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

limited commitment and the demand for money understanding money demand is important for our comprehension of macroeconomics and monetary policy its instability has made this a challenge common explications for the instability are financial regulations and financial innovations that shift the money demand function we provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data limited commitment can also explain why the ratio of credit to m1 is currently so low despite that nominal interest rates are at their lowest recorded levels this article is protected by copyright all rights reserved

budget processes and commitment to fiscal discipline abstract we present a framework of investigation into the political economy of the budget process our model suggests that institutional rules governing the budget process can be found to limit the importance of fiscal illusion empirical evidence supports that proposition the choice of rules depends on the political environment as well as the dominant source of uncertainty in the budget process

re examining the buffer stock model of money this paper critically examines recent papers in the buffer stock or supply side disequilibrium models of money the paper first investigates the assumptions at the m icroeconomic level and concludes that even with these assumptions aggregate behavior does not necessarily follow buffer stock models in which excess cash balances are held involuntarily in a simple model with uncertain cash flows it is shown that in the aggregate short run involuntary cash holdings are negligible if the buffer stock story is applicable it is to a broader definition of money than used in most empirical work the second part of the paper examines empirical work and argues that the buffer stock idea cannot be implemented using single equation techniques and that when viewed appropriately current empirical result s refute the buffer stock idea as it is currently modeled copyright 1987 by royal economic society

the demand for money in developing countries assessing the role of financial innovation traditional specifications of money demand have commonly been plagued by persistent overprediction implausible parameter estimates and highly autocorrelated errors the authors argue that some of these problems stem from the failure to account for the impact of financial innovation they estimate money demand for ten developing countries using various proxies for financial innovations they also assess the relative importance of this variable finding financial innovation can be better modeled as a stochastic random walk trend rather than a deterministic time trend financial innovation plays an important role in determining fluctuations of the demand for money the importance of this role increases with the rate of inflation

effects of financial innovations on the money demand function a canadian evidence a money demand function for the candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants two sets of estimation results have been analysed the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations the estimated equations have been used to generate ex post simulations and forecasts the results suggest that innovations have displaced the money demand function in the early 1980s it also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function

modelling money demand in open economies over the modern floating rate period the role of open economy factors in influencing domestic money demand in major industrial countries over the modern floating rate period is examined the theoretial model for the empirical analysis is derived from a general two country portfolio balance framework that determines the demand for domestic and foreign monetary and non monetary assets in each country the ecm estimates indicate that capital mobility plays an important role in the money demand function in all seven counteries considered currency substitution in contrast is not an important phenomenon

contingent capital with a capital ratio trigger contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues specific proposals vary in their choice of conversion trigger and conversion mechanism we analyze the case of contingent capital with a capital ratio trigger and partial and ongoing conversion the capital ratio we use is based on accounting or book values to approximate the regulatory ratios that determine capital requirements for banks the conversion process is partial and ongoing in the sense that each time a bank s capital ratio reaches the minimum threshold just enough debt is converted to equity to meet the capital requirement so long as the contingent capital has not been depleted we derive closed form expressions for the market value of such securities when the firm s asset value is modeled as geometric brownian motion and from these we get formulas for the fair yield spread on the convertible debt a key step in the analysis is an explicit expression for the fraction of equity held by the original shareholders and the fraction held by converted investors in the contingent capital this paper was accepted by gerard p cachon stochastic models and simulation

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

nominal costs and the demand for real transactions balances the standard specification of constant real transactions costs assumes that over the sample period transactions costs move in lock step with the gnp deflator our model assumes that transactions costs move negligibly compared to the gnp deflator that is nominal transactions costs are assumed constant here rather than real transactions costs as in other estimates of money demand we find with this nominal transactions cost specification that the real money demand function is more stable in terms of the stability of the coefficients and the accuracy of out of sample predictions than indicated by earlier studies

us business credit sources demand deposits and the missing money abstract this study accounts for much of the missing money in the us through compensating balances business lending by banks affects demand deposit growth standard money demand models include variables that likely pick up income and interest rate effects on the transactions demand for demand deposits and on compensating balance requirements provided that bank lending to firms is stable however during the missing money period business shifted toward nonbank sources of short term credit causing a decline in compensating balances empirical finding support this hypothesis as a partial explanation for the missing money using the federal reserve board s demand deposit model

state responses to fiscal crises the effects of budgetary institutions and politics this paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits more restrictive state fiscal institutions such as no deficit carryover rules and tax and expenditure limitations are correlated with more rapid fiscal adjustment to unexpected deficits political factors are also important when a single party controls the state house and the governorship deficit adjustment is much faster than when party control is divided in gubernatorial election years tax increases and spending cuts are both significantly smaller than at other times

money demand instability has it ended abstract some researchers suggest that much of the seeming instability in the post 1973 money demand occurred because of financial innovation and deregulation money demand was in transition further unprecedented declines in the income velocity of circulation during 1985 and 1986 indicate that this hypothesized transition continues have the effects of financial innovation and deregulation run their course do additional unexpected shifts in velocity loom in the near future or has the transition come to a halt these questions are examined using the methodology of hafer and hein 1982 as modified by miller 1986 no evidence of structural shifts exists beyond 1986 m1 growth may have become a reliable monetary aggregate target again further the missing money has more than returned more money is held today than predicted by the pre 1973 money demand function since m1 now includes interest bearing transactions accounts and incorporates a saving motive the finding is not counterintuitive

valuing risky fixed rate debt an extension this paper develops a corporate bond valuation model that takes into account both early default and interest rate risk it corrects a defect of recent contributions where pricing equations do not assure that the payment to bondholders upon bankruptcy is no greater than firm value the bankruptcy triggering mechanism is directly related to the payoff received by bondholders when early bankruptcy is forced upon the firm more specifically the default barrier is defined simply as a fixed quantity discounted at the riskless rate up to the maturity date of the risky corporate bond as soon as this threshold is crossed bondholders receive an exogenously specified fraction ofthe remaining assets deviations from the absolute priority rule also are captured because it accounts for gaussian interest rate uncertainty default risk and deviations from the absolute priority rule this model is capable of producing quite diverse shapes for the term structure of yield spreads

which road leads to stable money demand this paper denies that the demand for money function is any more unstable than other demand functions and maintains that the controversies regarding unstable money demand are produce by poor methodology that is not shared by other areas of the field of economics when investigating demand function properties this abstract was borrowed from another version of this item

notes on the microfoundations of monetary economics it is important to keep two closely related distinctions in mind when discussing the microeconomics of money that between the social arrangement known as monetary exchange and those assets known as money and that between what patinkin 1957 called the market experiment and individual experiment this abstract was borrowed from another version of this item

cross country estimates of the demand for money and its components the demand for money aggregates m1 m2 and their components currency demand deposits and time deposits are estimated using a sample of 103 countries at two time periods money demand is found to be affected by age literacy industrial development and political structure as well as income and inflation this expanded demand function helps to explain the considerable changes in money demand that have occurred over long periods and the large variation in money demand found across countries the knowledge thus gained is useful for understanding differences in monetary and taxation policies across countries

structural changes and the us money demand function previous literature on the stability of the us money demand function suggests mixed results in this article we study the stability of the money demand function from the standpoint of structural changes in the function we first investigate if a stable money demand function can be found for the us for the period from the first quarter of 1959 to the fourth quarter of 2000 the results show that a stable long run money demand function does not exist for the sample period under consideration we then estimate unknown structural break points in the variables of the money demand function using bai and perron s 1998 method and test if there is a stable relationship in each sub sample period of the break points the results show that a stable relationship exists for each sub sample period the estimated income elasticity and interest rate semi elasticity are relatively smaller than ball s 2001 estimates but consistent with his argument

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

transaction services inflation and welfare this paper is motivated by empirical observations on the comovements of currency velocity inflation and the relative size of the credit services sector we document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money our model makes two new contributions first we show that direct evidence on the appropriately defined credit service sector for the united states is consistent with the welfare cost measured using an estimated money demand schedule second we provide estimates of the welfare cost of inflation that have some new features

the scourge of the monetarists kaldor on monetarism and on money nicolas kaldor s critique of monetarism from 1970 until his death is described and evaluated it is argued that subsequent events as well as empirical research vindicate his critique kaldor s critique of john maynard keynes s monetary theory is then seen as an extension of his radcliffe views and this paper argues that in this matter kaldor was mechanical in his modeling of the endogeneity of money supply it is suggested that the work of hyman minsky and victoria chick has the potential for further work in this area copyright 1989 by oxford university press

sovereign debt markets in light of the shadow economy we investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets in addition to a standard ordered probit regression we employ two nonparametric neural network modeling techniques in order to capture possible complex interactions between our variables results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs mlp neural networks offer the best fit to the data followed by the rbf neural networks and probit regression respectively the results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector our study has important implications especially in the context of the ongoing sovereign debt crisis since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs finally a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector

monetary anticipations and the demand for money abstract it has recently been argued that unanticipated changes in nominal money supply should affect the real demand for money and empirical results which appear to support this hypothesis have been presented unfortunately the econometric techniques used by previous authors yield severel biased estimates in this paper we show how valid estimates may easily be obtained and present some illustrative empirical results using u s data these results do not support the conclusions of earlier authors we find that unanticipated money supply changes do indeed affect the real demand for money but with the wrong sign and that anticipated changes also have a significant effect a consistency test for all models employing the anticipated unanticipated distinction is also proposed

generalised soft binomial american real option pricing model fuzzy stochastic approach abstract the stochastic discrete binomial models and continuous models are usually applied in option valuation valuation of the real american options is solved usually by the numerical procedures therefore binomial model is suitable approach for appraising the options of american type however there is not in several situations especially in real option methodology application at to disposal input data of required quality two aspects of input data uncertainty should be distinguished risk stochastic and vagueness fuzzy traditionally input data are in a form of real crisp numbers or crisp stochastic distribution function therefore hybrid models combination of risk and vagueness could be useful approach in option valuation generalised hybrid fuzzy stochastic binomial american real option model under fuzzy numbers t numbers and decomposition principle is proposed and described input data up index down index growth rate initial underlying asset price exercise price and risk free rate are in a form of fuzzy numbers and result possibility expected option value is also determined vaguely as a fuzzy set illustrative example of equity valuation as an american real call option is presented

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

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

specification tests of the money demand function in an open economy this paper addresses empirically the issues of selecting the appropriate opportunity cost and scale variables of the money demand function in the presence of alternative nonnested hypotheses as part of the process of model specification the role of currency substitution in the demand for money function in an open economy is examined the tests are carried out with quarterly data from the open economy of greece over the floating exchange rate period 1975 82

cointegration and structural change an application to the u s demand for money wankeun oh i perform the cointegration tests for the trivariate model of real monetary aggregates real personal income and short term interest rate i find the existence of a long run relationship among these three variables to check the stability of a long run money demand relationship i implement a rank constancy test and cusum test the test results show that real mi is relatively more stable than other aggregates but structural change occurred during the 1970s and early 1980s this is consistent with prior research on money demand jel e41 i introduction incorporating structural change when performing tests on the properties of stochastic processes is important because structural breaks may cause misspecification problems most tests of structural change consider the stability of the parameters over time tests for structural breaks and parameter stability have been studied extensively a partial list includes chow 1966 brown et al 1975 harvey and collier 1977 king 1987 ploberger et al 1989 in the context of unit root processes perron 1989 showed that the presence of a one time change in the level or slope of the trend function can severely distort the results of unit root tests and it is natural to ask how structural change can distort the results of cointegration tests 1 traditional tests of parameter stability ask if the parameters of the model are constant in contrast quintos 1993 proposed a test for stability of the long run relationship s in a cointegrating regression the test is based on johansen s 1988 framework and the test statistic is simply the weighted sum of the likelihood ratio test as given in johansen 1988 quintos s rank test is very different from the traditional cusum and chow tests for parameter stability because her rank test checks for stability of the cointegrating relationship between variables in other words the rank test checks whether cointegration holds for the full period the traditional cusum and chow tests assume that cointegration holds for the full period or does not hold for the full period and tests simply whether the cointegration vector changes for example if there is cointegration from 1960 1990 between revenues and expenditures with cointegrating vector 1 1 then the cusum and chow tests check whether the cointegra ting vector 1 1 is stable throughout the period the rank constancy test checks whether the cointegration rank is stable throughout the period not whether the cointegrating vector is stable at 1 1 in other words the rank test will check whether for example there is cointegration from 1960 1980 and no cointegration from 1980 onward the chow and cusum tests are not designed to check for this the structural stability of money demand relationships has been the issue of a substantial number of empirical studies 2 in general structural stability means stability of the underlying behavioral equations 3 this term includes parameter stability and stability of functional form friedman s 1990 research on the money demand function assumes that a long run equilibrium relationship exists between real money balances real income or real wealth and the opportunity cost of holding real money balances recently there has been strong evidence of cointegration between real income real money balances and a nominal interest rate for instance engle and granger 1987 dickey et al 1991 hafer and jansen 1991 hoffman and rasche 1991 mehra 1993 miller 1991 fischer and nicoletti 1993 and baba et al 1992 report on cointegration among variables in u s aggregate money demand jain and moon 1994 report on cointegration in u s sectoral money demand yashiv 1994 and engsted 1993 on money demand in a high inflation country and hoffman et al 1995 report on international money demand comparison this article asks if long run money demand relationship is stable and if so for which measure of money is it stable over time

finance capital in dynamic factor demand models the lagged partial adjusment money demand function has been studied theoretically and empirically for the aggregate economy this paper focuses on a sectoral analysis of two partial adjustment functions one for optimal money demand and another for optimal loans demand the two partial adjustment equations are derived employing a representive firm approach a dynamic factor demand model with internal costs of adjustment is utilized to generate euler equations for the demand for money and short term business loans these euler equations parallel the aggregate partial adjustment money demand equations typically employed in applied monetary research the significant difference between the ad hocderivation and the microtheoretic derivation employed here is that desired money and loan holdings are found by solving the euler equations these particular definition of desired money and loan holding are model consistent and depend upon the predetermined and exogeneous variables of the model empirical analysis ge

macroeconomic disequilibrium structural changes and the household savings and money demand in china abstract this paper presents an empirical study of the chinese personal money demand and savings in an economy of disequilibrium and structural changes we propose specifications capable of encompassing and testing the two competing hypotheses which have been advanced to explain the case of the chinese household money demand and savings based on the national and provincial data we find that both repressed inflation and structural changes are significant suggesting the need to capture both the possible disequilibrium and structural shifts further statistical evidence shows that there might have been multiple regime shifts during the post 1949 period which is at variance with the conventional approach of exclusive focus of the effects of the recent reforms nesting the competing hypotheses appears to be the key in providing an adequate account of the savings and money demand of the chinese household sector the evidence seems to favor the repressed inflation hypothesis

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

structural recovery of face value at default abstract we carefully study the transmission mechanisms from default free rates to corporate bond prices within structural models of endogenous default risk the transmission critically depends on whether the model is value based or cashflow based on the assumptions made for the drift of the state variable and on the way the residual value at default is shared among bondholders the recovery assumption is crucial recovery of face value which entails receiving the same share of residual value at default regardless of the remaining maturity greatly helps explaining the empirical evidence on bond price sensitivities to interest rates

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

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

what will take the con out of econometrics the paper begins with the question of whether leamer s extreme bounds analysis eba really does take the con out of econometrics by analytically demonstrating that the extreme bounds are simply functions of the f statistic for the deletion of variables from a regression we conclude that the information provided by eba represents no advance over that available from traditional methods furthermore there is a degree of arbitrariness in eba which exactly parallels the selective reporting of regressions it was designed to supplant the last part of the paper attempts a positive response to its title by following a well defined series of modelling steps we maintain that cooley and le roy s eba derived conclusions concerning the interest elasticity of money demand owe more to a faulty methodology than to the data this abstract was borrowed from another version of this item

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

impulse response analysis of cointegrated systems abstract impulse response or dynamic multiplier analysis of vector autoregressive systems with cointegrated variables is considered the asymptotic distribution of the responses estimated with johansen s 1988 maximum likelihood procedure is derived the results are illustrated with an analysis of a west german money demand system the investigation shows that a direct interpretation of the cointegration relations may be difficult or misleading thereby the virtue of impulse response analysis for applied work is illustrated

the demand for money a dynamic rational expectations model macroeconomic modelling generally has widely adopted the use of forwardlooking variables in behavioural relationships studies of the demand for money being something of an exception the aim of this paper is to provide preliminary empirical results of a model which explicitly incorporates expectations of the future into the demand function for narrow money the approach adopted is the modelling of the demand for money within a multi period costs of adjustment framework under the assumption of rational expectations agents are assumed to pursue a target or long run level of money balances which is itself a function of prices income and interest rates this results in an empirical specification which consists of both backwardlooking and forward looking components the model is estimated using uk data for the period i963i i983iii the remainder of the paper is divided into four sections in section i we outline the framework in which our model is derived in the following section we discuss the econometric techniques used and in section iii we present our empirical results a final section concludes

monetary policy lessons of recent inflation and disinflation by 1975 most economists agreed that the money demand function in the united states was reasonably stable and could serve as a reliable basis for the formulation of monetary policy those suspicious of monetarism were on the defensive in the light of the apparently inexorable increase of m1 velocity of about three percent per year with deviations of only a few tenths of a percent experience with rising money growth and rising inflation through 1980 only confirmed monetarist views as figure 1 shows all this had changed by 1986 with disinflation in the 1980s m1 velocity departed convincingly from its 1953 79 trend the money demand function seems to have fallen apart and is apparently not a reliable basis for monetary policy after all consequently the first major section following this introduction is devoted to the decline of velocity after 1981 and the demise of the standard money demand function some authors including i believe benjamin friedman conclude that this evidence leaves us so uncertain about the nature of money demand that policymakers cannot rely at all on any presumed money demand regularities in contrast my working hypothesis is that the money demand continues to be a stable function of relatively few variables but that the interest elasticity of money demand is substantially higher than previously thought others have sought money demand explanations in terms of regime shifts but that literature will not be discussed here events have not been kind to keynesian monetary policy positions either keynesians tend to concentrate on interest rates especially real interest rates as the best guide to the effects of monetary policy on the economy the real rate is discussed

an error correction approach to money demand the case of sudan abstract an empirical analysis of money demand behavior in sudan is presented based on the dynamic error correction model a theoretical basis for the model is offered which allows an explicit parameterized division of effects into long run influences short term adjustments and proportional equilibrium conditions we refute previous claims that income and price effects may be abnormally high in sudan in part by accounting for both foreign exchange and inflationary influences

on the reinterpretation of money demand regressions a stylized fact concerning estimated money demand relationships is that lagged dependent variables have high explanatory power and large estimated coefficients which is hard to explain at a theoretical level marvin s goodfriend 1985 suggests that this may be due to the presence of serially correlated measurement errors in the independent variables the author demonstrates how consistent estimates of the short run demand function can be obtained even if the goodfriend hypothesis is accepted and also how the hypothesis might be tested application of the suggested test using the goldfeld 1973 data set leads to decisive rejection of the hypothesis copyright 1994 by ohio state university press

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

on cash in advance models of money demand and asset pricing this paper shows how a cash in advance model of money can be written in a way that combines a simple yet empirically defensible money demand function with an asset pricing equation that is similar to the standard barter economy euler equations return premia are determined as in the barter exchange model except that a short term risk free nominal interest rate enters into the first order conditions in special cases asset prices satisfy the barter economy euler equations exactly in the empirical analysis the interest rate factor adds some explanatory power but both the barter and the monetary asset pricing model perform rather poorly copyright 1991 by ohio state university press

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

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

sweep programs the fall of m1 and rebirth of the medium of exchange this paper investigates the effect of sweep programs on m1 using dynamic simulations of money demand over 1994 2000 the postsample period constitutes when sweep programs have been in effect all models generate predictions systematically above reported m1 using data on newly initiated programs test findings indicate that sweeps account for the overprediction within the conventional money demand model with a long term interest rate we construct a medium of exchange measure m1s equal to m1 plus estimated holdings of sweep balances m1s velocity compares favorably with that of broader aggregates evidence indicates cointegration within m1s money demand

u s money demand instability a flexible least squares approach this paper uses a jle rrhle leust squares fls time varying linear regression technique to investiaate coefficient stabilitv for the goldfeld u s money demand model over the period 1959 62 to 19x5 q3 time paths traced out by the fls coefficient estimates exhibit shifts in 1974 and 1983 but these shifts are small relative to a persistent downward trend in the estimated coefficient for the inflation rate indicating potential model misspecitication the fls estimates also indicate that the unit root nonstationarity problem reported by ols money demand studies disappears if the coefficient estimates are allowed to exhibit even small amounts of time variation

caution and conservatism in the making of monetary policy does society benefit from the delegation of monetary policy to cautious and conservative central bankers we offer a critical view on the delegation literature and relax seemingly innocuous assumptions about uncertainty and preferences first caution improves credibility but does not obviate the need for central bank conservatism second previous models of delegation have focused on suboptimal forms of conservatism we derive optimal concepts of conservatism that mitigate or eliminate any residual problem of credibility third we rationalize why credible monetary policy may be conducive to stable inflation and output

an empirical examination of the inventory theoretic model of precautionary money demand abstract this study examines the empirical contents of precautionary demand for transactions money balances panel data are utilized to construct estimates of income variance regression results indicate that income uncertainty has a positive effect on precautionary money demand but the magnitude of the elasticity of income variance falls far short of those suggested by economic theories

the adaptive mesh model a new approach to efficient option pricing abstract most derivative securities must be priced by numerical techniques these models contain distribution error and nonlinearity error the adaptive mesh model amm sharply reduces nonlinearity error by grafting one or more small sections of fine high resolution lattice onto a tree with coarser time and price steps three different amm structures are presented one for pricing ordinary options one for barrier options and one for computing delta and gamma efficiently the amm approach can be adapted to a wide variety of contingent claims for some common problems accuracy increases by several orders of magnitude with no increase in execution time

evaluating corporate bonds with complicated liability structures and bond provisions this paper presents a general and numerically accurate lattice methodology to price risky corporate bonds it can handle complex default boundaries discrete payments various asset sales assumptions and early redemption provisions for which closed form solutions are unavailable furthermore it can price a portfolio of bonds that accounts for their complex interaction whereas traditional approaches can only price each bond individually or a small portfolio of highly simplistic bonds because of the generality and accuracy of our method it is used to investigate how credit spreads are influenced by the bond provisions and the change in a firm s liability structure due to bond repayments

are cash budgets a cure for excess fiscal deficits and at what cost abstract this paper investigates the effect of recent reforms of budgetary institutions in uganda and zambia we argue that cash budgeting has brought clear benefits in terms of improved expenditure control with regard to line ministries contrary to what is often suggested however adoption of a cash budget has not provided a means for top politicians in either country to tie their hands with respect to intervention in fiscal policy decisions in uganda improved fiscal policy outcomes have in fact been achieved as a result of and not in spite of discretionary interventions by top politicians in zambia a strict rule imposing a balanced budget on a monthly basis has proven partially effective due in no small part to international monetary fund imf enforcement but costly in terms of increased volatility of expenditures

are price equations really money demand equations on their heads it is often argued that the dependent variable in money demand functions is really the price level the money stock itself being exogenous a recent approach which stresses the theme is the buffer stock hypothesis in which money supply shocks explicitly appear in the demand for money function because prices and interest rates do not adjust rapidly enough to bring about short run equilibrium in the money market although this approach has been adopted by a number of authors it is not been subjected to much econometric testing in this paper we outline the economic and econometric issues involved in testing the exogenous money buffer stock hypothesis and subject it to a variety of tests using three different data sets none of our results supports the hypothesis fundamental restrictions are rejected at very high levels of significance and a reasonably good money demand equation is seen to be badly misspecified if interpreted as a price equation this abstract was borrowed from another version of this item

the persistence of interest rate effects on the demand for currency note since the end of world war ii there has been a trend decline in the demand for real currency balances part of the decrease is due to the rise in interest rates to unprecedented heights yet this is not the complete answer since a trend term included in a simple and conventional currency demand equation that already includes an interest rate still emerges with a significant negative coefficient for example using quarterly data from 1950 i to 1981 iii a demand for currency equation can be estimated as

debt valuation renegotiation and optimal dividend policy the valuation of debt and equity reorganization boundaries and firm s optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game theoretic setting which can accommodate varying bargaining powers to the two claimants two formulations of reorganization are presented debt equity swaps and strategic debt service resulting from negotiated debt service reductions we study the effects of bond covenants on payout policies and distinguish liquidity induced defaults from strategic defaults we derive optimal equity issuance and payout policies the debt capacity of the firm and the optimal capital structure are characterized

a closer look at long run u s money demand linear or nonlinear error correction with m0 m1 or m2 i introduction the stability of money demand has been a long standing issue 1 lucas 1988 informally analyzes the stability of a log linear m1 money demand function and concludes that real money demand is a stable function and he supports earlier findings of meltzer 1963 with an income or wealth elasticity of around unity 2 with the development of cointegration methods engle and granger 1987 numerous empirical studies have applied these techniques to long run u s money demand examples are baba hendry and starr 1992 haferand jansen 1991 hoffman and rasche 1991 and miller 1991 who find support for a cointegrated money demand model with either m1 or m2 3 king et al 1991 also find support for cointegration with m2 and a short term interest rate in contrast to these studies others have argued against a stable u s money demand function in the postwar period for example friedman and kuttner 1992 do not find support for cointegration particularly when the period march 1970 to april 1990 is considered similarly miyao 1996 studies the behavior of the m2 money demand function over the period from 1959 to 1993 with quarterly data and various interest rates in levels and in logs miyao concludes that m2 is not a useful intermediate target for monetary policy in the 1990s 4 however carlson et al 2000 reach the conclusion that m2 does have predictive content for nominal economic activity and that the real m2 money demand function is stable but only after accounting for financial innovation in the first half of the 1990s two recent papers ball 2001 and stock and watson 1993 focus on especially long data sets for the united states and m1 stock and watson 1993 analyze various estimation methods for cointegrating relationships and illustrate their performance for money demand functions with annual data from 1900 to 1987 they pay particular attention to the postwar period and use monthly data in addition to annual data for this period they employ a semi log linear real m1 money demand model with real net national product and the level of the 6 mo commercial paper rate for the postwar period they also consider the 90 day treasury bill rate and the 10 yr treasury bond rate they compare and contrast their results to those of various others they also carry out recursive estimations to check their results for stability stock and watson 1993 conclude that a long span of data is needed to estimate long run money demand functions precisely their overall evidence is in favor of a stable long run money demand function with an income elasticity near one and an interest rate semielasticity near 0 10 however the postwar data are found to be not very informative a lack of low frequency variation in the postwar data as suggested by lucas 1988 does not allow a disentangling of the effects of output and interest rates on money demand for this time period estimates are imprecise and sensitive to subsample specifications due to substantial colinearity ball 2001 revisits the m1 money demand model of stock and watson 1993 using the same data set but extended through 1996 he applies the same array of estimation techniques as stock and watson did ball obtains precise estimates over the postwar period for his extended data set an income elasticity of approximately 0 5 and a semielasticity of 0 05 for the interest rate he does not find support for a velocity specification the m1 model is not stable over the period 1900 1996 lutkepohl terasvirta and wolters 1999 apply a nonlinear error correction model with smooth transition adjustment to capture instabilities in the linear cointegration model the long run equilibrium is described by a linear cointegrating relation and the adjustment to this long run equilibrium is nonlinear they analyze german m1 money demand granger and terisvirta 1993 terasvirta 1998 and van dijk terasvirta and franses 2002 provide details on the econometric theory for estimating and testing such nonlinear models

on the markov switching welfare cost of inflation abstract this paper uses the markov switching approach to account for instabilities in the long run money demand function and compute the welfare cost of inflation in the united states in doing so it circumvents the problem of data mining of some earlier seminal contributions on these issues allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function moreover it extends the sample period and investigates the robustness of results to alternative money demand specifications monetary aggregation procedures and assumptions regarding dynamics aspects of the money demand specification

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

bank float mail float and the definition of money this paper argues that the true magnitude of voluntary holdings of money balances is actuallysmaller than the magnitude of conventional m1 preliminary calculations suggest that the discrepancy is quite substantial these findings force us to doubt the overall validity of traditional money demand studies that employ m1 data for empirical testing

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

evaluating corporate bonds and analyzing claim holders decisions with complex debt structure abstract although many different aspects of debt structures such as bond covenants and repayment schedules are empirically found to significantly influence values of bonds and equity many theoretical structural models still oversimplify debt structures and fail to capture phenomena found in financial markets this paper proposes a carefully designed structural model that faithfully models typical complex debt structures containing multiple bonds with various covenants for example the ability for an issuing firm to meet an obligation is modeled to rely on its ability to meet previous repayments and the default trigger is shaped according to the characteristics of its debt structure such as the amount and schedule of bond repayments thus our framework reliably provides theoretical insight and concrete quantitative measurements consistent with extant empirical research such as the shapes of yield spread curves under various firm s financial statuses and the impact of payment blockage covenants on newly issued and other outstanding bonds we also develop the forest a novel quantitative method to handle contingent changes in the debt structure due to premature bond redemptions a forest consists of several trees that capture different debt structures for instance those before or after a bond redemption this method can be used to analyze how poison put covenants in the target firm s bonds influence the bidder s costs of debt financing for a leveraged buyout or investigate how the presence of wealth transfer among the remaining claim holders due to a bond redemption influences the firm s call policy or further reconcile conflicts among previous empirical studies on call delay phenomena

consumer theory and the demand for money the following sections are included introductionthe definition of moneythe microeconomic theory of a monetary economythe aggregation theoretic approach to money demandindex number theorythe links between aggregation theory index number theory and monetary theoryunderstanding the new divisia aggregatesthe optimal level of monetary subaggregationeconometric considerationsapproximating the monetary services subutility functionan exampleempirical dimensionsempirical comparisons of index numbersempirical results for the demand system approachextensionsconclusions this abstract was borrowed from another version of this item

lessons on monetary policy from the 1980s t he half decade running from mid 1982 to mid 1987 was a pretty good era for u s monetary policy as these things go a sharp easing of policy beginning some time around midyear 1982 helped set in motion a recovery from the most severe business downturn the united states had experienced since the 1930s a downturn that tight monetary policy earlier on had deliberately brought about in order to slow the alarming acceleration of prices the recovery that ensued developed into a sustained expansion that continued without interruption through the end of 1987 thereby setting a new record for the longest recorded business expansion in u s peacetime experience a fiscal policy based on unprecedentedly large and continually growing structural budget deficits was a major factor underlying this record length expansion but at least monetary policy did not stand in the way just as importantly the severe 1981 82 recession served its intended purpose of substantially restoring price stability and even after five years of expansion inflation remained modest by recent historical standards at least as judged by these outcomes for the standard objectives of macroeconomic policy u s monetary policy was a distinct success during these years economists hoping to say something useful about monetary policy have had a tougher time the quantitative relationships connecting income and price movements to the growth of familiar monetary aggregates including especially the m1 measure of the money stock that had been the chief focus of monetary policy during 1979 82 utterly fell apart during this period moreover the collapse of these long standing

an experimental test of the baumol tobin transactions demand for money historically generated data do not allow a clean test of any particular money dema nd theory by creating the artificial environment analyzed by william baumol and james tobin s work on the transactions demand for money one can observe how real people pursuing real rewards behave in that environment baumol and tobin assumed people were sufficiently rational to learn four axioms of rational behavior the authors subjects learned only three however trial and error methods plus subjects limited rationality did produce results similar to the baumol tobin predictions this supports the need to weaken the definition of rationality in the manner suggested by herbert simon copyright 1988 by ohio state university press

international evidence on misspecification of the standard money demand equation abstract this paper tests the proposition that the interest rate in the standard money demand equation acts as a proxy for the expected change in interest rates if this is true the interest elasticity in the standard equation will depend on the expectations process for interest rates using cross country data we find that there does exist a relationship between the observed interest elasticity in the standard equation and the predictability of future interest rates from current interest rates