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

instability of the u s money demand function this paper surveys the two major episodes of instability of the u s money demand function known respectively as the mystery of missing money and the great velocity decline it also assesses the recent literature on open economy money demand models and their usefulness in explaining the puzzling behavior of money demand manifested shortly after the transition to floating exchange rates copyright 1991 by blackwell publishers ltd

estimating money demand functions the question of which functional forms of money demand regression equations are useful for empirical work is addressed here specifically it is argued that a functional form that focuses attention on the ability of the growth rate of nominal money to predict the inflation rate is a useful way of summarizing empirical evidence on the existence of a stable money demand function the results of estimating and simulating this functional form as well as standard functional forms are presented in the final part of this paper a typical equation expressing the public s demand for real money balances m is as follows

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

what do regulators do dynamic behavior of resource managers in the north pacific halibut fishery 1935 1978 abstract most of the literature in resource economics is normative focusing on questions such as how should the use of resources be regulated little attention has been paid to exactly what regulators actually do in practice this paper develops and estimates a model of regulatory behavior we model the regulators objective structure as well as the mechanism regulators use to select policy instruments to achieve their objectives we estimate the model using the north pacific halibut fishery as a case study allowing computation of the basic structural parameters as well as implicit weights in the regulators objective function as revealed by their actual decisions

expenditures and receipts in state and local government finances comment the aim of this note has been to show that marlow and manage s 1987 paper suffers from serious methodological problems due to the non stationary data series used and the arbitrary lag lengths employed use of appropriate stationarity tests and optimal lag lengths of the variables change some of the basic conclusions of their paper contrary to their suggestion the presence of a feedback between local tax receipts and expenditures imply that local governments should be concerned with the implication of their spending and revenue enhancing decisions on their budget decisions to increase current expenditures may lead to higher future taxes similarly efforts to impose higher taxes to reduce budget deficits at the local government level may be futile due to a subsequent increase in spending

new concepts of aggregated money the federal reserve board s recent redefinition of its monetary aggregates followed three years of intensive board staff research on monetary aggregation while the new aggregates ultimately were selected along conventional lines some of the staff s research was oriented towards more fundamental changes in monetary aggregation methods this paper reviews such proposals which are based upon the rigorous application of index number and aggregation theory and of principal components analysis in the construction of economic monetary aggregates the usefulness of aggregation and index number theory in acquiring price indices is widely known the theory of the true cost of living index is an application of aggregation theory examples of applied index number theory include the commerce department s implicit price deflator which is a paasche index and the labor department s consumer price index which is a laspeyres index somewhat less well known is the fact that dual to the theory of economic price aggregates and indices is a theory of economic quantity aggregates and indices an example of a highly reputable quantity index is the divisia quantity index the monetary aggregates traditionally are thought to measure the supplied quantity of an economic good called money whenever monetary aggregates are used in the context of economic theory rather than as simple accounting identities the theory of economic quantity aggregation is specifically applicable however published monetary aggregates in all countries have always been computed as simple sums but as fisher 1922 p 29 observed in the conclusion to his classic treatise on index number theory the simple arithmetic average produces one of the very worst of index numbers and if this book has no other effect than to lead to the total abandonment of the simple arithmetic type of index number it will have served a useful purpose with an example of the simple sum index fisher 1922 p 363 found that the bias alone reaches 36 percent although index number theory has not yet found its way into the monetary theory literature all of the literature on index number theory and aggregation theory for the past half century supports the result long ago deduced by fisher 1922 p 361 that the simple arithmetic index should not be used the views expressed herein are solely those of the authors and do not necessarily represent the views of the board of governors of the federal reserve system this research was partially supported by national science foundation grant soc 76 84459 we are deeply indebted to the conference session s discussant of this paper w erwin diewert for volunteering to cede his allocated journal space to us so that the paper could take its current extended form federal reserve board washington d c

the search for a stable money demand function a survey of the post 1973 literature phe question of whether the demnand function for money is stable is one of the most important recurring issues in the theory and application of macroeconomic policy what is being sought in a stable demand function is a set of necessary conditions for money to exert a predictable influence on the economy so that the central bank s control of the money supply can be a useful instrument of economic policy as such the notion of a stable demand function appears to involve three key elements e g john t boorman 1976 p 317 and david e w laidler 1977 pp 34 35 first the demand for money relation should be highly predictable in a statistical sense as measured by the usual goodness of fit statistics precision of estimated coefficients and presumably its ability to forecast accurately out of sample second a stable demand function for money has relatively few arguments a relationship that requires knowledge about a large number of variables in order to pin it down is in effect not predictable finally the variables that appear as arguments in the function should represent significant links to spending and economic activity in the real sector in sum a stable demand function for money means that the quantity of money is predictably related to a small set of key variables linking money to the real sector of the economy the importance of a stable money demand function for monetary policy can be illustrated with the standard is lm model in which interest rates and gnp are the endogenous variables in this context a stable demand function for money translates into a well defined relationship between money interest rates and gnp

profit sharing unemployment and effort abstract efficiency wages above market clearing arising from unobservable individual effort are not compatible with profit sharing based on collective output if profit sharing is a feasible contract then full employment is the unique nash equilibrium of the economy

real versus nominal specification of the demand for money function this paper re examines the issue of real versus nominal specification of the money demand function and presents evidence in favor of the nominal specification a series of experiments with u s quarterly data show that the money demand function specified in nominal terms is more stable and generates more accurate forecasts than that specified in real terms the case of the missing money also is discussed

short run money demand abstract the conventional wisdom holds that the short run demand for money is unstable this paper challenges the conventional view by finding a stable demand for m1 in u s data from 1959 through 1993 the approach follows previous work in interpreting long run money demand as a cointegrating relation and it uses goldfeld s partial adjustment model to interpret short run dynamics the key innovation is the choice of the interest rate in the money demand function most previous work uses a short term market rate but this paper uses the average return on near monies the savings accounts and money market mutual funds that are close substitutes for m1 this choice helps rationalize the behavior of money demand in particular the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies

recent instability of the demand for money an international perspective aggregate money demand functions once an apparent bulwark for macroeconomic research have had to be re examined in the light of the events and discoveries of the 1970s following goldfeld s extensive analysis it now is widely recognized that the demand for mi balances in the united states cannot be explained satisfactorily by standard functions apparently because of shifts occurring in the early 1970s similar reservations see below have been expressed with respect to m3 balances in the united kingdom where the demand relationships appear to have been upset by the introduction of regulatory reforms in 1971 in both cases part of the problem can be traced to specific events but the possibility remains that a more general instability may be present the rapid inflation experienced by all major industrial countries after 1973 the concurrent collapse of the bretton woods system of fixed exchange rates and the attempts by most major central banks to control growth in domestic money stocks may all have altered the responses of the demand for money to the standard functional arguments this paper presents a range of stability tests for a set of demand functions estimated for two monetary aggregates in each of six countries in order to determine whether money demand functions more generally have been stable over the recent period and to attempt to identify the nature and causes of any observed instabilities the major conclusions are that none of the other functions examined displays instabilities as severe as those of the mi function for the united states and that the latter may be unstable in a more persistent and fundamental way than has heretofore been recognized the equations estimated for this study are based on a variant of goldfeld s log linear real balances function the deflated value of money balances is related to real income interest rates and inflation with lagged adjustments introduced via a simple koyck transformation this function obviously is in a simplified form especially with respect to the lag struc

is profit sharing a cure for unemployment in less developed countries abstract the effects of introducing profit sharing in modern sectors in ldcs are discussed within a dual model with endogenous wages and internal migration profit sharing does not have a direct job creation effect as long as firms set the pay parameters yet the new system may have long run effects on employment allocation under some circumstances profit sharing may in fact destabilize short run employment such that jobs last for a shorter duration modern sector wages are then raised to discipline workers and urban unemployment goes up arguments are also given for the hypothesis that profit sharing stabilizes short run employment with the opposite results

instrument choice in a fishery abstract this paper considers the choice of regulatory instruments in a fishery fishing captains consumers and input suppliers each attempt to influence the regulator s choice of instruments the regulator chooses among instruments such as input restrictions entry restrictions or individual transferable quotas itqs regulatory instruments that result in zero fishery rents can only occur if the regulator places an extraordinary weight on the welfare of input suppliers relative to fishing captains and consumers indeed heterogeneity of fishing captains is neither necessary nor sufficient to obtain regulations that fail to generate fishery rents

estimating money demand in log first difference form the purposes of this paper are to recommend a certain form for the estimation of demandfor money functions and to examine some fundamental issues using the form we provide an estimate of the demand for money that achieves a reduction in the instability so characteristic of recent estimates through examination of the time series properties of the variables in the function and adjustments to produce stationarity in them an improved form of the demand for money function is possible evidence of its greater stability is offered by a comprehensive comparison of short and long term forecasts for demand for money in loglevel and log first difference forms finally several issues are explored using the more stable form including the contribution of an interest rate ratchet variable the speed of adjustment the adjustment mechanism and the appropriate scale variable we conclude that estimation in log first difference form 1 is preferable to the log level form because of its stable time series properties 2 is superior to log level form for long term forecasts 3 implies a faster and more reasonable speed of adjustment than does the log level form and 4 suggests that the nominal adjustment mechanism and real gnp as a scale variable are appropriate section ii of the paper reviews the proolem of stationarity for a regression model of the demand for money section iii presents the demand for money equation and the adjustment mechanisms section iv compares the forecasts of log level and log first difference forms section v explores the issues of the interest rate ratchet variable speed of adjustment adjustment mechanism and the scale variable a summary and conclusions are offered in section vi

the role of money supply shocks in the short run demand for money abstract previous money demand models are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible interest rate fluctuations in response to innovations in nominal money we propose a shock absorber money demand model in which money supply shocks affect the synchronization of asset transactions and so engender a temporary increase or decrease in desired money holdings expected changes do not engender such fluctuations in real money inventories in simultaneous estimates for eight industrial countries the shock absorber model proved empirically superior

unstable money demand and the monetary model of the exchange rate in this paper the authors investigate the importance for the monetary model of exchange rate determination of j frankel 1979 of allowing unrestricted dynamics and of accounting for shifts in the demand for money due to financial innovation based on estimation and simulation results for the canada u s bilateral exchange rate over the 1970 85 period the aut hors find strong evidence in favor of a generalized approach to dynamic specification but find that the shif t adjustment of official money supply data has only minor implications for the empirical results moreover neither modification is sufficient to generate a monetary model that is well supported by the data

a model of regulated open access resource use abstract this paper develops a model of regulated open access resource exploitation the regulatory model assumes that regulators are goal oriented choosing target harvest levels according to a safe stock concept these harvest quotas are implemented by setting season lengths conditioned on the industry fishing capacity the industry enters until rents are dissipated conditioned on season length regulations harvest levels fishing capacity season length and biomass are determined jointly using parameter estimates from the long regulated north pacific halibut fishery predictions of these variables from the regulated open access model are compared to predictions that arise from the gordon model

efficiency wages in weitzman s share economy abstract weitzman 1985 proposes widespread profit or revenue sharing as a way of guaranteeing low levels of equilibrium unemployment and stability in the face of shocks when efficiency wage considerations are important the benefits of the share economy are largely eliminated

the appropriate scale variable in the u s money demand an application of nonnested tests of consumption versus income measures the purpose of this article is to employ several nonnested procedures to empirically test the proposition put forward by mankiw and summers that consumption rather than income is the appropriate scale measure in the money demand function real income real disposable income consumer spending on nondurables personal consumption expenditures and total private spending are tested as candidates for the scale variable tests are carried out for both m1 and m2 concepts of money the results based on both m1 and m2 support the mankiw summers position but the results based on m2 are not as strong as those based on m1 implications for fiscal and monetary policies are discussed

steady state unemployment under profit sharing this paper demonstrates how asymmetric treatment of high seniority insider workers and non tenured outsiders gives rise to bad macroeconomic st eady states in a wage economy the framework uses a nash bargaining solution where workers may bargain over pay but firms control hiring profit sharing is then considered as an alternative payment mechanism having the automatically corrective incentive property that employers want to hire more outsiders given the assumptions of the model it is shown that widespread profit sharing results in lower unemployment and more output even though it is individually rational for insiders to prefer wages over profit shares copyright 1987 by royal economic society

a comparison among partial adjustment rational expectations and error correction estimates of the canadian demand for money starting from a dynamic optimization principle the currently most popular approaches to modelling money demand functions are derived the partial adjustment adaptive expectations rational expectations and error correction mechanism formulations are then estimated using a common data set the error correction mechanism equation is found to dominate the others either because their implicit restrictions are rejected rational expectations or by employing the encompassing principle partial adjustment adaptive expectations surprisingly all three forms have similar long run solutions since the short run dynamics differ substantially the results have important implications for the conduct of monetary policy