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

alternative approaches to money and growth this paper reexamines the issue of money and growth in an economy with both endogenous labor supply and endogenous capital stock using three recently developed approaches the money in the utility function approach the cash in advance approach and the transactions costs approach by establishing a qualitative equivalence between alternative setups the authors find economically justifiable conditions such that all comparative statics results derived from the aforementioned approaches are identical copyright 1992 by ohio state university press

investment and the nominal interest rate the variable velocity case investment and the nominal interest rate the variable velocity case evan f koenig models treating money either as a consumer good or as a producer good are encompassed by a model in which both households and firms use money as a buffer between receipts and expenditures a rise in nominal interest rates increases resources devoted to intermediation while discouraging purchases financed from accumulated cash if investment is financed from contemporaneous earnings there is a tendency to substitute out of consumption and into investment when interest rates are high greater resources devoted to intermediation generate a negative wealth effect the net impact on investment is ambiguous i introduction the relationship between investment and the nominal interest rate in an economy where the cash balances of households and firms are rigidly linked to their respective expenditures has been examined by koenig 1987b in such an economy the nominal interest rate acts like a tax on agents purchases as a result households are inclined to save rather than spend when the nominal interest rate is relatively high provided that at the margin firms are able to finance at least some of their capital spending out of contemporaneous earnings this increase in desired saving is only partially offset by a decrease in desired investment realized investment is thus greatest when the nominal interest rate is high in comparison to its own moving average a short run tobin effect this paper extends koenig s analysis to the case in which households and firms at a cost in terms of real resources are able to increase the velocity of money in this context it is shown that the short run tobin effect may be reversed intuitively when the nominal interest rate is high consumption of financial services by households and firms may rise to such an extent that any decline in the consumption of nonfinancial goods and services is overwhelmed reducing the resources available for investment as in the earlier paper i allow for the possibility that some fraction 1 u of firms investment expenditures can be financed from contemporaneous earnings unless u equals zero there is a stockman effect 1981 a tendency for investment to be depressed whenever the nominal interest rate is expected to be higher on average in the future than it has been in the past when u equals unity so all investment must be financed out of accumulated assets the money balances of the representative firm can be interpreted as an argument of its production function regardless of the value of u the money balances of households may be thought of as an argument along with gross household spending of an indirect utility function thus both of the most frequently used methods of modeling the role of money as an argument of the household utility function and as an argument of the production function are special cases of the model developed here this is a substantially less restrictive framework than that employed by fischer 1979 sweeney 1984 cohen 1985 and obstfeld 1985 each of whom has also examined the effects of anticipated policy in an economy where the velocity of money is variable 1 section ii discusses the utility and profit maximization problems facing households and firms respectively and shows how the behavior of economic agents is affected by the presence of real costs of financial management a dynamic analysis is undertaken in section iii and it is shown that the short run tobin effect may operate in reverse a summary concludes the paper throughout agents are assumed to possess perfect foresight ii the model preliminary analysis intuition imagine a world in which each household receives wage and dividend income at discrete intervals but desires to purchase and consume output continuously through time

evidence on the cross country transmission of monetary shocks the international transmission of monetary shocks between the us and canada is explored focusing on real variables such as consumption investment employment and the bilateral trade balance along with measures of us and canadian money the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries the long run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run the short run analysis provides strong evidence that us monetary shocks affect real activity in both the usa and canada the analysis also indicates that canadian monetary disturbances affect canadian and us real activity and that many of these effects are similar in magnitude to the effects of us monetary shocks the importance of the nominal exchange rate

sources of meteor showers and heat waves in the foreign exchange market abstract we examine the role that news and heterogeneous expectations play in the persistence of exchange rate volatility or so called meteor shower effects our empirical focus is on the u s trade balance news which is shown to have a significant and persisting effect on the exchange rate and its conditional variance furthermore the impact of u s trade balance news is not isolated to the u s foreign exchange market the degree to which u s trade balance news affects other geographical market locations is functionally related to heterogeneous priors

economic news exchange rates and interest rates the paper esamines the post october 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen us macroeconomic series illarkets respond primarily to monetary news but also to news about the trade deficit domestic inflation and variables that reflect the state of the business cycle for all fifteen macroeconomic variables an increase decrease in interest rates is accompanied by an appreciation depreciation of the dollar which is consistent with models that stress price rigidity and absence of purchasing power parity the effect of economic news on asset prices has received increasing attention in the economic literature because an outcome of the efficient markets rational expectations hypothesis is that flesible asset prices change the moment new information about future fundamentals arrives in the market in the exchange rate literature the role of news has gained importance because structural models have failed to predict most of the variation in exchange rates during the 1970s see imeese and rogoff 1983 researchers were naturally led to investigate the types of news that make exchange rates so volatile and to utilize news in order to test which model of exchange rate determination is consistent with the floating eschange rate experience notable studies are those of dornbusch 1980 frenkel 1981 edwards 1982a b 1983 copeland 1984 and rose 1984 in this paper i also examine the effects of macroeconomic news on eschange rates but i adopt a different more direct strategy one that complements previous work avoids some of its shortcomings and promises interesting conclusions i examine the instantaneous response of exchange rates the moment a piece of economic news hits the market if one can isolate the exact time during a business day when news arrives it is straightforward to examine the response of exchange rates because financial data are continuously available the advantages of the present methodology are many first it is possible to identify the exact types of economic news and how they affect exchange rates second the simultaneity bias which plagues the previous literature on exchange rates and news is not present here the independent variables that represent news can be interpreted as causal the paper was presented at the 1985 meeting ofthe american economic association the author wishes to thank sebastian edwards r w hafer nicholas karamouzis andrew rose and two anonymous referees for helpful comments kim rupert of the money market services for providing the survey data soo kounne for able research assistance and barnard college for research support

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

specialization the terms of trade and the international transmission of monetary policies the ricardian model with a continuum of goods is extended to a cash in advance environment with variable labor supply which allows domestic monetary policy to influence real activity through an inflation tax channel and to be internationally transmitted to real activity abroad the continuum of goods feature of the model allows for the international transmission of monetary policies to occur at both intensive and extensive margins at the intensive margin monetary policy is internationally transmitted via its impact on relative employment levels at home and abroad this in turn alters the terms of trade thereby affecting the range of commodities in which the home country has a comparative advantage monetary policies are thus transmitted at the extensive margin by influencing international patterns of trade and specialization

the effects of macroeconomic news on high frequency exchange rate behavior this paper studies the high frequency reaction of the dem usd exchange rate to publicly announced macroeconomic information emanating from germany and the u s by us ing data sampled at a five minute frequency we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post announcement although the significance of these effects decreases rapidly as the interval over which the post announcement change in exchange rates is increased the direction of the exchange rate response conforms in general with a reaction function interpretation whereby reac tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets further we detect influences of german monetary policy deci sions on the reaction of the exchange rate and also differences between u s and german announcements in the exchange rate reaction time pattern i introduction this paper studies the high frequency reaction of the dem usd exchange rate to macroeconomic information emanating from germany and the u s specif ically we utilize exchange rate data covering the period 1 1 92 to 31 12 94 sam pled at a five minute frequency to investigate how the major monthly macroe conomic releases from these two countries impact the dem usd the infor mation contained in announcements over this three year period is extracted via a set of market expectation series supplied by money market services interna tional mms 1 our analysis improves on previous work in this area in two main respects first our study is conducted using very high frequency data whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more this allows us to construct a very precise characterization of

real exchange rates under alternative nominal exchange rate systems abstract the paper develops an equilibrium model of the determination of exchange rates the relative price of nontraded goods and the current account the focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange rate system is neutral with respect to real variables in the economy the model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates an econometric investigation of the raltion between the exchange rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis

international transmission of anticipated inflation under alternative exchange rate regimes this paper studies the international transmission of anticipated inflation a two country two good two currency cash in advance model is used to examine analytically and numerically the consequences of changes in a country s inflation rate domestic monetary policy influences real activity at home through an inflation tax channel these real effects are transmitted to the foreign country via fluctuations in the real exchange rate under a flexible nominal exchange rate inflation is a beggar thy neighbor policy under a fixed nominal exchange rate each country suffers a welfare loss when one country inflates the quantitative results are fairly insensitive to variations in the cash credit mix used to finance investment expenditures 2001 elsevier science ltd all rights reserved

adjustment to stagflation and neoliberal reforms in japan the united kingdom and the united states the implications of the japanese case for a comparative analysis of party competition this article explains why the stagflation and neoliberal reforms that reinforced party polarization in the united kingdom and the united states instead led to party convergence in japan in japan industry centered adjustment and bureaucratic coordination distributed the costs of policy changes across societal groups and facilitated party convergence whereas the lack of such societal and state institutions in the united kingdom and the united states led to policy changes with polarizing consequences focusing on industry centered adjustment brings the unions back into japanese politics and provides an alternative to the pluralism neocorporatism dichotomy of organizing societal interests bureaucratic coordination not only includes the opposition in the framework but also provides a more nuanced view than is assumed in the debate over whether the ruling party of the bureaucracy dominates the japanese state when combined these conceptualizations of market and state go a long way toward explaining the dyn

the short run dynamics of the price adjustment to new information we examine how prices in interest rate and foreign exchange futures markets adjust to the new information contained in scheduled macroeconomic news releases in the very short run using 10 second returns and tick by tick data we find that prices adjust in a series of numerous small but rapid price changes that begin within 10 seconds of the news release and are basically completed within 40 seconds of the release there is some evidence that prices overreact in the first 40 seconds but that this is corrected in the second or third minute after the release while volatility tends to be higher than normal just before the news release there is no evidence of information leakage in our analysis we correct for the biases created by bid ask spreads and tick by tick data

bourgeois revolutions the policy consequences of resurgent conservatism much of the literature on reform politics has focused on social democratic governments this article reexamines the dynamics of reform by concentrating on conservative governments in four advanced

the impact of news and alternative theories of exchange rate determination over the last decade two of the more important developments in the area of exchange rate determination are the construction of the asset market model and the recognition that news is a key factor affecting exchange rates the asset market model has evolved as an alternative to the traditional flow model of exchange rate determination in contrast to the flow model where the exchange rate is determined by the flow demand for and flow supply of foreign exchange exchange rates adjust to allocate the total stock of foreign exchange in question in the asset market model this model may be presented in one of two forms the monetary approach or the portfolio balance approach the former is summarized in the work of bilson 1978a dornbusch 1976 frenkel 1976 johnson 1976 and mussa 1976 1979 while the latter stems from the efforts of branson 1981 branson halttunen and masson 1977 dooley and isard 1982 kouri 1976 kouri and de macedo 1978 and rodriguez 1980 while the logical consistency of these models has enhanced their popularity empirical support has been limited the importance of unanticipated shocks or news in explaining exchange rate behavior has been suggested by dornbusch 1980 frenkel 1981 isard 1983 and mussa 1979 the basis for this suggestion is the efelcient markets approach that suggests securities prices in a capital market should reflect all available information therefore the predominant cause of exchange rate movements is news that could

how markets process information news releases and volatility we examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets we find these announcements are responsible for most of the observed time of day and day of the week volatility patterns in these markets while the bulk of the price adjustment to a major announcement occurs within the first minute volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours nonetheless these subsequent price adjustments are basically independent of the first minute s return we identify those announcements with the greatest impact on these markets we examine the impact on interest rate and foreign exchange markets of scheduled macroeconomic news releases such as the employment report the consumer price index cpi and the producer price index ppi many market participants believe that such announcements have a major impact on financial markets indeed a small industry devoted to predicting the figures to be released in upcoming releases has evolved in recent years with the exception of the weekly money supply figures however the impact of such announcements on financial markets has received scant attention 1 this is doubly surprising given the considerable research interest in market volatility since these news releases are a potential source of much of this volatility consider for instance figure 1 as shown there prices in interest rate and foreign exchange futures markets are much more volatile between 8 30 and 8 35 a m eastern time et than during any other five minute trading period including

effects of inflation on the pattern of international trade this paper integrates a transactions based model of money with a real trade model and examines how steady state inflation affects the direction and size of international trade the effects of inflation work through changes in supplies of labour and capital which are chosen jointly with production and consumption by utility maximizing households if production exhibits constant returns to scale in domestically mobile factors then it is unlikely that the economy will produce both of the two traded goods for certain rates of inflation small changes can have dramatic effects on the direction of trade for other rates of inflation the volume of trade is affected when money is held for transactions purposes and factor supplies are endogenous changes in inflation can cause changes in the pattern of trade that do not reflect real underlying changes in comparative advantage

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

are survey forecasts of macroeconomic variables rational this article examines the rationality of forecasts of 11 macroeconomic variables among the nonstationary series only surveys of housing starts the unemployment rate and the trade balance are rational forecasts among the stationary series survey forecasts for only consumer prices and personal income are consistent with rational expectations lack of rationality in forecasts of durable goods industrial production leading indicators money supply and retail sales suggests that such forecasts do not fully exploit public information indeed survey forecasts for industrial production and retail sales can be improved significantly with past information copyright 1995 by university of chicago press

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

the politics of structural change swedish social democracy and thatcherism in comparative perspective the 1930s and the 1980s were decades of significant political economic change in the capitalist democracies depression and the rise of the industrial working class created opportunities for the establishment of social democracy in the 1930s stagflation and the decline of the working class made possible waves of radical rightist reform however this article suggests that only governments that do not have to concentrate myopically on the exigencies of winning the next election have the political space to undertake structural changes the benefits of which may only be manifest in the medium term in turn successful reforms are likely to entail changes in underlying social structural conditions such as the strengthening or weakening of organized labor movements that both expand the electoral constituencies of the government s partisanpreferred policies and improve their macroeconomic efficacy these propositions are examined with respect to the construction social democracy in sweden in the 1930s and the

open economy macroeconomics under imperfect competition a two country model abstract this paper constructs a two country macroeconomic model where prices are set by imperfectly competitive firms and wages by trade unions unemployment benefit is nominally rigid in at least one country the effects of monetary expansion under both fixed and flexible exchange rates and exchange rate changes under fixed rates are considered the results change significantly if it is assumed that in one country unemployment benefit is fully indexed

trade balance news and exchange rates is there a policy signal abstract contrary to earlier studies surprisingly large us trade deficits are shown to have a significant effect on exchange rates throughout the 1980s three possible reasons for the time varying effect are considered the evidence presented yields the following inference deficit news is likely to have changed expectations of fed intervention that moved exchange rates deficit news probably has an effect on revisions of future deficit expectations and exchange rates change as a result and deficit news may change expectations regarding us trade policy that is reflected in exchange rates

real exchange rate effects of monetary disturbances under different degrees of exchange rate flexibility an empirical analysis abstract we examine the effects of monetary policy on the real exchange rate in a cross country analysis we find that the variability of money shocks and the degree of informativeness of the exchange rate are important determinants of the magnitude of the real exchange rate effects of domestic money shocks our results are consistent with previous cross country evidence on the output effects of money shocks but also highlight the role of the exchange rate regime

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

balance of trade announcements and asset prices influence on equity prices exchange rates and interest rates abstract this paper examines the informational impact of traded balance announcements on asset prices including equities currrencies long and short term debt instruments and financial futures this study finds that in the 1980s prior to the 1985 plaza agreement for international economic cooperation information in trade balance announcements seem to have influenced only interest rates however in the 1985 1987 period such announcements also influenced stock prices and currency values these influences intensity further in the 1987 1988 period thus asset prices are sensitive to news in trade balance announcements and this sensitivity seems to have increased significantly in recent years with important implications for asset pricing models and economic policy formulation jel f30

the short run tobin effect in a monetary optimizing model in an economy in which households face a cash in advance constraint the nominal interest rate acts like a tax on consumption to the extent that investment is financed from current earnings and so escapes the interest rate tax households will defer their consumption when the nominal interest rate is high a short run tobin effect results capital accumulates most rapidly when the interest rate is thought to be high relative to its past and future values

excess capacity monopolistic competition and international transmission of monetary disturbances analyzes the excess capacity monopolistic competition and international transmission of monetary policy disturbances in the united states sheds light on the international impact of monetary policy emphasis on the spillover effects of monetary disturbances similarity of framework used with open economy macroeconomics

a dynamic specific factors model with money when the capital stock is endogenously chosen by optimizing households the predictions of the static specific factors model are modified an increase in tariffs unambiguously increases real wages whereas an expansion of the labor force does not reduce wages capital and land are not only factors of production but also assets and their shares in the household s portfolio are determined by features of the supply side time preference and inflation an increase in inflation reduces the capital stock but its impact on the price of land is ambiguous because of opposite movements in the inflation tax and in land rents

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

exchange rate dynamics and international effects of monetary shocks in monetary equilibrium models abstract this paper analyzes the ability of open economy extensions of lucas s 1990 liquidity model to explain features of observed nominal and real exchange rate dynamics and responses of key variables to monetary shocks the two country models that we consider are inhabited by multi member households who face cash in advance constraints on goods purchases and shocks to each country s technology and money growth rate countries are linked by trades in goods and currencies qualitative and quantitative implications of the model economies for exchange rate dynamics and behaviors of other key variables are examined