FINANCIAL INNOVATION, PRICE SMOOTHING, AND MONETARY POLICY

This paper examines an unregulated transaction services market that is subject to financial innovation in an economy that experiences aggregate supply and demand shocks. The availability of this unregulated market to transactors smooths the price response to these shocks. However, financial innovations act as money supply shocks that increase price disturbances. If there is persistence in the real aggregate supply shocks and in the rate of adoption of financial innovations, then the central bank can forecast some portion of the changes in transaction requirements that accompany these shocks and damp the residual variation in prices by accommodating these anticipated needs.     

A CLARIFICATION OF THE EXCESS DEMAND FOR OR EXCESS SUPPLY OF MONEY

One of the most misunderstood and neglected concepts in all of economics is the notion that money may be in excess supply or excess demand. The article presents several reasons why monetary disequilibrium would indeed persist, including the fact that no "money market" exists with a single price which would clear that market. Contrary to the claims of several leading textbooks, the article explains why changes in the interest rate would not immediately eliminate an excess supply of or demand for money.     

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.     

COSTLY PORTFOLIO ADJUSTMENT AND THE SHORT RUN DEMAND FOR MONEY

In many empirical studies the short-run demand for money includes a lagged dependent variable; this is usually attributed to some cost of adjusting money balances toward their desired level. This short-run money-demand equation is sometimes used as a structural equation in models in which market clearing is also assumed (in the sense that money supply equals short–run money demand). In this paper, a theoretical counterexample demonstrates that this use of a short-run money demand equation is not generally valid. This finding challenges the usual interpretation of the lagged dependent variable.     

COMMERCIAL BANKS AND THE FEDERAL FUNDS MARKET: RECENT DEVELOPMENT AND IMPLICATIONS

Several important aspects of the growth of the Federal funds market and non-bank participation in this market are examined. It is shown that the recent growth and development that has taken place has significantly influenced bank behavior and the process of bank credit determination. Additionally, it is shown that non-banks' use of Federal funds sales as an integral part of their cash management affects money demand. The implications of these recent developments in the Federal funds market for policymakers are examined.     

UNCERTAINTY IN THE DEMAND FOR MONEY DURING HYPERINFLATION

Much recent empirical work on hyperinflation has centered on the direct and indirect effects of uncertainty on the demand for money. We test the hypothesis, originally put forward by Klein, that uncertainty positively affects the demand for real balances. A variant of Cagan's demand for money function is utilized and operational measures of uncertainty are derived by fitting autoregressive integrated moving average models to the inflation series for each of three hyperinflation nations. We find that the most reasonable measures of variation do not significantly enter the money demand function for any of the three hyperinflations studied.     

REAL VERSUS NOMINAL SPECIFICATION OF THE DEMAND FOR MONEY FUNCTION

This paper re-examines the issue of real versus nominal specification of the money demand function and presents evidence in favor of the nominal specification. A series of experiments with U.S. quarterly data show that the money demand function specified in nominal terms is more stable and generates more accurate forecasts than that specified in real terms. "The case of the missing money" also is discussed.     

Social Impact Investment Behavior in the Nonprofit Sector: First Insights from an Online Survey Experiment

This study investigates the social impact investment behavior of private investors in a nonprofit setting. In particular, the influences of three effects—financial return, social impact, and age—on social impact investment behavior are tested in an online survey experiment. The study sample includes bank clients (N = 145) from Germany’s first and largest bank exclusively focused on social and ecological investments. The results with regard to the financial return effects are in line with for-profit research that social impact investors are willing to accept 1% lower financial returns. In addition, younger philanthropists are more likely to contribute part of their money to social impact investments. Further findings reveal that the perceived innovativeness of the project has a consistently positive effect on social impact investment behavior. People with certain profile characteristics (e.g., entrepreneurial spirits) also are more likely to participate in social impact investments.     

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.     

THE WORLD OIL CRISIS: A PORTFOLIO INTERPRETATION

This paper applies the mean-variance portfolio model to the analysis of one facet of the production decision confronting the oil exporting countries. Specifically we assume that the countries in question seek the optimal solution to the problem of diversifying their assets between oil reserves in the ground and other non-petroleum investment alternatives. With respect to the group of countries which tend to accumulate money resources in excess of their domestic development needs (e. g., Saudi Arabia and Kuwait) the availability of an "inflation-proof" investment outlet whose principal and interest are linked to a general index of the change in world prices is likely to enhance these countries' incentive to extract oil from the ground on portfolio considerations alone.     

THE TIMING OF MARKETS AND MONETARY TRANSFERS IN CASH-IN-ADVANCE ECONOMIES

In cash-in-advance models, do the timing of markets and the timing of the monetary transfer affect equilibrium money demand? The timing of markets generates different individual money demands; however, under the common assumption that agents are identical, these differences do not affect the behavior of equilibrium real balances. In contrast, the timing of the monetary transfer has important implications for agent's information sets; these implications can influence the equilibrium characteristics of real balances.     

MONEY SUPPLY VARIABILITY IN A MACRO MODEL OF MONOPOLISTIC COMPETITION

The effects of changes in money supply variability are examined for a macro model of monopolistic competition. Increases in money supply variability raise demand uncertainty causing individual firms to produce more for inventory. In addition, expected profits decrease, inducing a number of firms to leave the economy. Aggregate income then falls in spite of an increase in firm-level production. The result on aggregate income is standard, but the results on inventories and the number of firms in the economy distinguish this monopolistic macro model empirically from conventional macro models when changes in money supply variability occur.     

A COUNTRY RISK INDEX: ECONOMETRIC FORMULATION AND AN APPLICATION TO MEXICO

Dynamic factor analysis is used to estimate a monthly country risk index for Mexico. This method extracts the unobservable risk information contained in deviations from interest rate parity and allows for hypothesis tests regarding the important determinants of such risk. The results suggest that the ratios of imports to reserves and debt to exports are important determinants of Mexican country risk. The estimated risk index correctly anticipates the Mexican capital controls and financial crisis of August 1982. In addition, the index significantly leads the country risk rating published by Institutional Investor based on commercial bank surveys.     

THE U.S. EMBARGO ACT OF 1807: ITS IMPACT ON NEW ENGLAND MONEY, BANKING, AND ECONOMIC ACTIVITY

For half a century economists have debuted the impact of the Embargo Act of 1807 on the U.S. economy. Using New England bank statistics and the weekly prices of financial assets traded in the Boston market, hypotheses generated by a real business cycle model are tested. The study concludes that the embargo significantly fnfected the levels of real and nominal bunk loans, the real and nominal money stock, and current financial asset yields. Also, increased monetary und banking activity in Maine during the period supports the long-standing hypothesis that the embargo caused an increase in smuggling activity.     

THE LONG RUN BEHAVIOR OF THE INCOME VELOCITY OF MONEY IN FIVE ADVANCED COUNTRIES, 1870–1975: AN INSTITUTIONAL APPROACH

The income velocity of money in Canada, the United States, Great Britain, Norway and Sweden displays a U-shaped pattern over the last one hundred years. This paper presents and tests empirically an explanation for this secular pattern emphasizing the influence on velocity of institutional changes. The inclusion into a simple velocity function of institutional developments such as the process of monetization, the spread of commercial banking, financial development and the growth of economic stability improves the explanation of long-run movements in velocity provided by a regression of velocity on real permanent income per head and the interest rate.     

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 ENDOGENEITY OF MONEY DURING THE GERMAN HYPERINFLATION: A REAPPRAISAL

This paper provides evidence that casts doubt on the conclusioon of several studies of the German hyperinflation that, since government raised most of its revenue from money creation, the money supply process was endogenous. This conclusion in the literature is based on the assumption that the money supply and the price level can be described by linear ARIMA models. It is shown here that the linearity assumption is violated by the data and that relaxing this assumption reverses the earlier results. The paper provides additional evidence in support of the finding that the money supply process may be exogenous.     

ESTIMATING THE LIQUIDITY OF M2 COMPONENTS IN THE POST-DIDMCA ERA

This paper estimates the liquidity of M2 components within an intertemporal model of a representative household. A modification of Pfann and Verspagen's asymmetric adjustment cost function measures liquidity cost. Generalized Method of Moments estimation of structural parameters using monthly data for December 1983–March 1993 reveals significant evidence of asymmetry toward decreasing asset holdings for all components except demand deposits. Estimated withdrawal costs for savings deposits, money market mutual funds, and small time deposits are small. Split sample estimations suggest greater liquidity in the more recent period. The results point to the effects of financial innovation in lowering withdrawal costs. (JEL E51, D91)     

INTRODUCTION TO THE SYMPOSIUM ON CONTEMPORARY BANKING RESEARCH: THE USE OF FIXED EFFECTS TO DISENTANGLE LOAN DEMAND FROM LOAN SUPPLY

With the onset of the financial crisis, disentangling the effects of loan demand and supply in contemporary banking research has become vital for a proper assessment of supply-related banking shocks. These shocks may negatively affect the real economy through many channels, such as the lending channel of monetary policy transmission, the bank risk-taking channel or the evaluation of macroprudential policy efficiency. All these rely on separating the two lending components. Empirical identification has largely relied on the use of demand-related fixed effects, which has also been applied in several analyses within this symposium. (JEL G21)