demand for money in open economies abstract the demand for real cash balances deduced from an underlying portfolio model of the financial market is shown to depend upon domestic variables and foreign monetary developments the model is estimated using quarterly postwar data for canada germany uk and us there is clear evidence that demand for money is affected not only by changes in domestic variables such as permanent income domestic interest rate and price expectations but also by fluctuations in exchange rate expectations and foreign interest rates the conclusion that domestic monetary policy is fairly ineffective and domestic financial markets are highly vulnerable to changes in foreign financial and monetary developments need to be modified in light of the results presented in this paper

the transactions demand for money in a two currency economy abstract in this paper the model of the transactions demand for money of baumol 1952 is extended to an economy where transactions are conducted in two currencies the currency substitution hypothesis that the domestic demand for domestic money depends on the expected rate of depreciation as well as the domestic rate of interest and level of income is derived from the model in addition several new insights into the implications of currency substitution are provided

allocative disturbances and specific capital in real business cycle theories chanted albeit in varying degree with business cycle theories that either posit unexplained nominal wage and price rigidities or rely on misperceptions about nominal variables as a key driving force one response to this disenchantment has been a concentration of research effort on real business cycle theories aside from dissatisfaction with competitor theories the very visible oil price shock episodes of the 1970 s lent plausibility to the view that exogenous real disturbances cause large fluctuations in aggregate economic activity this essay on real business cycle theory considers the role of allocative disturbances in aggregate economic fluctuations when human and physical capital are specialized by allocative disturbances i mean events that impinge on the economy by inducing a costly time consuming reallocation of specialized resources at least since the publication of ricardo s principles in 1817 economists have recognized some of the potentially important aggregate consequences of allocative disturbances ricardo writes

job search and mobility in developing countries theory and policy implications abstract a labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive we show that there exists a unique steady state equilibrium in this dual economy we then consider different policies financed by a tax on firms profits we find that reducing the unemployment benefit or the firms entry cost in the formal sector induces higher job creation and formal employment reduces the size of the informal sector but has an ambiguous effect on wages we also find that an employment wage subsidy policy and a hiring subsidy policy have different implications in particular the former increases the size of the informal sector while the latter decreases it

wages and employment in a segmented labor market this paper analyzes the impact of business cycle fluctuations on a labor market segmented into a unionized primary sector and a competitive secondary sector either permanent or temporary changes in real aggregate demand are shown to widen the intersectoral wage differential in recession and under reasonable specifications of key parameters to cause greater fluctuations of primary sector employment than secondary sector employment this pattern agrees with the stylized facts of the u s economy

currency substitution and the demand for money some evidence for canada recently the possibility that foreign and domestic currencies are substitutes has received considerable attention see 1 2 3 10 19 21 currency substitution has important implications for the working of flexible exchange rates if the degree of currency substitution is high small changes in the money supply would induce large changes in the exchange rate furthermore currency substitution would transmit the effect of monetary disturbances from one country to another indeed significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence this paper examines the empirical importance of currency substitution in the framework of the demand function for money if currency substitution is important the expected change in the exchange rate should be a significant determinant of the demand for home currency in section 2 we undertake such a test for the canadian demand for money during the recent flexible exchange rate period there is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate our own tests confirm these results for canadian data since 1970

alternative models of earnings determination and labor market structures there are three distinct research traditions in the analysis of individual earnings determination human capital or earnings function analyses aggregate wage analyses and labor demand analyses an important and incongruous aspect of each is the treatment of geographical differences in labor markets this paper first investigates the magnitude and character of geographical wage differentials the sizable differences discovered there are then related to the existing and highly simplified models of labor market differences while the two major classes of models compensating differentials and labor demand differ significantly in assumptions and implications it is impossible to distinguish adequately between them there appears to be a clear need for more structural analyses of labor market operations

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

energy price shocks household location patterns and housing crises theory and implications abstract the u s housing collapse in 2007 is widely blamed for inducing a financial crisis that spread to the real economy and caused a severe and prolonged downturn this paper develops a model to investigate the role of gasoline price shocks in triggering the housing market collapse and identifies a new channel through which energy price shocks affect the financial market and the macro economy results suggest that unanticipated gasoline price shocks increase the cost of work commutes lower the value of homes away from the city center and increase foreclosure rates as homeowners either cannot afford mortgage payments amid elevated gas expenditures or seek to abandon underwater homes the model predicts that gasoline price shocks disproportionately affect suburban households that face greater exposure due to longer commutes and lower incomes empirical evidence from the 2007 08 housing collapse is presented to corroborate this theory

the determinants of migrating with a pre arranged job and of the initial duration of urban unemployment an analysis based on indian data on rural to urban migrants abstract based on survey data on 1 400 rural migrants in delhi this paper examines within a multivariate context the determinants of migrating with a pre arranged job and of the initial duration of urban unemployment the results show that the probability of moving with a prearranged job increases with education and with age and is higher for those who seek non manual jobs for migrants who arrive in the city without a pre arranged job unemployment duration depends on marital status premigration information on urban employment opportunities and on the reliance on contacts for job search

why do people save in cash distrust memories of banking crises weak institutions and dollarization abstract the paper analyzes why households hold sizeable shares of their assets in cash at home rather than at banks a phenomenon that is widespread in many economies but for which information is scarce using survey data from ten central eastern and southeastern european countries i document the relevance of this behavior and show that cash preferences cannot be fully explained by whether people are banked or unbanked the analysis reveals that a lack of trust in banks memories of past banking crises and weak tax enforcement are important factors moreover cash preferences are stronger in dollarized economies where a safe foreign currency serves as a store of value

modelling the informal sector formally abstract the theoretical characterization of formal informal sector dualism by labor market dualism is integrated with its empirical characterization by size dualism by supposing that the minimum formal sector wage is only enforced for firms greater than a certain size a firm s size varies directly with the talent of its enterpreneur manager and the choice between formal and informal sector entrepreneurship is determined endogenously it is then shown that the size gap between the smallest formal sector firm and largest informal sector firm varies directly with the formal informal sector wage differential which in turn is shown as expected to increase the further is the minimum wage above the market clearing wage the comparative statics of changes in the size of the firm above which the minimum wage is enforced are also examined

currency substitution under finance constraints the perfect foresight continuous time couterpart of lucas and stokey s cash in advance model is generalized to the case of two currencies the money demand function for eac currency has as arguments the endowments of goods associated with each denomination various monetary shocks are investigated including permanent and temporary changes in levels and growth rates it is shown that substitution can be an important factor in explaining the possible negative transmission of inflation the amount of volatility of exchange rates and the degree tp which exchange rate movements approximate a random walk

currency substitution and instability in the world dollar standard comment myron ross correctly points out in his comment that u s price inflation is better predicted by the american money supply mlus than by the broader ten country world money supply mlw over the whole statistical time series from 1960 to 1980 provided in mckinnon s 1982 article specifically he showed that american price inflation is more highly correlated with mlus lagged one or two years than with mlw similarly lagged however mckinnon s present tense assertion that in general growth in the world money supply is a better predictor of american price inflation than is american money growth applies only to the weak dollar standard of the 1970 s and early 1980 s as his preceding discussion intended but failed to indicate clearly only in this later period of volatile exchange rates and price level instability in the united states do alternative hard currencies such as the yen and deutsche mark become competitive as international stores of value and units of account hence international currency substitution associated with the ebb and flow of speculation against or for the dollar significantly destabilized the demand for mlus in the 1970 s and 1980 s and only in this later period might one expect the sum of these internationally substitutable monies ml to predict world and perhaps even american price inflation better than does mlus in contrast during the strong dollar standard of the 1950 s and 1960 s the dollar was unchallenged as international money exchange rates were by and large convincingly fixed speculation for or against the dollar was incapable of substantially altering u s interest rates or of directly affecting the demand for mlus because cyclical international influences did not then destabilize the demand for dollars mlus was by itself a fairly efficient predictor of american prices thus ross s statistical results for the period 1960 to 1980 show somewhat greater predictive strength in mlus compared to ml because the 1960 s data outweigh the dissimilar data of the 1970 s let us instead partition the sample of imf data around the year 1970 whence began the transition from fixed to fluctuating exchange rates and the maturation of alternative monetary systems in europe and japan after applying similar statistical correlation procedures to those used by ross we show a striking structural shift in the world s monetary system the explanatory power of mlw increases sharply as that of mlus declines moderately tan 1982 for the early period of 1960 to 1970 table 1 shows simple correlation coefficients between annual percentage changes in money supplies and changes in american and world wholesale price indices the mlus provides a good explanation of u s prices and of world prices one to two years hence whereas the broader definition of mlw in which mlus enters with a 50 percent weight does surprisingly poorly being insignificantly correlated with american or world prices apparently money growth in industrial countries other than the united states was not then an independent source of worldwide inflationary pressure during the strong dollar standard table 2 shows the same simple correlations between percentage changes in prices and money for the weak dollar standard of stanford university please note that a typographical error giving the last word in the original title as market appeared on the cover of the june 1982 issue of this review the title was correct in the table of contents and on the article

on the job search in a developing country an analysis based on indian data on migrants job search by those who are employed has received increasing attention in recent years in both the theoretical and the empirical literature on labor markets in developed countries much of the interest stems from the observation that job changes often take place without an intervening period of unemployment and that there is a close relationship between searching for a job and quitting the current job also on the job search affects the rate of unemployment during the period between jobs a major preoccupation of the empirical research has been to estimate the returns to on the job search and to test the determinants of job search the bulk of this work uses data for the united states and the united kingdom 2 job search theory has not been empirically tested in the context of a developing country on the job search particularly in the so called informal sector of the urban labor market is an important feature of probabilistic models of migration in developing countries in the vein of michael p todaro and of john r harris and todaro 3 such models hypothesize that individuals migrate to urban centers with the aim of obtaining employment in the formal sector and that informal sector employment is a transitional phase during which migrants are searching for formal sector jobs recent work by gary s fields has formalized the theoretical aspects of this job search process within the framework of a multisector model 4 thus it would be of interest to find out if there are significant differences between developed and developing countries with respect to the determinants of on the job search

on the job search in a labor market model a comment abstract using a three sector model of the labor market built by fields 1989 this note shows that when the demand for goods produced in the traditional sector increases with modern sector employment modern sector enlargement may reduce the level of urban unemployment

on the job search in a labor market model ex ante choices and ex post outcomes abstract this paper builds a multi sector labor market model including wage dualism open unemployment underemployment on the job search and expected wage equalization the innovative feature of this model is the distinction between the ex ante allocation of the labor force among search strategies and the ex post allocation of the labor force among labor market outcomes among the findings are more efficient on the job search lowers the equilibrium unemployment rate in a rational expectations equilibrium the average rural and urban wages will not be equal modern sector enlargement may leave labor market conditions in one of the sectors unchanged even when wages and employment in that sector are fully flexible

a welfare economic analysis of labor market policies in the harris todaro model this paper presents a welfare economic analysis of the benefits of various labor market policies in the harris todaro labor market model the policies considered are a policy of modern sector job creation which i call modern sector enlargement msenl a policy of rural development which i call traditional sector enrichment tsenr and a policy of wage limitation in the urban economy which i call modern sector wage restraint mswr first i analyze the inequality effects of these policies i then perform two welfare economic analyses the first based on summary measures of labor market conditions total labor earnings unemployment inequality of labor incomes and poverty rates and the second based on dominance analysis in the labor market in both cases assuming that the costs are borne elsewhere the results of the welfare analyses are compared and it is shown that tsenr unambiguously increases welfare in the labor market using both approaches the other policies yield ambiguous results and no policy is unambiguously welfare decreasing

the relative effects of unemployment insurance parameters on search strategy abstract this paper theoretically examines the relative effect of two unemployment insurance parameters on search behavior the relative influence of each parameter is found to depend upon what an individual could expect to earn if he worked part time while searching

currency substitution capital mobility and money demand abstract this paper re examines the currency substitution cs issue by specifying a general portfolio balance pb model where domestic residents demand for foreign money is distinguished from their demands for foreign non monetary assets the latter possibility which reflects international capital mobility as opposed to cs per se is already a key feature in the open economy macro literature the inclusion of foreign money leaves the usual asset demand functions unchanged in the pb model that ignores cs at least as far as the appropriate rate of return arguments and their signs are concerned although this suggests that cs is of limited importance in macro modelling it implication for the estimation of money demand functions is pursued an initial attempt is made to empirically isolate the separate efects of high capital mobility and currency substitution for canada germany the united kingdom and the united states the results while not conclusive due to high multicollinearity problems bring into question the empirical as well as the theoretical relevance of currency substitution

currency substitution and the precautionary demand for money abstract although the implications of currency substitution have received considerable attention recently the microeconomic foundations of this phenomenon seem largely to have been taken for granted the present paper considers the precautionary motive for holding cash balances as one possible motivation for the currency substitution hypothesis a three asset model is presented in which transaction costs are explicit and an agent is faced with uncertain cash requirements in two different currencies the role played by the expected rate of depreciation in the optimal portfolio allocation is found to conform with prior beliefs