the relative forecasting performance of the divisia and simple sum monetary aggregates this paper provides direct evidence on the forecasting performance of the divisia monetary aggregates relative to the traditional simple sum monetary aggregates it is shown that forecasts of u s real gdp from a four variable vector autoregression var are most accurate when a divisia aggregate is used rather than a simple sum aggregate particularly at broad levels of aggregation further the two m1 aggregates relative to the broader aggregates are superior predictors of the gdp deflator with a slight edge going to divisia m1 over simple sum m1

are the discounts on closed end funds a sentiment index in investor sentiment and the closed end fund puzzle charles lee andrei shleifer and richard thaler 1991 claim to solve not one but two longstanding puzzles discounts on closed end funds and the small firm effect both according to lee et al are driven by the same waves of small investor sentiment killing two such elusive birds with one stone would be a neat trick indeed if lee et al could bring it off but they can t measured properly the comovement between fund discounts and small firm returns is neither strong enough nor robust enough to support their common sentiment story the case of lee et al rests mainly on their key table iv in which monthly returns for 10 separate size grouped portfolios are regressed on monthly changes in the discount of a value weighted portfolio of closed end funds avwd and the monthly return on a value weighted portfolio of nyse firms vwny for their twenty year sample period running from july 1965 to december 1985 lee et al find changes in the value weighted discount holding market returns constant to be positively related to the returns of the largest firms decile 10 but negatively related to those of all other size deciles the negative coefficient is largest for the very small firms in decile 1 leading lee et al to conclude that when individual investors become optimistic about closed end funds and smaller stocks these stocks do well and discounts narrow and when individual investors become pessimistic about closed end funds and smaller stocks smaller stocks do badly and discounts widen pp 94 95 could the observed relation between fund discounts and small firm returns be just a chance sampling fluctuation lee et al checked for robustness by dividing their sample in half and rerunning their regressions on each half separately their table vii they found the coefficient of avwd in the decile 1 regression dropped in the second subperiod by 80 percent and in absolute size fell to barely one standard error from zero similar attenuation in size and significance was noted for all other size groups the virtual disappearance of the relation between the discounts and small firm returns after 1975 might have led other researchers to abandon a common sentiment hypothesis but not lee shleifer and thaler they see

purchasing power parity modeling and testing mean reversion abstract a model of mean reversion of exchange rates to purchasing power parity is developed and tested where exchange rates are assumed to follow a mean reverting elastic random walk toward a stochastic ppp rate the model recognizes the possibility that mean reversion towards ppp may be nonlinear which allows greater flexibility in the adjustment process regression equations consistent with the theoretical model are derived the model is tested using long and short term data for six countries while the results are generally consistent with the findings of previous studies evidence is presented which demonstrates that the mean reversion process is not linear for some countries

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

the empirical relationship between money prices and income revisited this article investigates the relationship between sum divisia and monetary velocity money prices and income using the notion of granger 1969 causality this is achieved by evaluating empirically using dickey fuller unit root tests whether the macroeconomic time series under consideration are trend stationary or difference stationary and by conducting tests using three different ad hoc lag lengths 8 6 and 4 quarters as well as a statistically determined using akaike s 1969a b final prediction error criterion lag structure

exchange rates financial innovation and divisia money the sterling dollar rate 1972 1990 in this paper we examine the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using as a convenient framework the monetary model of the exchange rate we demonstrate inter alia that for the sterling us dollar exchange rate over the period 1972 q1 to 1990 q2 that the use of divisia money makes a significant difference to both the long and short run modelling of the exchange rate

nonlinear adjustment to purchasing power parity in the post bretton woods era abstract this paper models the dynamics of adjustment to long run purchasing power parity ppp over the post bretton woods period in a nonlinear framework consistent with the presence of frictions in international trade we estimate exponential smooth transition autoregressive estar models of deviations from ppp which are obtained using the johansen cointegration method for both consumer price index cpi and wholesale price index wpi based measures and a broad set of us trading partners in several cases we find clear evidence of a mean reverting dynamic process for sizable deviations from ppp with the equilibrium tendency varying nonlinearly with the magnitude of disequilibrium analysis of impulse response functions also supports a nonlinear dynamic structure but convergence to long run ppp in the post bretton woods era is very slow

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

short memory and the ppp hypothesis abstract the purchasing power parity ppp puzzle has been framed in recent years in terms of half lives of real exchange rate shocks that exceed 3 years recent studies have attempted to solve that puzzle by adopting nonlinear stochastic models of real exchange rates the notion of half life is fundamentally linear and therefore is inappropriate for those nonlinear models we provide operational algorithms for estimating more general measures of persistence that are appropriate for nonlinear as well as linear models memory in mean and memory in distribution we study three parametric models autoregression threshold autoregression and exponential smooth threshold autoregression our monte carlo simulations suggest that all three models can produce biased estimates of persistence measures depending on the true data generating process in addition the sample size is found to be too small for reliable nonparametric estimation suggesting that we need to impose parametric structure in the empirical application all three parametric models provided general support for the long term ppp hypothesis suggesting that there is no puzzle and questioning the need for recently introduced nonlinear models

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

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

the long run behavior of the real exchange rate a reconsideration using a new statistical test this paper provides empirical evidence that the real exchange rate is not a random walk if the real exchange rate were a random walk deviations from purchasing power parity could be expected to become unbounded as the forecast horizon became longer recently christopher a sims proposed a test based on bayesian posterior odds ratios that is designed to discriminate between a unit root and a large but stationary autocorrelation coefficient this paper applies the sims test to real exchange rate data for six industrial countries the results reject the random walk hypothesis copyright 1992 by ohio state university press

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

arbitrage behaviour in the exchange rates of taiwan and japan applying the smooth transition vector error correction model with gjr garch and spillover volatility this study utilizes a smooth transition vector error correction model stvecm with glosten jagannathan runkle generalized autoregressive conditional heteroscedasticity gjr garch and spillover volatility to investigate the changes in short run return dynamics when a deviation from the comovement equilibrium between the prices of new taiwan dollar ntd and japan yen jpy exists empirical results demonstrated that both exchange rates have a nonlinear relationship with the comovement equilibrium which was captured by the logistic smooth transition vector error correction model with gjr garch and spillover volatility lstvecm gjr garch sv both exchange rates will quickly reverse to equilibrium when there are large deviations between the two exchange rates implying that information traders obtain profit in two markets and then both exchange rates continue to deviate from equilibrium when small deviations exist from comovement owing to noise trader to expand mispricing moreover small and large devi

purchasing power parity in the long run a test of the dollar pound exchange rate 1890 1978 this paper tests the purchasing power parity ppp hypothesis by analyzing t he long run tendency of the dollar pound exchange rate using data sin ce 1890 two different models are considered 1 a na ive model and 2 a modified monetary model the conditions of propor tionality and symmetry cannot be rejected when using the naive model the final results using the monetary model however indicate that t he existence of permanent deviations from ppp cannot be ruled out copyright 1987 by ohio state university press

the dual characteristics of closed end country funds the role of risk this article explores which of two hypotheses market segmentation or investor sentiment determines the behaviour of closed end country funds cecfs with the inclusion of risk factors the risk factors are proxied volatility as estimated with a bivariate markov switching autoregressive conditional heteroskedasticity bswarch model which simultaneously includes foreign and us markets our findings are as follows on average a positive response is larger than a negative response in terms of absolute value and the market segmentation hypothesis with risk factors gains support in mexico where cecf returns are related to a market with low volatility but not to one with high volatility third the investor sentiment hypothesis which argues that cecf returns are not responsive to foreign markets is weakly supported in brazil the philippines indonesia and to a lesser degree in germany

the choice among monetary aggregates as targets and guides for monetary policy difficulties in meeting its monetary targets led the federal reserve in october 1979 to adopt a new operating procedure to achieve firmer control over monetary aggregates yet the inflationary environment has fostered financial developments that affect the behavior of the traditional monetary aggregates and that raise questions whether different aggregates may not be better this paper compares the various monetary aggregates for their usefulness as guides for monetary policy in the light of recent financial developments the criterion of usefulness is the ability to influence and predict gnp growth this ability is tested in two ways first by the stability of the velocities of the monetary aggregates and second by the advance information they provide of gnp growth it is presumed that the aggregates with the most stable velocities make the best targets for monetray policy and that those containing the most advance information make the best guides for policy the paper has three main sections the first discusses the criteria for using monetary aggregates as targets and guides the second two sections describe and report tests of the various monetary aggregates as targets and guides a summary of findings is presented as a final section

international transmission of stock market movements this paper investigates the international transmission mechanism of stock market movements by estimating a nine market vector autoregression var system using simulated responses of the estimated var system we i locate all the main channels of interactions among national stock markets and ii trace out the dynamic responses of one market to innovations in another generally speaking a substantial amount of multi lateral interaction is detected among national stock markets innovations in the u s are rapidly transmitted to other markets in a clearly recognizable fashion whereas no single foreign market can significantly explain the u s market movements also the dynamic response pattern is found to be generally consistent with the notion of informationally efficient international stock markets

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

microfoundations for a stable demand for money function scientific revolutions seldom occur when the prevailing theories appear to be performing well it is only when the accepted theory fails to offer a satisfactory explanation of events that new and more robust theories are proposed of these new theories the one which can explain the successful performance of the previous theory and also the events which led to its demise becomes the replacement so it is in the history of modern monetary economics the failure of the partial adjustment model in the mid s is well documented in the united kingdom and the united states and the search for a replacement has been the main point on the agenda since that time there are many contending theories some of which are advocated by the other contributors to this controversy but the mark of a truly better theory which can be claimed to supersede the partial adjustment model is one that can explain the success and the breakdown of the previous theory as well as the events subsequently central to the argument of this paper is the importance of individual behaviour in the context of a market for monetary assets only by means of careful investigation of the microeconomic behaviour underpinning monetary economics at the individual and the market level can the stability of the money demand function be restored it is the purpose of this paper to suggest that the buffer stock approach has gone further than other approaches in dealing with the fundamental micro foundations of the demand for money it does not suggest that other approaches have no microfoundations but they tend to concentrate exclusively on specific aspects of the micro structure such as separability and ignore others relating to the behaviour of individual optimisers in a monetary market the buffer stock model has firm micro foundations which can explain the events both before and after the breakdown of the partial adjustment model section i provides an historical background to the debate and section ii gives a brief overview of buffer stock models which shows that unlike other approaches they have been able to reconcile the past success of the partial adjustment model with its present failure the nature of the microfoundations of buffer stock models are the source of the success and are discussed in more detail in section iii the final section evaluates the buffer stock approach in the light of the other alternatives

on the dual characteristics of closed end country funds abstract in a mildly segmented world market closed end country fund cecf returns and premiums or discounts would be determined by factors due mainly to market segmentation and investor sentiment the role of these two types of factors has been debated we reexamine this issue by examining the relative importance of us market returns and foreign market returns in determining cecf returns by employing time series empirical methods we find that cecf returns are more heavily influenced by their local foreign market returns than by us market returns which implies that there remains a substantial diversification benefit from investing in cecfs

the new monetary aggregates comment in a recent paper published in this journal berkman 10 disputed the usefulness of the new chained tornquist theil divisia quantity indexes of the economy s flow of monetary services which just have begun to become available within the federal reserve system l while a few of his comments have some merit his criticisms are largely based upon a faulty understanding of aggregation theory and he thereby fails to see the forest for the trees

fractional monetary dynamics we test for fractional dynamics in us monetary series their various formulations and components and velocity series using the spectral regression method we find evidence of a fractional exponent in the differencing process of the monetary series both simple sum and divisia indices in their components with the exception of demand deposits savings deposits overnight repurchase agreements and term repurchase agreements and the monetary base and money multipliers no evidence of fractional behaviour is found in the velocity series granger s journal of econometrics 25 1980 aggregation hypothesis is evaluated and implications of the presence of fractional monetary dynamics are drawn

the empirical reliability of monetary aggregates as indicators 1983 1987 the empirical reliability of monetary aggregates as indicators 1983 1987 i introduction it is widely believed that monetary aggregates have failed to predict real growth and inflation over 1983 87 this presumed breakdown of previously reliable linkages between money growth and future output and inflation has been variously attributed by the present authors among others to changes in money demand induced by regulatory change and to parameter instability due to structural change this paper observes that these disputations may be moot since the traditional definition of money currency plus demand deposits shows no evidence of structural change and yields nearly as low or lower prrediction root mean square errors for both real gnp growth and inflation over 1983 87q2 than the standard errors of estimate obtained for 1961 82 part of the so called breakdown in the monetary indicators especially in the case of m1 may be explained by the fact that current m1 or m1b is defined much like the old m2 and current m1a is defined much like old m1 thus it is probably not too surprising that use of m1 as a monetary indicator does not yield consistent predictive power over a period of time in which it experienced redefinition if there is a mystery in the 1980 it is not why m1a has done so well but why economists abandoned it for broader m1b currency demand deposits and other checkable deposits or ocds 1 with the nationwide introduction of negotiable order of withdrawal now accounts on january 1 1981 m1a fell by 5 5 percent a 22 1 percent per annum rate in the first quarter while m1b rose at a 3 1 percent per annum rate at the time the federal reserve system expected m1a demand to shift down as households chose to substitute from demand deposits to the newly available in most states ocds accordingly the sharp drop in m1a was expected to be reflected in a once for all upward shift in its velocity with no effect on nominal income or its components 2 however consistent with the shock absorber view of money demand even if the long run demand for m1a was unchanged a sharp decrease in its quantity would induce an equal contemporaneous increase in its velocity 3 contrary to the federal reserve s expectation the shock absorber view would thus predict that the actual value of velocity would temporarily exceed its long run equilibrium level so that nominal income would tend to fall or grow less rapidly as m1a velocity adjusted to the money shock figure 1 shows that compared to a relatively small drop in m1 velocity the contemporaneous velocity of m1a moved sharply in the first quarter of 1984 4 the shock absorber hypothesis suggests that contemporaneous velocity movements would be dominated by money supply shocks and thus attributes the different movements of m1a and m1 velocity to differences in magnitude and signs of the shocks in m1a and m1 what milton friedman 1983 calls leading velocity is a crude way of allowing nominal gnp to adjust to past money shocks panels a and b in figure 2 illustrate leading velocity for lags between money and gnp of one and four quarters respectively the longer the adjustment lag the more leading velocity becomes a smooth trend dominated series for m1a 5 however m1b continues to display a sizeable break from its historical pattern this observation suggests that the recent behavior of the economy may be consistent with that indicated by movements in m1a and that the choice to switch to m1b as the standard definition of the narrow money supply was unfortunate and a major source of recent forecasting failure 6 this paper runs a race among m1a m1 and m2 by comparing out of sample forecasting performance and tests of structural stability 7 an explanation is also offered for the observed departure of m1 velocity from its historical trend based on a large battery of conventional tests the results are remarkably favorable to the continued reliability of m1a as a useful indicator of future economic performance and for its relevance as a tool in monetary policy

cointegration tests of purchasing power parity the case of swiss exchange rates abstract this paper tests purchasing power parity ppp as a long run equilibrium condition by examining the long run relationshiop between exchange rates and wholesale price indices using cointegration tests this paper avoids some of the problems of previous cointegration tests of ppp by using more precise data pretests and by not imposing a priori restrictions upon the cointegrating vector of the nine combinations of swiss exchange rates and price indices examined cointegration is detected in seven cases thus supporting ppp as a long run equilibrium jel f31 c32

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

international investment restrictions and closed end country fund prices some closed end country funds trade at large premiums relative to their net asset values this paper examines whether international investment restrictions raise country fund price net asset value ratios by segmenting international capital markets we test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from may 1981 to january 1989 the results provide evidence that some foreign markets are at least partially segmented from the u s capital market

microfoundations and the demand for money the reader should note that i write this piece in a style that aims to be accessible to that much neglected representative agent the woman on the eurostar train hence unlike the man on the clapham omnibus i assume my intrepid traveller has reasonable knowledge of monetary economics and econometrics but not of the details of the demand for money space constraints force me to indulge in a certain amount of poetic licence but i hope this results in poetic justice there have been many wars fought on this particular battlefield some with almost religious zeal on the theoretical side of the debate we sometimes have the equivalent of religious fundamentalists be they muslims jews christians etc who would dismiss almost any evidence unless it were associated with a strong microtheoretic basis as laid down in the koran talmud or bible the empirical side encompasses agnostics atheists as well as born again econometricians pure theorists inhabit the sunlit uplands while applied economists and policymakers flounder in the muddy plain below occasionally gaining solace from their copy of zen and the art of motorcycle maintenance in general in economics we do not have the luxury of controlled experiments as is the case in the natural sciences what distinguishes good microfoundations from bad and how to weight priors and statistical evidence is subject to much dispute leamer i983 hendry et al i990 as in religion sometimes there is the occasional miracle proclaimed after a suitable interval a new saint may be declared and disciples flock to the new shrine later doubts may arise as to whether a miracle really did occur human behaviour is difficult to explain let alone predict so the search for the equivalent of the holy grail ark of the covenant etc is bound to be arduous in scholarly journals we generally read of the success of the demand for money like diplomats who are sent abroad to lie for the good of their country publication may require applied economists to be somewhat economical with the actualite lovell i983 leamer i983 in this article i want to be as honest as possible about our success and failures in this area the prior information an armchair economist would consider when thinking about the demand for money over the past 40 years in western industrialised countries which have experienced moderate inflation might

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

modelling the monetary multiplier and the controllability of the divisia monetary quantity aggregates fama eugene and richard roll some properties of symmetric stable distributions journal of the american statistical association 63 sept 1968 817 838 parameter estimates for symmetric stable distributions journal of the american statistical association 66 june 1971 331 338 friedman daniel and stoddard vandersteel short run fluctuations in foreign exchange rates evidence from the data 1973 79 journal of international economics 13 aug 1982 171 186 gnedenko b v and a n kolmogorov limit distributions for sums of independent random variables reading ma addison wesley 1968 international monetary fund international monetary fund survev various issues judge george g william e griffiths r carter hill and tsoung chao lee the theory and practice of econometrics new york john wiley and sons 1980 kendall maurice g and alan stuart the advanced theory of statistics 2nd edition vol i london charles griffin and co 1963 kindleberger c p the benefits of international money journal of international economics 2 sept 1972 425 442 mandelbrot benoit the variation of certain speculative prices journal of business 36 oct 1963 394 419 mcfarland james w r richardson pettit and sam k sung the distribution of foreign exchange price changes trading day effects and risk measurement journal of finance 37 june 1982 693 715 moulton westerfield janice an estimation of foreign exchange risk under fixed and floating rate regimes journal of international economics 7 june 1977 181 200 rogalski richard j and joseph d vinso empirical properties of foreign exchange rates journal of international business studies 9 fall 1978 69 79 roll richard the behavior of interest rates new york basic books inc 1970 schmidt peter econometrics new york marcell dekker inc 1976

a dual approach to measuring the nearness of near monies increasing returns to scale rts is frequently po stulated as affecting productivity in surface coal mining however it is not cl ear whether increased capital intensity or increased output is the relevant phen omenon a ray homothetic production function that incorporates the capital labor mix and fixed site geology into the scale elasticity is presented and estimated with a micro mine level dataset the results indicate that higher capital int ensity contributes to higher rts for some types of capital equipment but not al l on the average increasing rts was found with few mines approaching optimal scale copyright 1987 by mit press

measures of money and the monetary model of the canadian us dollar exchange rate abstract although the measurement of money is central to an empirical monetary modelof exchange rates existing empirical studies rely on official aggregates as a measure of money this paper uses superlative monetary aggregates in the context of a monetary model to explain the exchange rate between canada and the united states the parameters of the model are estimated using two stage least squares with quarterly data for the period 1972 1985 the paper applies davidson mackinnon tests to establish whether superlative and official monetary aggregates areobservationally equivalent in a monetary model of the canadian u s dollar exchange rate

competitive interest payments on bank deposits and the long run demand for money reply this paper tests two assumptions made in previous demand for money studies the first assumption concerns the role assigned to the interest rate in the demand for money function common practice identifies the rate of interest with the opportunity cost of holding money in section i this formulation is shown to blur an important distinction between the price of money and the price of money substitutes and to implicitly assume that the relevant price variable is the difference between these two distinct prices a second assumption is that the current ban on interest payments on demand deposits is fully effective in section ii i operationally define these price variables and estimate perfectly competitive interest payments on commercial bank deposits this is done by crudely measuring commercial bank marginal costs and assuming that all excess profit is passed on to depositors in indirect ways section iii presents estimates of a more complete longrun demand for money relationship which explicitly includes an own price and a cross price as separate influences and assumes that the prohibition of the payment of interest on deposits is totally ineffective although no firm conclusion is reached concerning the proper functional specification of the demand function the results significantly improve upon previous demand for money estimates which assumed that the interest payment prohibition is totally effective in section iv the results are summarized and implications of the analysis for monetary theory are presented my competitive demand for money formulation leads to a reinterpretation of the existing evidence on what is generally referred to as the interest elasticity of demand for money this estimate is shown to be significantly biased downward it also implies that the demand for and supply of money are more interdependent than is usually assumed

the translog utility function and the demand for money in the united states in recent years considerable effort has been directed towards establishing the nature of the relationship between money and nearmonies but with mixed success the approaches vary from multi interest rate single equation studies to the careful simultaneous equations studies summarized and amended by feige and pearce 1977 and extended recently by donovan 1978 offenbacher 1979 and barnett 1980 the empirical results also vary with numerous studies favoring only one interest rate see the surveys in fisher 1978 1983 some claiming that a variety of entities are close substitutes for money e g chetty 1969 and others showing that weak substitution or even complementarity may be the result of the measurement of elasticities of substitution between money and a number of other assets e g feige and pearce 1977 offenbacher 1979 and barnett 1980 the debate seems to have overshadowed a second and equally intriguing issue which centers on the establishment of an acceptable definition of money the basic idea of this study is to take an approach that takes account of the different degrees of moneyness possessed by the various monetary assets this paper produces quantitative estimates of the degree of substitutability of other monetary assets for money in the context of a flexible functional form model with a

currency substitution and economic monetary aggregates abstract existing analyses of currency substitution rely on the assumption that domestic monetary assets are perfect substitutes for each other the present paper examines empirically the currency substitution hypothesis using divisia monetary aggregates which relax the perfect substitutability assumption used in earlier work the empirical results support the hypothesis of currency substitution for the united states

yes discounts on closed end funds are a sentiment index chen kan and miller 1993 best pronounced chek m provide a detailed critique of our earlier paper lee shleifer and tlialer 1991 ckm accuse lee et al of trying to kill two birds the closed end fund puzzle and the small firm effect with one stone and missing both their approach is to throw at lee et al every stone they can presumably hoping that one will hit this reply shows that none does ckm focus on four empirical issues 1 the role of utilities in the lee et al sample of small institutional ownership firms 2 the robustness of the relationship between fund discounts and the returns on high versus low ownership firms their table i 3 the appropriate way to specify the regression in table iv of lee et al their table ii and 4 the regressions using one closed end fund tricontinental their table iii we address these criticisms in turn ckm begin with the finding of lee et al that even during the second half of their sample when the relationship between closed end fund discounts and small firm returns weakens there is a significant relationship between return on stocks with low institutional ownership and changes in discounts ckm describe as a concession the finding of lee et al that most of these low ownership stocks are public utilities however this finding makes even more vivid the main claim of lee et al that stocks with similar ownership structures but very different fundamentals move together in the market after all what do public utilities have in common with closed end funds other than a similar ownership structure the one plausible common factor that might similarly affect closed end fund discounts and prices of public utility stocks is small investor sentiment ckm also say that they tested a portfolio of nyse public utility firms with more than 10 percent institutional ownership and that their results were essentially the same as for the sample with less than 10 percent ownership they do not report these results but have kindly provided us with their data to investigate their claim we divided all utilities into three groups of equal numbers of firms with high low and medium institutional ownership we then ran regressions like those in table viii of lee et al for each group the results in table i of this paper show that low institutional

measuring the average marginal tax rate from the individual income tax the economic effects of taxation depend on the configuration of marginal tax rates we consider here the appropriate measure of a marginal tax rate for the federal individual income tax which has a graduated rate structure and allows for numerous legal and illegal deductions from total income our conclusion is that the explicit marginal rate from the tax schedule is the right concept for many purposes hence we construct approximately weighted averages of these marginal tax rates for 1916 80 when weighted by adjusted gross income the arithmetic average of marginal tax rates is 5 in 1920 2 in 1930 6 in 1940 20 in 1950 23 in 1960 24 in 1970 and 30 in 1980 we also discuss the dispersion of marginal tax rates as well as the behavior of average tax rates and deductions from taxable income one noteworthy result concerns the fraction of adjusted gross income that accrues to families that face a marginal tax rate of at least 35 this fraction quadruples from 1964 to 1980 this abstract was borrowed from another version of this item

international diversification through closed end country funds abstract the primary objectives of this paper are to assess the potential of closed end country funds cecfs as vehicles for achieving international diversification at home and to examine the effect of the closed end status of these funds on their investment characteristics the main findings are first cecfs exhibit significant exposure to the u s market factor and act more like u s securities than do their underlying assets second despite these characteristics cecfs retain significant exposure to their local home market factors and provide u s investors with substantial diversification benefits emerging market funds such as brazil mexico and taiwan receive large weights in optimal international portfolios comprised of cecfs implying that these funds can play a unique role in spanning the opportunity set for u s investors third performance evaluations indicate that our sample cecfs generally did not offer significant overseas alphas fourth fund value and net asset value are found to be co integrated for the majority of cecfs from north america and europe but not for those representing the asian emerging markets

relative prices in the uk personal sector money demand function nonparametric demand analysis is used in order to establish admissible monetary aggregates and also to establish a potential role for relative prices in the money demand function a conventional money demand specification is then contrasted with a money demand function which contains the relative prices of durables nondurables and services as additional regressors evidence from long run cointegration analysis short run error correction models and nonnested testing all confirm a role for relative prices in the u k personal sector s money demand function copyright 1996 by royal economic society

a new empirically weighted monetary aggregate for the united states i introduction this article uses an approach to long run econometric modeling proposed by pesaran et al 2001 hereafter pss to develop an empirically weighted broad monetary aggregate for the united states and to demonstrate the advantages of this type of aggregate from a monetary policy perspective in particular we examine the ability of this type of approach to deal with periods of significant financial innovation and money demand instability a key requirement for monetary aggregates to provide a useful role in guiding monetary policy is that they should be stably related to the objectives of policy such as inflation or nominal income growth in this context the united states has exhibited periodic evidence of significant money demand instability most notably these have been goldfeld s 1976 case of the missing m1 in 1973 74 and the missing m2 episode of the early 1990s feldstein and stock 1996 in both cases the aggregate in question experienced a significant velocity increase and as a consequence previously established and apparently stable money demand relationships began to seriously overpredict the growth in these aggregates the missing m1 episode in 1973 74 together with subsequent evidence that m2 was more predictable than m1 led many economists to use m2 as an indicator of nominal activity hence during the 1980s m2 became the primary intermediate target of monetary policy furthermore the primacy of m2 appeared to be well supported by the available empirical evidence feldstein and stock 1994 for example established that the rate of change of m2 was a statistically significant predictor of the rate of change of nominal gross domestic product gdp over the period 1959 92 furthermore m2 remained statistically significant when short term interest rates were added to the relationship subsequent research such as miyao 1996 and estrella and mishkin 1997 however cast doubt on the robustness of this result carlson et al 2000 p 34 for example summarize the current situation by arguing that the promising empirical conclusions of feldstein and stock 1994 that established predictive content for m2 in a vector error correction setting do not seem to find support in data that extend through the mid 1990s the key factor behind the breakdown in the m2 relation appears to have been the substitution away from time deposits and into mutual funds particularly stock and bond mutual funds in the low interest rate environment of the early 1990s although the definition of m2 has been expanded by the federal reserve in the past to include money market mutual funds mmmfs and money market deposit accounts mmdas for example a number of analysts duca 1995 darin and hetzel 1994 orphanides et al 1994 have advocated that m2 should be expanded further to include these stock and bond mutual funds m2 significantly these studies typically use the simple sum aggregation approach in which all component assets are given equal and constant weights over time this approach does not seem consistent however with the accumulating evidence of a significant shift in wealth holders preferences sometime in the early 1990s carlson et al 2000 for example add to the empirical evidence that had accumulated during the 1990s by suggesting that the instability was associated with a permanent upward shift in m2 velocity between 1990 and 1994 furthermore they argue that our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds p 381 clearly simple sum aggregation is not able to take account of these changes in preferences more significantly however simple sum aggregation cannot take account of any changes in the relationship between component assets and nominal income over time although carlson et al 2000 do manage to reestablish a stable money demand relationship for the mzm money at zero maturity and m2m m2 minus small time deposits aggregates through the 1990s this is only possible by specifically accounting for the financial innovation that occurred in the early 1990s