A DIFFICULTY WITH MONETARIST MODELS OF HYPERINFLATION

The Cagan, Barro, and Allais analyses of hyperinflation have been shown to be questionable. Their impressive empirical results are a direct result of the method used to solve their models. Their solution does not depend on the input forcing function (the rate of change of the money stock) of their differential equation systems but expresses one dependent variable, real money balances, as a function of another dependent variable, the rate of change of prices. As a result, price changes which are unrelated to changes in the money stock acting through the dynamic structure of the model will incorrectly yield a good fit of the data.     

INFLATION, HEDGING AND THE DEMAND FOR MONEY: SOME EMPIRICAL EVIDENCE

This paper explores the role of nominal rate of return uncertainty and inflation hedging as potentially important factors explaining the pattern of money demand. Using U.S. quarterly data over the period 1952.2–1982.4, it is shown that in conformity with theoretical considerations the nominal rate of return uncertainty variable tends to have a significantly positive effect and the inflation hedging variable (the covariance between nominal rate of return and inflation rate) a significantly negative effect on the demand for money. These findings seem to be reasonably robust in terms of various definitions of income, interest rates, inflation rate and money variables as well as in terms of different estimation methods.     

Estimates of Money Demand Functions for Estonia

This paper examines the money demand function of Estonia in the period 1995–2006. Since Estonia has a currency board system, euro area interest rates are taken into account. We apply different cointegration procedures like the Engle–Granger, the dynamic OLS, and the Johansen procedure to estimate the long-run relationship among money, output, and interest rates. The results show that it is difficult to find a cointegrating relationship for the broad money aggregate M2. For the preferred relationship including euro area money market rate and euro area bond rate a dynamic equation is estimated. This dynamic equation is stable for the whole period. The change of the anchor curreny in the currency board and the accession to the European Union do not alter the relationship.      

A MARKET-BASED TEST OF THE EFFECT OF MONETARY POLICY

This paper tests the rational expectations-natural rate hypothesis without basing expectations on time series estimates. Instead, market-based data are used. Unexpected money supply changes are determined via the Fisher Effect and the Quantity Equation. This introduces errors of a very different kind than the traditional approach, and yet the results are remarkably similar to those generated using time series estimates. Unanticipated money shocks are shown to exert a significant but only short-run effect on real output, suggesting only a short-run Phillips curve trade-off. Anticipated money growth appears to have no effect on real output.     

Production Inflexibilities and the Cost Channel of Monetary Policy

This article shows how the existence of production inflexibilities in the form of capacity utilization constraints conditions the magnitude of the response of macroeconomic variables to a money supply stimulus. Capacity is modeled under explicit microfoundations, where the existence of idiosyncratic demand uncertainty generates variable utilization rates across firms. In this context, money has real effects due to non-Fisherian effects stemming from limitations in households' access to the financial market. Firms' capacity constraints generate a convex aggregate supply curve, which is a feature of the economy that has important implications for the conduct of monetary policy.     

A NOTE ON ADJUSTMENT TO PRODUCTION UNCERTAINTY AND THE THEORY OF THE FIRM

This paper analyzes the impact of production uncertainty on the firm's optimal output decision. If uncertainty is introduced by an additive risk variable, then short-run optimal output is unchanged, but the owner-manager's expected utility can change causing long-run output effects. If uncertainty is introduced by a multiplicative random variable, then short-run output can change as well.     

Buying a Dream: Alternative Models of Demand for Lotto

Existing lotto demand models utilize effective price, computed as the face value of a ticket minus the expected value of prize money per ticket, as their primary explanatory variable. By contrast, this article proposes a key role for consumption benefit or "fun" in the demand for gambling in general and lotto demand in particular. It develops an alternative model of lotto demand that focuses on the maximum possible prize. When this is tested against the traditional model using data from the U.K. National Lottery, we find that jackpot considerations exert an influence over and above that of variations in effective price.     

1979–1982: RULES OR DISCRETION IN MONETARY POLICY?

What determined MI growth from November 1979 through October 1982? A reaction function is developed and tested which ascribes the level of M1 to two Fed motives. One is the Fed's desire to hit its money growth targets, the other is to carry out a counter-cyclical short-run monetary policy. Both motives are found to be significant during the period. This evidence is consistent with the contention of some economists that the period was not a valid test of monetarist policy rules.     

GOVERNMENT DEBT AND THE DEMAND FOR MONEY: AN EXTREME BOUND ANALYSIS

The article provides evidence that there is a relationship between government debt and interest rates via the demand for money. This relationship is examined through the wealth effect of government debt on money demand, and the robustness of the results is tested by the use of extreme bound analysis in addition to standard econometric techniques. We find that OLS regression shows government debt fnfecting the demand for money positively, implying that Federal government debt is net wealth. In addition, the extreme bound analysis shows that the estimates of the government debt coefficient are robust under alternative specifications of the Goldfeld model.     

Perceived risk and the precautionary demand for money

Keynes contended that individuals hold money for fear of being unable to meet unforeseen future cash requirements. This ‘precautionary demand’ for money has long been an accepted part of monetary theory, but has played a subservient role because of our inability to measure an individual's degree of aversion to risk. This study, however, employs a risk taking scale, similar to that developed by Zuckerman, to empirically investigate Keynes's precautionary demand for money. The results are sufficiently encouraging to suggest that this scale might successfully be applied to other economics subfields in which risk plays a role.     

INTERNATIONAL PRICE BEHAVIOR AND THE DEMAND FOR MONEY

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figured prominently in explanations of the international inflation process in the late 1960s and early 70s. OUT major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced-form rational-expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976.
The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance.
The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used GLS with a second-order correction for autocorrelation. We believe this produced more plausible estimates of the parameters of the long-run demand function and of the adjustment process itself.     

Time-based versus money-based decision making under risk: An experimental investigation

This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that “time is money” with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.     

MONEY DEMAND AND QUANTITY CONSTRAINTS: EVIDENCE FROM THE SOVIET INTERVIEW PROJECT

This paper examines the effects of shortages on the demand for money of Soviet citizens. It is the first to examine the demand for money in a centrally planned economy using cross-section data in which alternatives to income and interest rates are used to explain money demand. We find demand for broad money and liquid assets depends on income, illiquid wealth, participation in the underground economy, and the severity of quantity constraints as well as demographic factors. Our findings show that quantity constraints decrease demand for the national currency and increase demand for convertible currencies and barter transactions.     

AN EXTENSION OF LERNER'S MONOPOLY INDEX FOR MARKETS WITH A DISPARITY BETWEEN LONG- AND SHORT-RUN DEMAND ELASTICITIES

This paper develops a theoretical analysis of steady state monopoly pricing in markets with a disparity between long- and short-run demand elasticities, based on a separation between the long-run demand schedule and the adjustment process that underlies actual demand levels. This sheds light, in a practical context, on the impact of the speed of adjustment and the firm's discount rate on its equilibrium markup; and on the measurement of realized monopoly power. An illustrative application of the analysis to existing empirical data supplements the theoretical presentation.     

OPTIMAL MONETARY POLICY AND IMPERFECT FINANCIAL MARKETS: A CASE FOR NEGATIVE NOMINAL INTEREST RATES?

This article studies optimal monetary policy in a model with credit frictions and money demand. We show that augmenting a standard New Keynesian model with money demand and financial frictions generates a mechanism that, in equilibrium, gives rise to optimal negative nominal interest rates. In addition, we find that the tighter credit markets are, the lower the optimal nominal policy interest rate and the more likely it is to be negative. Quantitatively, when credit constraints are binding, a standard calibration of the model generates an optimal nominal policy interest rate that is roughly ?4% annually. (JEL E31, E41, E43, E44, E52, E58)     

CROSS-COUNTRY ESTIMATES OF THE DEMAND FOR MONEY AND ITS COMPONENTS

The demand for money aggregates (M1, M2) and their components (currency, demand deposits, and time deposits) are estimated using a sample of 103 countries at two time periods. Money demand is found to be affected by age, literacy, industrial development, and political structure, as well as income and inflation. This expanded demand function helps to explain the considerable changes in money demand that have occurred over long periods and the large variation in money demand found across countries. The knowledge thus gained is useful for understanding differences in monetary and taxation policies across countries.     

THE INTEREST ELASTICITY OF MONEY DEMAND, LIQUIDITY AND REVERSE CAUSATION

This paper employs theoretical neoclassical and Keynesian models which have been expanded to include near monies to demonstrate that the interest elasticity of money demand is a peripheral issue to more fundamental differences between monetarists and Keynesians. The analysis indicates that the money supply is endogenously determined by income in such models, i.e. the reverse causation argument applies, and money is therefore an inappropriate instrument of monetary policy. The analysis also reveals that necessary and sufficient conditions for fiscal policy to be impotent are that the interest elasticities of money demand, money supply and all near monies must be zero.     

Climate Change Policies in the Transitional Economies of Europe and Eurasia: The Role of NGOs

This article examines ratification of the Kyoto Protocol across 26 transitional economies of Europe and Eurasia for the period of 1998–2009; the period between the Kyoto Protocol and the 2009 Copenhagen meeting. The dependent variable measures whether or not the country has ratified the Kyoto Protocol in a given year. The key variable of interest is the strength of domestic non-governmental organizations (NGOs). To account for the nascent stage of the NGO sector, I measure NGO strength as a “stock” and as a “flow” variable. Using an event-history model, I examine the impact of the NGO strength while controlling for other domestic-based and international drivers of treaty ratification. All time-variant independent variables are lagged by a year. My analysis suggests that the stock of domestic NGO strength is a significant predictor of the timing of ratification. Further, EU accession pressures, ratification levels in contiguous countries, and domestic economic cycle impact the timing of ratification of the treaty.     

Two‐Wave Panel Analysis: Comparing Statistical Methods for Studying the Effects of Transitions

Study of the effect of transitions on individual and family outcomes is central to understanding families over the life course. There is little consensus, however, on the appropriate statistical methods needed to study transitions in panel data. This article compares lagged dependent variable (LDV) and change score (CS) methods for analyzing the effect of events in two‐wave panel data. The methods are described, and their performances are compared both with a simulation and a substantive example using the National Survey of Families and Households two‐wave panel. The results suggest that CS methods have advantages over LDV techniques in estimating the effect of events on outcomes in two‐wave panel data.     

On the formation of inflationary expectations: Some empirical evidence from Finland, 1979–1980

The results of a survey of inflationary expectations executed in 1979–1980 are reported. The respondents form one “informed” and one “uninformed” group. The purpose of the study are: (1) to test standard hypotheses on the formation of inflationary expectations, (2) to study the term structure of those expectations, (3) to study their dispersion among individuals, (4) to investigate the uncertainty in the formation of expectations.The results suggest that the adaptive expectations formation model works best for the uninformed group, while the extrapolative model is more satisfactory for the informed group. The lagged rate of unemployment was found to be a significant explanatory variable as well. Long-run inflationary expectations turned out to be very similar to short-run predictions, although the dispersion among individuals was greater in the former case. The uninformed respondents also expressed expectations with a greater dispersion than the informed respondents. The standard deviation of the expectations was quite stable over the observation period. The proxy used for subjective uncertainty also indicates a high degree of stability.