Alternative specifications of the demand for money and their implications for forecasting and policy analysis with large macroeconomic models

The demand for money is an important function in large macroeconomic models because of its central role in monetary policy. The interest rate responsiveness of money demand determines the interest rate changes consistent with the initial change in monetary policy and the subsequent changes on aggregate demand and the price level. This paper uses the DRI macroeconometric model to investigate these issues, finding that the model's predictive power and its estimates of the relative potency of monetary and fiscal policy are dependent upon the specification of the money demand function.     

The impact of the Soviet Union upon the U.S. feed/livestock sector— An assessment

In this article, the impact of volatile Soviet Union corn imports on the U.S. feed/livestock sector is analyzed using an econometric model. The model's attention to supply response when feed price changes enables it to determine the nature of the effect of exogenous shocks across feed and livestock sectors. The model is used in historical simulation to demonstrate the effects of actual and alternative paths of variable Soviet import demand and to explore the difficulties of deriving a stabilizatior policy for these linked sectors.     

Commodities and monetary policy: Implications for inflation and price level targeting

We examine the relative ability of inflation targeting and price level targeting monetary policy rules to minimize inflation variability and business cycle fluctuations in a commodity-exporting country for supply and demand shocks to global commodity markets. The macroeconomic consequences of oil and non-oil primary commodities differ and affect the relative merits of the alternative monetary policy frameworks. Particularly, the consumption of refined oil products and demand-driven commodity price movements induce highly persistent inflation pressures resulting in a significant deterioration of the inflation-output gap trade-off available to central banks. When such terms-of-trade shocks are prevalent, price level targeting is inferior to inflation targeting.     

Asymmetric price rigidity and the optimal interest rate defense of the exchange rate: Some evidence for the US

This paper analyses the optimal monetary policy under incomplete exchange rate pass-through and asymmetric price rigidity. In a general equilibrium sticky price model of an open economy we find that the optimal interest rate rule is to respond to all types of shocks in an economy: real exchange rate shocks, supply shocks and demand shocks. We concentrate our analysis on the interest rate defense of the currency. We claim that the extent of the optimal response of the interest rate to exchange rate shocks depends positively on the degree of pass-through and negatively on price rigidity. Therefore, in the presence of asymmetric price rigidity, the optimal monetary policy should be non-linear, and the interest rate should be adjusted more in case of depreciation of the domestic currency than in case of its appreciation by the same magnitude due to higher downward price rigidity and lower downward pass-through, which are observed empirically. We test this prediction for the US economy and find that the US monetary policy is asymmetric indeed with higher reaction of the interest rate to depreciations of US dollar than to appreciations of the same size.     

Policy Simulation of the Indian Silk Industry through an Econometric Model

This study aimed at understanding and quantifying the relationship between the important variables of the various subsectors of the Indian silk industry through an econometric simulation model, and using the model for forecasting as well as policy simulations. Forecasts of the endogenous variables of the system (demand, supply, and prices of mulberry cocoons, raw silk, and silk fabric) for the period 1991–92 to 2000–01 indicates that the growth in the industry will slow down in the future. Policy simulations were undertaken to assess the changes in the import price of raw silk, export price of fabrics, and regulation of the quantity of imports of raw silk on the silk industry. While imports and exports were closely linked, their impact on the silk industry was not very high. It was also revealed that the income of the consumers and mulberry acreage have significant influence on the industry.     

Macroeconomic stabilization of primary commodities price cycles in developing economies

This paper proposes a strategy for stabilizing macroeconomic policy to address jointly the effects of changes in the prices of food, minerals and energy (oil). Our approach differs from the general literature, which analyzes the effects of a commodity boom or bust and therefore the solutions in terms of economic policy separately, that is, by type of commodity. The stabilization strategy that we propose considers a key fact affecting many open economies, namely, that they not only are affected by increases or decreases in commodity prices, but also benefit from them. Consequently, we use a structural model for an open economy with restricted households to show that welfare could be improved with a fiscal rule incorporating transfers to stabilize household consumption. This strategy noticeably dominates an aggressive monetary policy focused only on stabilizing inflation and a fiscal policy that has an excessive bias toward saving income from exports.     

Foodgrain price stabilization: Implications of private storage and subsidized food distribution

Through simulation exercises, this paper explores the implications of private storage and subsidized distribution of foodgrain for price stabilization policies in India. A multi-market equilibrium approach is used to incorporate the simultaneity in the determination of supply and demand for the three major cereals, namely, rice, wheat, and coarse cereals. The policy implications of the results obtained are relevant to the current debate on agricultural policy reforms in India.     

Policy modelling of the trade-off between agricultural development and land degradation—the Sudan case

The agricultural policy model of the trade-off between agricultural growth and land degradation that we have developed, with Sudan as an application, shares common features with the computable general equilibrium (CGE) models. The model is used to address two questions. First, what are the future prospects of a green gross domestic product (GDP), are there reasons for alarm or not, and to what extent? Secondly, which among the four policies of price incentives, property rights, poverty reduction, and human capital are more effective than the others? We show that the prospects of natural resource-friendly agricultural development in Sudan—a rising green GDP—are not promising in the medium run, but that, indeed, there is a range of effective policies and choices that could reduce the trade-off between economic growth and land degradation.     

The unregulated private rental sector and the impact on Israeli housing market

Israel’s rapid population growth, deriving from its unique demographics, is generating a consistent rise in the demand for residential housing. The low interest rate environment in Israel since the beginning of the last decade has also contributed to the rise in demand for housing, which exceeded the available supply and led to a continuous rise in the price of housing. The various government programs all attempted to halt the rising prices, with no long-term success, if any. Policymakers focused on making ownership of housing affordable for young couples but directed their activity at repressing the demand for housing among investors and housing upgraders. This interpretive article focuses on analyzing Israel’s housing policy and indicates the built-in failure engrained in this policy, as the demand for housing in Israel is a rigid demand deriving from the country’s demographics and values and therefore attempts at repressing it are futile in essence. The housing policy aimed at making housing affordable for young people must examine, before it is finalized, their overall incentives to own housing on one hand and the obstacles they encounter that prevent them from opting for rentals on the other, and accordingly formulate the features and different terms of the policy. The research conclusion indicates the need to implement a public policy that will promote the rental alternative as an efficient way of meeting the demand for housing on one hand and of curbing the price of housing on the other.     

The Simplest Dynamic General-Equilibrium Model of an Open Economy

This paper presents the simplest possible general-equilibrium model of an open economy in which producer and consumer decisions are both intra- and intertemporally consistent. Consumers maximize the present value of the utility of consumption; producers maximize the present value of profits. The model solves for the set of intertemporally consistent prices. The parsimonious structure of the model is achieved by dividing the economy into two producing sectors—exports and domestic goods—and two consumed goods—imports and domestic goods. As a result, there is only one endogenous price per period to be solved for (the price of the domestic good), although “structural” questions, such as the evolution of the real exchange rate, can be posed with the model. Furthermore, with this structural breakdown, the model can be calibrated with national accounts data only. In the paper, we show how to calibrate such a model (including specification of an adjustment-cost function, to avoid “bang-bang” behavior) and use the model to examine various questions where intertemporal issues are important, including terms-of-trade shocks and tariff reform.     

An analysis of International Bulfer Stocks for cocoa and copper through dynamic optimization

Optimal control theory is used to analyze buffer stock price stabilisation. Linear econometric models of the world cocoa and copper markets are estimated over the period 1956-75 and the simulated to determine the “systematic” price for each commodity—the price when stochastic sources of market variation are suppressed. Stabilization at this price reduces the instability of producer revenue and also increases total revenue for both commodities. However, the buffer stocks are expensive. Net costs over the period 1966-76 are estimated at $1.7 billion for cocoa and $0.9 billion for copper.     

Money demand stability: A case study of Nigeria

Monetary policy in Nigeria aims is to achieve price and monetary stability. During the 1980s and 1990s, monetary targeting was the dominant monetary policy framework in Nigeria. However, in 2006 the Central Bank of Nigeria (CBN) adopted the new monetary policy framework through which short-term interest rates are adjusted to achieve stability in the value of the domestic currency. This paper has presented an empirical investigation into the demand for Nigerian real narrow money (M1) over the period 1960–2008 in an attempt to identify whether the CBN were right to adopt the new monetary policy framework. In doing so, we estimate alternative (canonical and extended) specifications of M1 demand using structural change methods. Our results suggest that the canonical specification is well-determined. Although the money demand relationship went through a regime shift in 1986, it is largely stable. These findings favour the use of supply of money as an instrument of monetary policy, thus lending limited support for the new monetary policy framework.     

China＇s Energy Strategy Adjustment under Energy Conservation and Carbon Emission Constraints

经济发展和能源需求的阶段性特征、节能减排的基本国策以及气候变暖和温室气体减排的制约,都要求中国能源战略,尤其是能源结构战略,进行相应调整。以往中国的能源战略规划主要是从能源储备和能源生产,即能源供给侧来考虑满足能源需求问题。为了应对气候变化,中国能源结构战略亟待调整：一是要从供给和需求双侧管理来考虑满足能源需求问题,二是要将二氧化碳排放作为满足能源需求的一个约束。建立优化模型,得到反映节能和排放约束下的最优能源结构,进而通过可计算一般均衡模型,评估能源结构变化导致的能源成本增加对宏观经济的影响,结果表明：政府的可再生能源规划对二氧化碳减排具有重要的正面影响,但二氧化碳排放约束改变能源结构导致的能源成本增加,对宏观经济具有一定的负面影响。因为中国许多重要行业对煤炭和火电的依赖程度依然很高,所以,现阶段通过改变能源结构减排的空间不大,应该重视其他方面的节能减排努力。     

Three models of OPEC leadership and policy in the aftermath of Iran

Collapse of the Shah's regime has transformed Iran's attitude regarding oil production policy. The nature of OPEC leadership is changing as well. Three models examine the nature of this leadership inside OPEC: (1) the conventional price leadership model, (2) a model emphasizing a concept of egalitarian leadership, and (3) a team model composed of coalitions. The three models establish the limits within which OPEC leadership is exercised. A composite model drawing upon all three sets of results suggests that Saudi Arabia shapes cartel policy not by itself, but through a dominant coalition of states. For most of the period 1969–1978 this coalition has been stable. Following the unsettling changes of 1973, cooptation of Iran into the dominant coalition in 1974 was an important step in achieving a new level of stability. But during the turbulence of regime transformation in Iran, the nature of the governing coalition appears to have changed. One consequence may be that in the future Saudi Arabia will yield more willingly to arguments heard within OPEC on behalf of upwards price pressure, especially in an atmosphere of growing political isolation and overall tight supply.     

Do changes in patent policy influence firms’ technology strategy? Evidence from manufacturing in India

India made patent policy changes to comply with TRIPs agreement that increased the rights of patent owners. Considering that such policy changes influence both in-house research and development investments and technology licensing from external sources, the firms have to accordingly devise their technology strategy. This study employs a simple and fixed effects multinomial logit regression models to study the impact of policy changes on the technology strategy of 402 firms operating in Indian manufacturing sector from 1999 to 2014. The results show that changes in patent policy have a significant impact on technology strategy of firms.     

Modeling oil price fluctuations and international stockpile coordination

Major interruptions in the supply of crude oil in the Middlle East have caused significant economic damage in terms of lost output and incresed inflation in the industrial countries. To the extent that the macroeconomic costs of shocks are a function of the magnitude of the oil price increases, domestic or internationally coordinated policies to restrain oil price increases during disruptions can be beneficial. One such policy initiative is the release of oil held in public stockpiles. We address the motivations for private and public stockpilling in an intertemporal optimizing model. As a special case of our general model, we develop and simulate a model of the world oil market to examine the benefits (in terms of lower world oil prices) of releasing oil from the U.S. Strategic Petroleum Reserve.     

Aspects of a new world development strategy II: Factors affecting the long-term prospects of developing nations

This paper explores some quantitative dimensions of the interdependence of rich and poor regions in the context of the United Nations World Model. It extends the original work on that model in three ways: (1) by updating some of the key parameters and exogenous variables in the light of recent data; (2) by developing a “control” solution to be used as a point of reference in policy simulations; and (3) by exploring the sensitivities of each of two groups of regions— developed and developing—to changes in one another's growth rates. Goals of closing the income gap between developed and developing regions and of increasing income levels in the latter are discussed.     

Distributional effects of international commodity price stabilization: Do the aggregate gains apply to individual producing countries?

This paper demonstrates the different producer gains and losses that can occur from a price stabilization scheme in a same market. An international buffer stock model integrated in a trade flow model of commodity exports of the Latin American economies is used to simulate two representative products: coffee, where instability in the world market has originated mainly from changes in supply, and copper, where the major source of world market disturbances have been demand shifts. The results show that global generalizations as to the net benefits or costs of price stabilization are erroneous at the producer country level in supply or supply/demand dominated instability, a condition that typifies many primary commodity markets.     

On comparing cost of living of cities using expatriate price survey

Commercial cost of living indexes, which are nominal Laspeyres price indexes derived from expatriate price surveys, are increasingly used in policy debate. However, these indexes contain two systematic errors – (1) using nominal exchange rate, instead of the purchasing power parity equivalent, cause upward biases in high income cities and (2) using a fixed basket causes upward biases in cities with different consumption pattern – that make them unfit for the purpose of policy debate if the errors are serious enough. Using a real Fisher index corrects these systemic errors. We showed high congruence in pair-wise comparison between these two indexes, but substantial differences in ranking arising from the systematic errors. Commercial indexes are useful for designing expatriate compensation, but we need a real Fisher index to calculate and rank the cost of living among cities.     

What price compromise?

This paper identifies, and tests experimentally, a prediction of the Nash bargaining axioms that may appear counterintuitive. The context is a simple bargaining problem in which two players have to agree a choice from three alternatives. One alternative favours one player and a second favours the other. The third is an apparently reasonable compromise, but is in fact precluded as an agreed choice by the Nash axioms. Experimental results show that agreement on this third alternative occurs rather often. Our subjects’ behaviour could be interpreted as the paying of an irrationally high price, according to the Nash axioms, in order to reach a compromise agreement.