money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

identifying domestic and imported core inflation this paper estimates core inflation in norway identified as that component of inflation that has no long run effect on gdp the model distinguishes explicitly between domestic and imported core inflation the results show that domestic core inflation is the main component of cpi inflation however cpi inflation misrepresents core inflation during some periods the differences are well explained by the other shocks identified in the model in particular the oil price shocks of the 1970s when norway imported inflation and the negative non core supply shocks of the late 1980s which pushed inflation up temporarily relative to core inflation

inflation taxation and welfare with externalities and leisure this paper examines how inflation taxation affects resource allocation and welfare in a neoclassical growth model with leisure a production externality and money in the utility function switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income but increases consumption labor capital and output the net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution while it is always negative without the externality it is likely to be positive with a strong externality and elastic intertemporal substitution

money capital and real liquidity effects with habit formation the money in utility model is reconsidered in the presence of endogenous labour and habits with standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money the model exhibits superneutrality in the steady state nevertheless habits give rise to real liquidity effects in the short run after an increase in the nominal interest rate employment falls resulting in a fall in capital accumulation and in the short and long term real interest rates the adjustment of the capital stock is non monotonic employment and the short and long term real interest rates may also adjust non monotonically jel classification e22 e52 e58 monnaie capital et effets reels de liquidite quand il y a formation d habitudes on re examine le role de la monnaie dans un modele d utilite quand travail et formation d habitudes sont endogenes dans le cadre des postulats usuels a propos des preferences et d une regle de politique qui definit le taux d interet en ajustant le rythme de croissance de la monnaie le modele fait preuve de super neutralite en regime permanent neanmoins les habitudes entrainent des effets reels de liquiditea court terme apres un accroissement dans le taux d interet nominal l emploi chute ce qui entraine un ralentissement dans l accumulation du capital et une chute des taux d interet reels a court et a long terme l ajustement dans le stock de capital n est pas monotone l emploi et les taux d interet reels a court et a long terme peuvent aussi ne pas s ajuster de facon monotone

the distribution of money and prices in search equilibrium this article considers a search theoretic model of monetary exchange agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings determining endogenously the distributions of money and of prices i show that money is neutral if changes in the money supply are accomplished via proportional transfers however within the class of lump sum transfers an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low but when inflation is high enough the opposite effects occur

borrowing constraints and complex dynamics in an olg framework abstract in this paper we model an olg economy a la kiyotaki and moore whose novel feature is the role of money as a store of value and of bequest as a source of funds to be invested in landholding the dynamics generated by the model are generally characterized by irregular cyclical trajectories and under special configuration of the parameters a strange attractor appears in this setting an expansionary monetary policy may have a stabilizing role due to the interaction between money holding and the accumulation of borrowers net worth

inflation financial markets and long run real activity abstract empirical evidence suggests that real activity the volume of bank lending activity and the volume of trading in equity markets are strongly positively correlated at the same time inflation and financial market activity are strongly negatively correlated in the long run as are inflation and the real rate of return on equity inflation and real activity are also negatively correlated in the long run particularly for economies with relatively high rates of inflation we present a monetary growth model in which banks and secondary capital markets play a crucial allocative function we show that at least under certain configurations of parameters the predictions of the model are consistent with these and several other observations about inflation finance and long run real activity

learning to carry the cat by the tail firm experience disasters and multinational subsidiary entry and expansion we investigate whether firm experience with discontinuous risks particularly high impact disasters that are episodic and difficult to anticipate moderates the relationship between disasters foreign entry and expansion decisions using a panel data set with 57 500 observations from 106 large european multinational corporations and their subsidiaries operating across 109 countries from 2001 to 2007 we find that although discontinuous risk was negatively related to firm entry and expansion firms that had experience with high impact disasters were more likely to expand in countries experiencing disasters

liquidity risk and banks asset composition implications for monetary policy monetary growth models in which the government is a net debtor demonstrate that inflation adversely affects capital formation through the crowding out effect interestingly the results are at odds with empirical evidence in particular recent studies point to an asymmetric relationship between inflation and the real economy across countries specifically inflation and output are negatively correlated in poor countries in contrast inflation is associated with higher levels of economic activity in advanced economies i present a monetary growth model with public debt where the exposure to risk is inversely related to the level of income in this setting i demonstrate that the effects of monetary policy depend on the level of capital of the economy in poor countries banks portfolios consist primarily of government liabilities therefore a higher rate of money creation inhibits capital formation in these economies in contrast banks devote more resources toward productive uses in advanced countries consequently monetary policy generates a tobin effect

imperfect interbank markets and the lender of last resort abstract this paper presents a monetary model in which interbank markets have limited commitment to contracts limited commitment reduces the proportion of assets that can be used as collateral and thus banks with high liquidity demands face borrowing constraints in interbank markets these constraints can be relieved by the central bank a lender of last resort through the provision of liquidity loans i show that the constrained efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited otherwise a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency

the long run relationship between inflation and output in postwar economies abstract we investigate the relationship between inflation and real output in a large sample of postwar economies our methodology is to use a structural vector autoregression to estimate the response of the level of real output to permanent inflation shocks separately for each country we find that a permanent shock to inflation is not associated with a permanent movement in the level of real output for most countries in our sample the main exceptions are certain low inflation countries in which permanent inflation shocks permanently increase the level of output we also find that permanent inflation shocks do not permanently influence real output growth rates in our sample

when do banks take equity in debt restructurings this article examines the conditions under which bank lenders make concessions by taking equity in financially distressed firms i show that the role banks play in debt restructurings depends on the financial condition of the firm the existence of public debt in the firm s capital structure and the ability of public debt to be restructured empirically i find that for firms with public debt outstanding banks never make concessions unless public debtholders also restructure their claims when banks do take equity on average they obtain a substantial proportion of the firm s stock and they maintain their position for over two years article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a diagrammatic exposition of weak complementarity and the willig condition this article provides a graphical explanation for one of the most important restrictions to utility functions used in revealed preference approaches for measuring the demand for public goods and product quality weak complementarity it also describes how the willig condition is an important element along with weak complementarity in measuring hicksian consumer surplus for changes in public goods or quality using marshallian demand curves

foreign activities of u s banks since 1997 the roles of regulations and market conditions in crises and normal times abstract using a unique newly constructed dataset on u s banks foreign activities since 1997 this paper examines how bank market and regulatory conditions in the u s and host countries affect u s banks choices of which foreign markets to enter and how much claims and liabilities to take on there using a two stage structural estimation framework the determinants of foreign market entry exit cross border claims and foreign affiliate claims and liabilities choices are examined in 107 host countries around the world it is shown that 1 the health of the balance sheet is the primary driver of foreign market entry exit choices especially so during the subprime crisis while host market and regulatory conditions play important roles in the choice of claims liabilities volumes 2 banks choose their foreign activities during banking and market crises differently than they do in normal times and 3 in addition to bank size previous experience with managing a global lending network significantly increases the intensity of banks foreign involvement structural estimates of the costs of foreign market entry exit and host market regulatory stringency are also derived

inflation and asset returns sustained inflation is detrimental to long run growth and the financial system a recent theoretical literature suggests that high inflation implies low real returns on assets these low returns exacerbate informational frictions interfering with the functioning of financial markets and the allocation of investment we investigate the plausibility of an inverse relationship between inflation and real returns inflation and nominal equity returns are negatively correlated or uncorrelated for all low to moderate inflation economies examined safe nominal rates of return and inflation are only weakly positively correlated however for high inflation economies inflation and nominal returns are strongly positively correlated

the decision to establish a foreign bank branch or subsidiary an application of binary classification procedures this paper has two purposes first we model a key decision for inter national banks using data on the foreign direct investment fdi behavior of foreign banks in japan and california second we examine the utility of linear discriminant analysis and maximum likelihood logit analysis as statistical techniques for relating a qualitative dependent variable to a vector of inde pendent variables we apply these techniques to the decision by parent banks as to whether or not to have a subsidiary branch in california japan we treat the deci sion as a binary choice based on a consideration of various relevant factors the population for each of the countries consists of those foreign to the host country banks that already have a presence in the country the research ques tion then becomes given that a foreign bank is in the country does the extent of the parent bank s experience internationally and in the host country affect the probability that it will deepen its presence the choice of statis tical tools by which to examine this question gives rise to our methodological concerns

banking crises and liquidity in a monetary economy abstract this study investigates banks liquidity provision using the lagos and wright model of monetary exchange with aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors needs for consumption smoothing we also show that banking crises can be eliminated by a rate of return equalizing policy under perfect risk sharing but the first best outcome can be only achieved with the friedman rule these results cannot be obtained with other monetary models e g overlapping generations models we also derive a rich array of non trivial effects of inflation on equilibrium deposits the probability of banking crises and banks portfolios

low inflation targeting and long run unemployment the model of akerlof dickens and perry 2000 adp predicts that low inflation may cause unemployment to persist at high levels when applied to u s data their results strongly rejected the conventional nairu model we apply the adp model to swedish data the fact that our swedish data also reject the nairu model has a number of interesting implications for the swedish economy and potentially for other european countries as well the results indicate that raising the swedish inflation target from 2 to 4 percent would bring longrun unemployment down by several percentage points the possibility of adp type long run phillips curves also across the euro countries may raise some concern about the emu project while detailed studies on other countries are needed there is nothing to suggest that these non vertical phillips curves would not differ considerably across the euro countries any single inflation level targeted by the ecb would then generate excess unemployment in individual member states

inflation output and welfare this paper studies the effects of anticipated inflation on aggregate output and welfare within a search theoretic framework we allow money holders to choose the intensities with which they search for trading partners so inflation affects the frequency of trade as well as the quantity of output produced in each trade we consider the standard pricing mechanism for search models i e ex post bargaining as well as a notion of competitive pricing if prices are bargained over the equilibrium is generically inefficient and an increase in inflation reduces buyers search intensities output and welfare if prices are posted and buyers can direct their search search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates the friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates

inflation tax in the lab a theoretical and experimental study of competitive search equilibrium with inflation in this paper we measure the effect of the inflation tax on economic activity and welfare within a controlled setting to do so we develop a model of price posting and monetary exchange with inflation and finite populations the model which provides a game theoretic foundation to rocheteau and wright 2005 s competitive search monetary equilibrium is used to derive theoretical propositions regarding the effects of inflation in this environment which we test with a laboratory experiment that closely implements the theoretical framework we find that the inflation tax is harmful with cash holdings production and welfare all falling as inflation rises and that its effect is relatively larger at low inflation rates than at higher rates for instance for inflation rates between 0 and 5 welfare in the two markets we consider 2 seller 2 buyer and 3 2 falls by roughly 1 percent for each percentage point rise in inflation compared with 0 4 percent over the range from 5 to 30 our findings lead us to conclude that the impact of the inflation tax should not be underestimated even under low inflation

hyperbolic discounting and the phillips curve using a standard dynamic general equilibrium model we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long run effects on real variables

how banks go abroad branches or subsidiaries the authors examine the factors that influence banks type of organizational form when operating in foreign markets using an original database of the branches and subsidiaries in latin america and eastern europe of the top 100 international banks they find that regulation taxation the degree of desired penetration in the local market and host country economic and political risks matter banks are more likely to operate as branches in countries that have higher corporate taxes and when they face lower regulatory restrictions on bank entry in general and on foreign branches in particular subsidiaries are the preferred organizational form by banks that seek to penetrate the local market establishing large and mostly retail operations finally there is evidence that economic and political risks have opposite effects on the type of organizational form suggesting that legal differences in the degree of parent bank responsibility vis a vis branches and subsidiaries under different risk scenarios play an important role in the kind of operations international banks maintain overseas

protectionism and international banking sectorial efficiency competitive structure and national policy abstract this paper deals with barriers to trade in services more specifically the paper deals with competition and its absence in the provision of international intermediation services by banks section 2 of the paper examines the substitutability of international trade and fdi foreign direct investment in the services sector as a basis for international competition it also considers the overlap between commercial policy measures and regulations governing the entry and operations of foreign affiliates section 3 describes the types of restrictions imposed on foreign banks and evaluates their effects existing practices in some countries are outlined in the fourth section the countries are the u s the u k switzerland australia brazil and taiwan section 5 evaluates competitive conditions in offshore banking centers and compares them with conditions in onshore markets the last section evaluates the costs and the benefits of an open free trade banking system such a system will tend to improve world welfare as well as the welfare of those countries who have a comparative advantage in international banking the results are not clear with regard to the countries who have a comparative disadvantage in banking

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

examining the robustness of the inflation and growth relationship author affiliation department of economics 208 laws hall miami university oxford oh 45056 usa hinelidr muohio edu acknowledgment i would like to thank eric fisher paul evans pok sang lam george davis and two referees for helpful comments 1 introductionwhether or not inflation affects long run growth has been one of the most widely studied questions since the resurgence of interest in economic growth if higher inflation does reduce long run growth it can be addressed by known policies that may be easier to implement than promoting investment in human capital or the development of new technologies despite this research the reliability of estimates is questionable since levine and renelt 1992 have shown the results are sensitive to changes in model specification 1 however levine and renelt s study was limited to a linear relationship in cross sectional data averaged over 30 years and subsequent work has shown that inflation s effects are more pronounced in higher frequency data and also non linear this paper uses bayesian model averaging bma to examine whether inflation s effect on long run economic growth is robust to alternative model specifications fernandez ley and steel 2001 and sala i martin doppelhofer and miller 2004 use bayesian model averaging to overcome some shortcomings of extreme bounds tests to re examine the robustness of determinants of growth but inflation is not considered unlike these previous studies this paper applies these methods to panel data and also allows for non linear effects 2 while inflation is not robust in the cross sectional data it is one of the more robust variables when using panel data even allowing for high inflation to drive the results we find that inflation is not robust when using cross sectional data suggesting that the original results of levine and renelt were not due to the simple linear relationship assumed although non linear effects are important in the panel data it is the higher frequency of the data that makes the difference with regard to robustness one of the main criticisms of growth regressions is that they are reduced form regressions revealing correlation yet many variables inflation in particular are endogenous variables using bayesian model averaging but instrumenting for inflation inflation is not robust even allowing for panel data and non linearities the paper proceeds as follows section 2 provides a brief literature review section 3 provides an overview of the bayesian model averaging methodology and section 4 proceeds to the application on inflation and growth section 5 concludes 2 literature reviewover the last 20 years many economists have examined the relationship between inflation and economic growth the typical approach has been to run linear regressions with the growth rate of per capita gdp as the dependent variable and numerous factors including inflation as independent variables kormendi and mcguire 1985 fischer 1993 and barro 1996 1997 using similar methods report statistically significant negative coefficients on inflation at least when inflation is above some moderate level such as 10 this apparent non linearity has been addressed in detail by some authors fischer 1993 uses a spline regression and finds a negative relationship at all levels of inflation barro 1996 found inflation to be harmful to growth but showed the results were driven by the observations where inflation exceeded 20 for inflation below 20 the point estimate was negative but statistically insignificant sarel 1996 tests for a structural break and finds that inflation is negatively related to growth after 8 the point estimate for inflation at rates less than 8 is positive but statistically insignificant khan and senhadji 2001 use recently developed methods on determining threshold effects and find a threshold at 11 for a large sample of countries

government policies market imperfections and foreign direct investment the internalization eclectic theory of foreign direct investment includes the important insight that government policies create market imperfections which make foreign direct investment an economically rational strategic alternative for firms this paper reexamines the effects of government policies on market imperfections and foreign direct investment fdi it broadens and refines the analysis of the impact of government policies by developing the following arguments 1 there is a wide range of government policies that affect firms fdi decisions via their effects on market imperfections 2 there are numerous dimensions of variability in government policies that need to be identified in order to understand fully the effects of government policies on market imperfections and hence fdi flows 3 some of the effects of government policies on market imperfections and fdi are the opposite of those previously noted in the fdi literature 4 the effects of government policies vary across the several individual components of fdi flows the paper thus examines the following variables and relationships more extensively and precisely than has the previous literature government policy variables as causal factors affecting fdi market imperfection variables as intervening factors in the causal connections between government policies and fdi and the multiple indicators of the various dimensions of fdi as dependent variables

the entry and the activity level of foreign banks in italy an analysis of the determinants abstract although the theory of multinational banking has pointed out the importance of local profit opportunities the empirical evidence is still poor and deserves further investigation to this end we analyse entry decisions and activity levels of foreign banks operating in italy between 1983 and 1998 we consider 22 oecd countries 10 of which had at least one bank branch or subsidiary in italy entries and activity levels were related to the degree of economic integration as well as to the financial market features of the home country relative to italy unlike other studies besides economic integration the relative profitability of the banking activity proves to be a significant variable in that it highlights the importance of local market conditions in the past decade increased competition in the italian banking sector has reduced these profit opportunities driving foreign banks towards more innovative sectors of financial intermediation

the optimal inflation rate under schumpeterian growth abstract to analyze the relationship between inflation and economic growth we construct an endogenous growth model with creative destruction incorporating sticky prices due to menu costs price changes reduce the reward for innovation and thus lower the frequency of creative destruction central banks can maximize the growth rate by setting their inflation target at the negative of a fundamental growth rate while the optimal inflation rate may be greater than the growth maximizing inflation rate our calibrated model shows that the optimal inflation rate is close to the growth maximizing inflation rate and that a deviation from the optimal level has sizable impacts

can higher inflation reduce real interest rates in the long run this paper describes a simple general equilibrium model in which a permanent easing of monetary policy engineered via open market purchases may produce a permanent decrease in the real interest rate and a permanent increase in the inflation rate under somewhat stronger assumptions the nominal interest rate may also decline est ce qu une inflation plus forte peut reduire les taux d interet reels a long terme ce m6moire pr6sente un modele d 6quilibre g6n6ral simple dans lequel un adoucissement per manent de la politique mon6taire engendr6 par des op6rations d open market peut pro duire une chute permanente du taux d int6ret r6el et un accroissement permanent du taux d inflation dans le cadre de postulats plus contraignants le taux d interet nominal peut meme chuter

international banking a survey two distinct sets of issues are involved in the analysis of international banking one set the industrial organization issues centers on the patterns of expansion of foreign branches and subsidiaries of banks headquartered in the united states great britain japan and a few other industrial countries and on the nature of the advantage that these branches and subsidiaries have in relation to their host country competitors the second set the international finance issues involves the role of banks in cross border and cross currency financial flows both from their head offices and from their foreign branches and subsidiaries despite the attention to international banking there are few uniquely international institutions rather international banks are a subset of domestic banks with significant numbers of foreign branches and subsidiaries moreover there are few uniquely international banking activities although foreign exchange trading may seem to be one in many countries most or all foreign exchange trading involves domestic banks with few if any foreign branches the growth of foreign branches and subsidiaries of major banks occurred in two waves the first occurred in the decades before world war i when the war started

the credit channel transmission mechanism and the nonlinear growth and welfare effects of inflation and taxes with the credit channel effect driven by the central bank s open market operations this paper s model easily gives rise to the nonlinear inflation growth nexus which is evidenced by a number of cross country empirical studies the threshold level of the inflation rate is found to be lower when tax rates are higher the presence of the credit channel effect also provides the rationale for setting positive and smaller than 1 tax rates on consumption labor income and capital income the optimal tax rates rise as the inflation target declines under a fiscal policy rule where labor and capital income taxes move proportionally to each other the optimal capital income tax rate could be higher than the optimal labor income tax rate under a sufficiently large central bank balance sheet the credit channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing this provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets jel e58 e62 o42

optimal monetary and fiscal policies in a search theoretic model of monetary exchange abstract search models of monetary exchange commonly assume that terms of trade in anonymous markets are determined via nash bargaining which generally causes monetary equilibrium to be inefficient bargaining frictions add to the classical intertemporal distortion present in most monetary models whereby agents work today to obtain cash that can be used only in future transactions in this paper we study the properties of optimal fiscal and monetary policy within the framework of lagos and wright 2005 we show that fiscal policy can be implemented to alleviate underproduction while money is still essential if lump sum monetary transfers are available a production subsidy can restore the efficiency of monetary equilibria the friedman rule belongs to the optimal policy set but higher inflation rates are also possible when lump sum monetary transfers are not available equilibrium allocations are generally not first best nevertheless fiscal policy still results in substantial welfare gains money can be extracted from circulation via a sales tax on decentralized market activities and the friedman rule is only optimal if the buyer has relatively low bargaining power

credit market frictions and their direct effects on u s manufacturing fluctuations abstract in this paper we explore how informational frictions in credit markets directly affect u s manufacturing fluctuations within the context of a dynamic industry model we propose a strategy for identifying intermediation costs related to informational asymmetries between lenders and borrowers the analysis suggests that these costs have been steadily falling over the post war period we also present evidence that changes in the cost of intermediation should directly affect output as opposed to just propagating the effects of other shocks in particular we find that shocks to the cost of intermediation account for a larger share of manufacturing output fluctuations at long horizons than at short horizons

liquidity risk and financial competition implications for asset prices and monetary policy abstract this paper studies the implications of banking competition for capital markets and monetary policy in particular i develop a two sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential banks insure depositors against such risk and invest in the economy s assets in this setting i compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector unlike previous work banks can have market power in both deposits and capital markets compared to a perfectly competitive financial sector i demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation assets prices and the degree of risk sharing furthermore multiple steady states can emerge and the economy becomes subject to poverty traps more importantly market power in financial markets may overturn the tobin effect present under a perfectly competitive financial sector this necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation

universal banking and firm risk taking abstract this paper analyzes the welfare implications of banks taking equity stakes in firms under conditions of imperfect information and moral hazard two cases of bank control over investment decisions are analyzed in the first the bank does not control the investment decisions of the firm here the investment efficiency is higher and bank risk is lower for an optimal positive level of bank equity holdings however in the case when the bank has veto power over investment proposals by the firm there is a trade off between increased investment efficiency and increased bank risk

inflation and productive activity in a multiple matching model of money abstract this paper investigates the relationship between money growth inflation and productive activity in a dynamic general equilibrium multiple matching framework where trade frictions are manifested by limited consumption variety productive activity and matching in the goods market are endogenized by a time allocation decision of work and search effort we find that a high degree of complementarity between participation in the labor and goods markets creates a channel by which inflation can positively influence production and output this feature arises when household preferences for consumption variety is sufficiently large and it can also lead to the multiplicity of monetary equilibria

monetary policy arithmetic reconciling theory with evidence empirical evidence indicates that in countries with low inflation rates a permanent decrease in inflation rate either has no impact on capital stock and output superneutrality or causes them to fall moderately existing budget arithmetic models of monetary policy cannot deliver superneutrality in this paper we conduct a budget arithmetic analysis of monetary policy using a money demand specification money in the utility function that is new to this literature we find that one simple assumption about utility from money delivers superneutrality while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence jel classification e60 e13

the long run phillips curve a structural var investigation both cointegration methods and non cointegrated structural vars identified based on either long run restrictions or a combination of long run and sign restrictions are used in order to explore the long run trade off between inflation and the unemployment rate in the post wwii u s u k euro area canada and australia overall neither approach produces clear evidence of a non vertical trade off the extent of uncertainty surrounding the estimates is however substantial thus implying that a researcher holding alternative priors about what a reasonable slope of the long run trade off might be will likely not see her views falsified

international lending patterns of u s commercial banks the international lending behavior of the u s commercial banks depends upon economic links between countries much of the difference between the international loan portfolios of u s banks and those of the non u s banks may be explained by the patterns of trade flows and investments by nonfinancial corporations these trade flows and investment patterns explain most of the variations in the bank lending patterns for 70 80 percent of the countries the analysis points to an increasing influence of economic ties on the lending process over time

economic growth under money illusion abstract empirical and experimental evidence documents that money illusion is persistent and widespread this paper incorporates money illusion into a stochastic continuous time monetary model of endogenous growth we model an agent s money illusion behavior by assuming that he maximizes nonstandard utility derived from both nominal and real quantities money illusion affects an agent s perception of the growth and riskiness of real wealth and distorts his consumption savings decisions it influences long run growth via this channel we show that the welfare cost of money illusion is negligible whereas its impact on long run growth is noticeable even if the degree of money illusion is low

introduction to monetary and financial arrangements abstract recent years have seen major innovations in the nature of monetary banking and payment arrangements these innovations which are certain to continue into the foreseeable future will have huge implications for the conduct of monetary policy for the regulation of banking and for the design of payment systems indeed central banks now need to think about the conduct of monetary policy in environments where the evolution of banking and payments systems already has implied and will continue to imply a declining demand for their liabilities central banks also need to think about the conduct of monetary policy in increasingly global markets and in a context where the number of currencies is shrinking as different nations abandon their own monies in favor of the dollar or the euro and at least in the united states all legal impediments to the issue of currency substitutes by private agents have been repealed this has occurred at the same time that developments in communications and record keeping technologies have made it feasible for agents to issue various forms of electronic currency substitutes what would the widespread issue of private possibly electronic currency substitutes imply for price level and interest rate determination or for the conduct of monetary policy in general in addition the increasing frequency and severity of financial crises around the globe and the increasing exposure of economies like the u s to external events raise issues about the appropriate roles for national central banks and the appropriate roles for international agencies like the imf and recent changes in u s banking legislation will force a rethinking of how the supervision and regulation of the banking system should be conducted and of how far the safety net created by deposit insurance provision and lender of last resort services should be extended these issues will become particularly vexing as the scope of activities conducted by banks increases and as the notion of a bank becomes more amorphous the papers in this issue are intended to provide frameworks for advancing research on these and other topics journal of economic literature classification numbers e0 e5 g0

the performance implications of relationship banking during macroeconomic expansion and contraction a study of japanese banks social relationships and overseas expansion we propose a social perspective emphasizing the opportunities and constraints of bank firm relationships to understand the determinants of relationship banks performance using japanese banks to test our theory using social exchange and role theories we found banks that have strong social relationships performed differently during japan s macroeconomic expansion and contraction cycles however our results indicate that social exchange and role relationships are context specific banks benefited from internationalization during a domestic macroeconomic expansion as a result of their home country social relationships but they were less constrained by the same social relationships in their international operations during a domestic macroeconomic contraction

money liquidity and the structure of production abstract we use a model in which media of exchange are essential to examine the role of liquidity and monetary policy on production and investment decisions in which time is an important element specifically we consider the effects of monetary policy on the length of production time and entry and exit decisions for firms we show that higher rates of inflation cause households to substitute away from money balances and increase the allocation of bonds in their portfolio thereby causing a decline in the real interest rate the decline in the real interest rate causes the period of production to increase and the productivity thresholds for entry and exit to decline this implies that when the real interest rate declines prospective firms are more likely to enter the market and existing firms are more likely to stay in the market finally we present reduced form empirical evidence consistent with the predictions of the model

internalization and experience japanese banks international expansion 1980 1998 we use an interdisciplinary approach to investigate multinational banks foreign activities we bridge core concepts from the stages theory of internationalization to internalization theory to extend the literature on the defensive expansion hypothesis unlike the primarily aggregate levels of analysis employed in previous research on multinational banking we utilize a firm level analysis of the internationalization experiences of 21 japanese banks in the period 1980 1998 we find that banks undertake foreign direct investment to secure internalization benefits by following their existing clients and to achieve economies of scale in the application of their intangible assets in international markets the magnitude of these relationships however is contingent upon the level of a bank s experience in the host countries consistent with predictions from internationalization theory we find that the motivations for international expansion can change over time

disinflation shocks in the eurozone a dsge perspective we investigate the effects of disinflation policies on key macroeconomic variables using euro area data and structural vector autoregressions svars we identify disinflation shocks as the only shocks that drive nominal variables to a lower long run level we find that in the immediate aftermath of a disinflation shock the euro area enters in a persistent recession we use these dynamic responses to estimate a dsge model with imperfect information about the disinflation shock we find that both nominal and real frictions and monetary policy gradualism have played a prominent role in the recessionary effect of disinflation shocks conversely allowing for imperfect credibility does not yield a better fit except when we shut key model s frictions down

volatile policy and private information the case of monetary shocks abstract we study how volatility in monetary policy affects economic performance in the presence of asymmetric information and endogenously chosen information structures we consider a model in which in the absence of either feature the equilibria would be efficient the equilibria that we find are inefficient for two reasons first in some cases agents fail to trade even though it is efficient to do so second agents spend resources acquiring socially useless information the model predicts a nonlinear relationship between inflation and output and a complex pattern of price dispersion with the nature of the relationship changing with the degree of volatility journal of economic literature classification numbers e30 e40 d82

long run impacts of inflation across sectors in a small sample of countries this article investigates the long run effects of inflation on economic output for 10 sectors of the economy with a sample of 7 countries the analysis is done using long run restrictions in a vector autoregression and reports long run multipliers with bootstrapped confidence bands the results suggest that some sectors seem to be affected differently than others as well as significant heterogeneity across countries the results suggest the strongest effects in the low inflation countries germany and japan as has been found in similar studies in contrast to research using growth regressions the evidence suggests a positive long run effect of inflation on output

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

international evidence on the long run impact of inflation in this paper i use a structural vector autoregression framework to analyze the effects of a permanent change in inflation on the long run real interest rate and real output level in 14 industrialized countries long run monetary superneutrality is rejected for all 14 countries using annual data the results indicate that a permanent increase in inflation lowers the long run real interest rate in each country a permanent increase in inflation also increases the long run real output level in a number of countries long run monetary superneutrality is also rejected for four out of the five countries examined using quarterly data under long run monetary superneutrality lrsn a per

the costs of price stability downward nominal wage rigidity in europe in most european countries the prevailing terms of employment including the nominal wage can be changed only by mutual consent this legal feature gives workers a strategic advantage in wage negotiations when employers push for a nominal wage cut the upshot is a long run trade off between inflation and unemployment for low levels of inflation in spite of all agents being rational and with no expectational errors specifically downward nominal wage rigidity and excess unemployment at zero inflation are related to three factors the coverage of collective agreements the legal framework at contract renewal and the strictness of the employment protection legislation for non union workers

political aspects of mne theory political behavior by mnes has usually been ignored downplayed or passively treated in dominant economic models of the multinational enterprise in order to remedy this lacuna dunning s eclectic paradigm is expanded to integrate political dimensions in the analysis of ownership internalization and location advantages

on the complementarity of money and credit i propose a model where agents choose to conduct their business using two payment instruments money and bilateral credit a friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit money and credit complement each other with anticipated inflation complementarity implies that the credit to money ratio decreases with inflation

real effects of money growth and optimal rate of inflation in a cash in advance economy with labor market frictions this paper studies the consequences of labor market frictions for the real effects of steady inflation when cash is required for households consumption purchases and firms wage payments money growth may generate a positive real effect by encouraging vacancy creation and raising job matches this may result in a positive optimal rate of inflation particularly in an economy with moderate money injections to firms and with nonnegligible labor market frictions in which wage bargains are not efficient this main finding holds for a wide range of money injection schemes with alternative cash constraints and in a second best world with pre existing distortionary taxes

money and growth revisited abstract conventional wisdom is that if public policy can affect the growth rate of the economy the welfare implications of alternative policies will be large in this paper a stochastic dynamic general equilibrium model with endogenous growth and money is examined in this setting inflation lowers growth through its effect on the return to work however the welfare costs of higher inflation are modest the endogenous labor supply is important in producing this result

is inflation in developing countries driven by low productivity or monetary growth abstract this paper investigates whether inflation in developing countries is driven by retrogression in productivity or by monetary expansion our empirical methodology relies on growth accounting non parametric and generalized method of moment techniques results indicate that inflation is primarily driven by monetary growth

the stock market monetary policy and economic development author affiliation edgar a ghossoub department of economics university of texas at san antonio san antonio tx 78249 usa e mail edgar ghossoub utsa edu robert r reed dagger department of economics finance and legal studies 200 alston hall university of alabama tuscaloosa al 35487 e mail rreed cba ua edu corresponding author acknowledgment we thank two anonymous referees and the co editor kent kimbrough for their insightful comments 1 introductiona vast amount of research in macroeconomics studies the role of financial markets for economic development for example king and levine 1993 document that active banking systems help economies achieve higher rates of growth 1 in addition to banking systems other measures of financial development are important notably levine and zervos 1998 conclude that stock market liquidity promotes activity 2 however minier 2003 identifies nonlinearities in the relationship between stock market activity and growth in particular minier concludes that there are threshold effects from financial development to economic performance beyond a threshold level of financial development growth and stock market activity are positively related however the correlation is not observed in countries with small stock markets consequently access to a stock market may result in a significant increase in economic activity or it may have little impact 3in addition to the stage of financial development monetary policy also affects the development process while initial studies indicate that inflation is generally associated with slower economic progress more recent research concludes that the effects of monetary policy vary across countries bae and ratti 2000 observe that higher rates of money growth are correlated with lower levels of output in argentina and brazil in contrast bullard and keating 1995 point out that inflation may be associated with an increase in output in low inflation countries in particular the recent work of ahmed and rogers 2000 finds evidence of a tobin effect for the united states 4 5why does the impact of financial development vary across countries furthermore why does the effect of monetary policy also differ across countries in this article we demonstrate that the impact of financial development depends on the services provided by various financial markets that is the economic functions of banks may be substantially different than stock markets although different types of financial markets fulfill unique allocative functions there has been surprisingly little attention devoted to studying the ways in which asset markets collectively interact from a general equilibrium perspective 6 furthermore previous work does not address how the role of monetary policy depends on the extent of financial market development we attempt to fill this gap by developing a monetary growth model that incorporates money bank deposits and equity 7 as in schreft and smith 1998 spatial separation and limited communication create a role for money and commercial banks in our economy young individuals are subject to random relocation shocks as money is the only asset that can cross locations relocated agents must liquidate all their asset holdings into currency thus random relocation is analogous to the liquidity preference shocks in diamond and dybvig 1983 as a result our model illustrates the risk pooling role of financial intermediaries in contrast to banks we consider that the stock market promotes economic development by establishing a market in which capital can be transferred across time for example this may reflect specialization of factor inputs to illustrate such ideas we consider the following motivation individuals in the economy have specialized production technologies

patterns in the expansion of u s banks foreign operations combining foreign direct investment theory with data on 32 countries from the federal reserve board we examined u s banks patterns of foreign operations including their levels of banking services and choice of organizational forms in host countries results generally supported predictions but only in developed countries the lack of support in rapidly growing markets of asia and latin america raises serious theoretical concerns and presents fresh research opportunities into the global banking industry

the determinants of us banking activity abroad abstract the banking industry provides an excellent example of the internationalization of world business and economic interdependencies across countries analysis of the past growth of international banking operations can also prove useful to banks interested in augmenting their current business or expanding their international coverage and to banks who anticipated future competition in their markets from new or strengthened foreign competitors this study provides the most comprehensive examination of the development of us bank branches in other countries is presented and tested in order to facilitate the understanding of the expansion of international banking

liquidity risk economic development and the effects of monetary policy abstract empirical evidence indicates that monetary policy is not super neutral in many countries in particular in high inflation economies inflation is negatively related to economic activity by comparison inflation may be positively correlated with output in low inflation countries we present a neoclassical growth model with money in which the incidence of liquidity risk is inversely related to aggregate capital formation interestingly there may be multiple monetary steady states where the effects of monetary policy vary in poor economies the financial system is highly distorted and higher rates of money growth are associated with less capital formation in contrast in advanced economies a tobin effect is observed since inflation exacerbates distortions from a coordination failure in the low capital steady state individuals become much more exposed to liquidity risk consequently optimal monetary policy depends on the level of development

the size distribution of the banking sector and the effects of monetary policy abstract in recent years the industrial organization of the banking system has received a large amount of attention in particular it is generally viewed that the size distribution of the banking sector has changed where it is dominated by a small number of large institutions in this paper we develop a model of imperfectly competitive banks that differ in terms of the size of their deposit base such differences are important for aggregate credit market activity and the effects of monetary policy notably we explain how the optimal size distribution of the banking system involves trade offs from distortions in credit markets due to imperfect competition across banking markets second the effects of monetary policy on credit market activity are weaker in an economy dominated by a small number of large banks empirical analysis examining the role of concentration among the current members of the european monetary union is consistent with the predictions of the model

service multinationals conceptualization measurement and theory the application of mne definitions measurements and theories to international services is still in its infancy despite the considerable size and growth of this sector there are problems in defining classifying measuring comparing and explaining service mnes but they do not require special definitions and theories still research to date suggests 1 delinking the concepts of multinational enterprise and foreign direct investment under certain conditions and 2 qualifying the nature of ownership internalization and location advantages in fdi theory as far as service mnes are concerned

an application of the theory of foreign direct investment to multinational banking in ldcs for assessing the determinants of mnbs expansion into ldcs a model that incorporates both supply and demand factors is constructed a reduced form of the model is tested by using pooled data over the period 1975 1982 for a sample of twenty three ldcs the results of the study indicate that market size the presence of multinational corporations from the home country the extent of economic development and the balance of payments are all significant determinants of the growth of mnbs in ldcs

the determinants of u s banks international activities abstract this paper develops a model and structural dynamic estimation of bank behavior to map the relationship between u s banks choices of foreign banking activities and bank and foreign market traits this estimation framework is applied to a unique bank level dataset compiled from regulatory sources covering u s banks foreign activities in 83 host markets over the 2003 2013 period bank traits are better able to explain the evolving patterns of foreign banking than host market characteristics after controlling for these traits the post financial crisis period shows a structural shift away from cross border claims towards foreign affiliate activities structural estimates of foreign market entry costs and regulatory attitudes towards risk are derived simulation exercises confirm the strong impact of banks and regulators risk stance on bank profits and portfolio composition

phillips curves and unemployment dynamics a critique and a holistic perspective the conventional wisdom that inflation and unemployment are unrelated in the long run implies that these phenomena can be analysed by separate branches of economics the macro literature tries to explain inflation dynamics and estimates the nairu the labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment we show that the orthodox view that the new keynesian phillips curve is vertical in the long run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate in the light of these results we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment

dollarization and the inflation threshold this paper analyzes the relationship among inflation dollarization financial intermediation and real activity empirical evidence suggests non linearity in the eects of inflation on financial intermediation and real activity i e the existence of an inflation threshold evidence also suggests that one way in which inflation aects financial intermediation in high inflation economies is through the substitution of dollars under the mattress for savings in domestic banks our model captures these empirical regularities inflation and real activity are positively related at low levels of inflation when the inflation rate exceeds certain threshold however agents substitute in their portfolios dollars a non productive asset of constant value that also provides liquidity services for deposits issued by domestic banks this substitution reduces the scale of financial intermediation and the capital investment in the economy as a consequence at high levels of inflation the levels of capital stock and output become negatively related to the inflation rate