to free ride we test four competing methods of dividing the coalition s worth a recently proposed optimal rule which accounts for subjects payoffs as a single free rider the shapley value the nash bargaining solution and an equal split each treatment generates the theoretically predicted coalition size more often than not the shares of the potential gains to cooperation achieved by each rule are 51 36 40 and 13 respectively these results highlight the importance of using an optimal rule to improve ieas and more broadly for voluntary public good provision

dynamic effects on the stability of international environmental agreements abstract in terms of the number of signatories one observes both large and small international environmental agreements the theoretical literature based on game theory discusses different concepts and mechanisms regarding stability of coalitions the conclusion has been reached that in all circumstances under farsightedness both large and small stable coalitions can occur this theory is based on behavioural reaction patterns but does not take account of the interaction with the dynamics of emission adjustments this paper shows that when these two dynamical processes are integrated large and small stable coalitions can still occur but only if the costs of emissions are relatively unimportant as compared with the costs of abatement

the bullionist controversy theory and new evidence the bullionist controversy in the united kingdom is one of the first debates about the determination of the price level and the exchange rate under a paper money standard despite the importance of the debate in the development of monetary theory there remains little empirical evidence that uses modern multivariate time series techniques the evidence that does exist provides support for the anti bullionist position the purpose of this paper is to review the debate and develop a dynamic general equilibrium model that is capable of capturing key features of the 19th century british financial system the model is estimated using bayesian procedures to test the competing hypotheses the paper provides support for the bullionist position

some aspects of the monetary economics of richard cantillon abstract this article examines several key aspects of the monetary economics in richard cantillon s essai sur la nature du commerce en general 1755 viewed from a modern monetarist perspective with special focus on monetary dynamics after establishing the quantity theory framework of cantillon s analysis the article reviews the following aspects of his work his theory of monetary disequilibrium his analysis of the open economy his treatment of the interest rate his treatment of expectations and information and his analysis of monetary induced business fluctuations and the use of monetary policy

the relative performance of five alternative warrant pricing models five warrant pricing models are examined in this study a pair based on the black scholes model a pair based on the constant elasticity of variance cev modification and an extendible warrant model a la longstaff based on more than 20 000 warrant price observations the flexible exponent cev model generates the lowest average absolute pricing error in most of the warrants examined the dilution adjusted black scholes model however remains a reasonable economical alternative in many cases

henry thornton and the development of classical monetary economics students of nineteenth century economics have held henry thornton in high esteem since his rediscovery by jacob viner and friedrich hayek in the 1920s thornton has been praised for the sophistication of his macroeconomic thinking a for the extent to which he developed ideas later associated with giants such as knut wicksell and j m keynes however the consensus has been that he had little effect on the development of british classical monetary economics i show that the consensus is wrong by demonstrating that thornton affected the course of classical thinking in important ways particularly through his influence on members of the banking school thornton was not simply a precursor of modern thought but was one of the dominant figures of classical monetary economics

farsightedness changing stock location and the stability of international fisheries agreements changes in stock location may affect the stability of international fisheries agreements this paper offers a theoretical analysis of the stability of regional fisheries management organisations rfmos in a non cooperative coalition formation game based on the classic gordon schaefer model we employ a new stability concept which modifies farsighted stability chwe j econ theory 63 299 325 1994 we call this concept farsighted downwards stability fds we also employ the internal stability is concept for comparison analytical results regarding fds for symmetric players without changing stock location show stable grand coalitions for n le 4 player games and the possibility for partial cooperation sensitivity analysis deals with changing stock location and cost asymmetry stability decreases in n increases when costs are asymmetric and increases when fds is employed farsighted conjectures on behalf of rfmo members can thus help to maintain cooperation as stock location changes however fds is more sensitive to changes in stock location than is

a reinterpretation of classical monetary theory relevance to current policy issues is usually not the motivation for studying the history of economic theory however questions about the practicality of conducting monetary policy in a deregulated financial system by controlling the monetary aggregates are stimulating interest in convertibility as an alternative to our present monetary arrangements 3 6 66 since classical writers were mainly concerned with monetary theory and policy under a gold standard it is to be expected that renewed attention will be devoted to classical monetary theory my aim in this paper is to show that contrary to received views about classical monetary theory it was not based on the quantity theory of money on the contrary it was based on a theory of a convertible competitively produced money supply that was fundamentally different from the quantity theory using the modern theory of a competitive money supply we can now rigorously derive many of the basic propositions of classical monetary theory that have been denied or misunderstood by modern theorists operating within the framework of the quantity theory received views about classical monetary theory can be summarized by the following propositions

retrospectives hume on money commerce and the science of economics david hume 1711 1776 is arguably the most esteemed philosopher to have written in the english language during his lifetime however hume was as well if not better known for his contributions to political economy particularly for the essays published as the political discourses 1752 hume left his mark on the economic thought of the physiocrats the classical economists and the american federalists adam smith who met hume circa 1750 was his closest friend and interlocutor for some 25 years among modern economists hume s essays on money and trade have informed theorists of both keynesian and monetarist persuasions in this essay we begin by discussing hume s monetary economics and then spell out his theory of economic development noting his qualified enthusiasm for the modern commercial system we end with an assessment of his views on the scientific standing of economics specifically his counterintuitive argument that economics could be epistemologically superior to physics

government spending interest rates prices and budget deficits in the united kingdom 1701 1918 abstract the british data from the early 1700s through wwi provide an unmatched opportunity for studying temporary changes in government purchases temporary increases which appeared mainly as wartime spending raised long term interest rates but significantly increased the growth rates of money and prices only during suspensions of the gold standard 1797 1821 and 1914 1918 temporary changes in military spending accounted for the bulk of budget deficits over the sample of more than 200 years i found only two major non war deficits one associated with compensation payments to slaveowners in 1835 1936 and the other with a dispute over the income tax in 1909 1910 interest rates did not react much to these exogenous deficits

the present relevance of hume s open economy monetary dynamics david hume s monetary economics has remained a source of sustained controversy rival interpretations situate his work at the fountainhead of the quantity theory of money the monetary approach to the balance of payments and the post keynesian analysis of inflation recent contributions to the literature have explicitly modeled several aspects of his monetary writings but have not placed his controversial discussion of output and monetary dynamics within all open economy analysis this paper does so and contrasts rival specifications and interpretations of humean open economy output dynamics copyright 1995 by royal economic society

cantillon and hume on money and banking the foundations of two theoretical traditions the distinction between the classical monetary theory and quantity theory has been proposed in literature on money and banking the overall feature of the classical theory of money is that it holds one principle of regulation for each kind of issue metallic money bank issues and paper money whereas the quantity theory applied the causality and proportionality postulates for all kinds of monies without claiming to adjudicate the validity of such a distinction the paper investigates the foundation of each tradition in this respect this paper respectively examines and provides a survey of the secondary literature on cantillon s essai and the hume s discourses

classical monetary theory new and old the distinctive features of so called new classical monetary theory may be listed as 1 rational expectations 2 quantity th eory of money 3 interest policy indeterminancy 4 market clearin g 5 neutral money and 6 monetary policy ineffectiveness this p aper investigates whether these features actually represent the tradi tion of classical and neoclassical economics since richard cantillon the result is largely negative new classical economics is a mis nomer keynes however with all his effort to create a revolution r emained actually quite close to the tradition copyright 1987 by ohio state university press

rediscounting under aggregate risk abstract this paper compares three institutions that offer an elastic currency open market operations a discount window and a private banknote issuing clearinghouse in an economy with financial markets otherwise hampered by a lack of liquidity when this economy is subject to aggregate financial shocks these alternative forms of central banking are shown to differ in their implications for risk sharing interesting implications include i central bank losses and monetary innovations that are part of an efficient equilibrium and ii desirable quantity restrictions at the discount window

a simple linear weighting scheme for black scholes implied volatilities a note abstract this study presents a piecewise linear weighting function for implied volatilities calculated from black scholes call and put prices a sensitivity analysis is conducted to compare black scholes prices calculated using the weighted implied volatilities to american model prices the analysis indicates that a relatively simple european model can provide close approximations to american prices

an empirical assessment of the swedish bullionist controversy in the eighteenth century a fierce political debate broke out in sweden about the causes of an extraordinary depreciation of the currency more specifically the deteriorating value of the swedish currency was discretionarily blamed on monetary causes e g the overissuing of banknotes or nonmonetary causes such as balance of payments deficits this paper provides a comprehensive empirical assessment of this so called swedish bullionist controversy the results of vector autoregressions suggest that increasing amounts of paper money did give rise to inflation and a depreciation of the exchange rate conversely nonmonetary factors were probably less important for these developments

time varying volatilities and calculation of the weighted implied standard deviation rogalski tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms maloney rogalski find that option prices reflect these monthly patterns ex ante this study extends maloney rogalski s work by devising an expiration specific weighted implied standard deviation wisd it is found that i the monthly patterns in one month wisds are basically similar to the monthly patterns in ex post variances detected by rogalski tinic for both large and small size firms and ii use of expiration specific wisds as opposed to standard composite wisds results in improved performance of option pricing models

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

farsightedness in a coalitional great fish war we explore the implications of the farsightedness assumption on the conjectures of players in a coalitional great fish war model with symmetric players derived from the seminal model of levhari and mirman bell j econ 11 649 661 1980 the farsightedness assumption for players in a coalitional game acknowledges the fact that a deviation from a single player will lead to the formation of a new coalition structure as the result of possibly successive moves of her rivals in order to improve their payoffs it departs from mainstream game theory in that it relies on the so called rational conjectures as opposed to the traditional nash conjectures formed by players on the behavior of their rivals for values of the biological parameter and the discount factor more plausible than the ones used in the current literature the farsightedness assumption predicts a wide scope for cooperation in non trivial coalitions sustained by credible threats of successive deviations that defeat the shortsighted payoff of any prospective deviator compliance or deterrence of deviations may also be addressed by acknowledging that information on the fish stock or on the catch policies actually implemented may be available only with a delay dynamic farsightedness in that case the requirements are stronger and the sizes and number of possible farsighted stable coalitions are different in the sequential move version which could mimic some characteristics of fishery models the results are not less appealing even if the dominant player or dominant coalition with first move advantage assumption provides a case for cooperation with the traditional nash conjectures

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

david hume on canadian paper money an overlooked contribution the philosopher david hume is renowned in international monetary economics for his 1752 analysis of the specie flow mechanism of international adjustment he has been viewed in the literature as an abstract theorist writing without direct practical experience of public policy or monetary affairs this paper shows hume in the unfamiliar role of a british diplomat negotiating the settlement of the outstanding paper money of new france after the british conquest of canada

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

the riksbank emergency finance policy experimentation and sweden s reversal of fortune abstract at the beginning of the 18th century sweden was an imperial power that had just sustained a century of modest economic growth in 1800 sweden s empire was gone after a series of military defeats real gdp per capita had fallen to the same level as the early 1600s in other words the 18th century witnessed the end of the swedish empire and a startling reversal of economic progress in this paper i propose a possible explanation for both of these outcomes first i argue that sweden s limited fiscal capacity played an important role the creation of the riksbank should have facilitated government borrowing and military spending as the bank of england did for the british however the riksbank was not designed or equipped for this role i document the constraints on financing national defense through the riksbank and argue that the bank was ill equipped to finance an adequate national defense this explains the reversal of the empire second when the hats took power in the riksdag in 1739 they used the riksbank to give loans to firms which were financed through the issuance of bank notes the objective was to increase investment and economic activity i find no evidence that these loans had any effect on real gdp per capita however the resulting inflation has a negative and significant effect on output during the period of inconvertible paper money the combined evidence suggests that hat policy contributed to the decline in economic activity during the reversal of fortune

on valuing american call options with the black scholes european formula empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the black scholes european formula such biases have been found related to the exercise price the time to maturity and the variance we argue here that the american option variant of the black scholes formula has the potential to explain the first two biases and may partly explain the third it can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods the expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings the black scholes european option pricing model tends to exhibit systematic empirical biases when used to value american call options the reported biases

the payments system liquidity and rediscounting in an economy where fiat money serves both as a medium of exchange and the means by which debts are cleared it is shown that nonoptimal equilibria of constrained liquidity may arise optimality may be restored by temporary expansions of the monetary base e g an active central bank discount window copyright 1996 by american economic association

nonparametric tests of alternative option pricing models using all reported trades and quotes on the 30 most active cboe option classes from august 23 1976 through august 31 1978

stability and success of regional fisheries management organizations according to international law straddling fish stocks should be managed cooperatively through regional fisheries management organizations rfmos this paper analyzes the stability and success of these organizations through a game in partition function form based on the classical gordon schaefer bioeconomic model results show that the larger the number of fishing states that compete for the fish stock the higher are the relative gains from full cooperation but the lower is the likelihood of large rfmos being stable it is also shown that new entrants increase the incentives of rfmo members to leave and decrease the incentives of non members to join it moreover the success of coalition formation is positively correlated with the degree of cost asymmetry among fishing states and negatively with the overall level of efficiency

david hume s monetary theory revisited was he really a quantity theorist and an inflationist david hume s monetary theory has been controversial since its formulation lately the focus has been on hume s alleged misapplication of the quantity theory of money while he appears to subscribe to a simple quantity theory with money neutrality in a famously contested passage in the essay of money he violates the neutrality condition by claiming that an increase in the money stock has favorable output effects while most commentators argue about the persistence of the output effect this paper suggests that we can derive an alternative understanding of hume s monetary thinking by recognizing that he made an analytical distinction between endogenous and exogenous money realization that only the former has a favorable output effect forces us to overturn the long standing consensus that hume instructed the government to use monetary or trade policy to engineer a gradually increasing money stock