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.     

MONEY TRANSFER AND BIRTH WEIGHT: EVIDENCE FROM THE ALASKA PERMANENT FUND DIVIDEND

The positive relationship between income and health is well established. However, the direction of causality remains unclear: do economic resources influence health, or vice versa? Exploiting a new source of exogenous income variation, this study examines the impact of the Alaska Permanent Fund Dividend (APFD) on newborns' health outcomes. The results show that income has a significantly positive, but modest effect on birth weight. We find that an additional $1,000 ($2,331 in 2011 dollars) increases birth weight by 17.7 g and substantially decreases the likelihood of a low birth weight (a decrease of around 14% of the sample mean). Furthermore, the income effect is higher for less‐educated mothers. Based on a gestation‐weight profile in the sample, increased gestation owing to the APFD could explain a maximum of 34%–57% of the measured weight increase, although we are unable to examine all the potential mechanisms. (JEL I10, I18, I12)     

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.     

COLLATERAL CONSTRAINTS AND THE CURRENT ACCOUNT: THEORY AND EVIDENCE

We investigate the impact of domestic financial frictions on the current account dynamics in Asian countries before and after the Asian financial crisis in 1997–1998 by introducing collateral constraints into the intertemporal current account approach. We examine six Asian countries. Before the crisis, collateral constraints significantly impact the current account in Korea, Malaysia, the Philippines, and Thailand, but after the crisis, they do not. Our study shows that the impact of domestic financial frictions on the current account changes before and after a financial crisis. (JEL F32, F41)     

CREDIT CONSTRAINTS AND LABOR SUPPLY: EVIDENCE FROM BANK BRANCHING DEREGULATION

This paper examines labor supply adjustment-both at the intensive and extensive margins-following financial market development. Specifically, we exploit the staggered passage of bank branching deregulation in the United State to study the impact of relaxing credit constraints on labor supply decisions. We find strong evidence that improvements in how credit markets function decrease weekly hours worked, and that the effect is most significant for the lower-middle (marginal) income group. Furthermore, we observe heterogeneous responses across demo graphic groups (race and income). In contrast, we find little to no evidence that deregulation has a significant impact on the extensive margin of participation.     

INTERTEMPORAL SUBSTITUTION AND CONSTRAINTS ON LABOR SUPPLY: EVIDENCE FROM PANEL DATA

This paper tests an intertemporal labor supply model for workers who say they face quantity constraints on their hours and for workers who say they do not. The data reject the model for the first group but not for the second. I conclude from this evidence that employment fluctuations result mainly from changes in the severity of constraints—that is, changes in involuntary unemployment—rather than intertemporal substitution. It also appears that liquidity constraints influence labor supply. Finally, the paper proposes a new approach to identifying intertemporal labor supply equations.     

NEW EVIDENCE ON INCOME AND THE VELOCITY OF MONEY

Time series and cross-country empirical results suggest that cash holding as a proportion of income rises, or equivalently that velocity falls, as income increases. Numerous cross sectional findings at many points in time, in several countries conclude oppositely. It is argued here that the former findings suffer from omitted variable bias by ignoring sociodemographic variables affecting the demand for cash balances. When one incorporates such demand shifters into the analysis the time series and cross-country findings are seen as consistent with the critically reexamined cross sectional result that velocity increases with income.     

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.     

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.     

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.     

INSTITUTIONAL CHANGE AND THE VELOCITY OF MONEY: A CENTURY OF EVIDENCE

We study common features in the income velocity of money, income, and interest rates for Canada, the U.S., the U.K., Sweden and Norway using annual data from 1870. The recently developed and refined techniques of testing for cointegration are employed.
The evidence suggests there is a unique long-run relationship in velocity but not in income and interest rates. Moreover, we find that only a model which includes institutional change proxies is properly specified. We argue that the evidence is best interpreted in the context of common historical developments in the respective countries' financial systems.     

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.     

THE DEMAND TO REGULATE FRANCHISE MONOPOLY: EVIDENCE FROM CATV RATE DEREGULATION IN CALIFORNIA

The motivation to price control a franchise monopoly is examined in the context of three distinct economic views of regulatory behavior. These views are tested against data from the California cable television market, over the years 1980–85, during which a subset of monopoly firms converted from regulated to unregulated pricing for basic cable service. As the price constraints of regulation appear to be insignificant in a welfare analysis, the demand for such controls by municipalities is derived from their utility in enforcing vote-maximizing transfer schemes–a Peltzmanian political outcome with a Stiglerian economic welfare result.     

THE DEMAND FOR EXCESS RESERVES, LIABILITY MANAGEMENT, AND THE MONEY SUPPLY PROCESS

Commercial bank behavior is not adequately dealt with in existing macro models of the financial sector. The central role of a demand for excess reserves (or free reserves) function in models of the money supply process is particularly suspect. In this paper, it is argued that changes in commercial bank behavior induced by alterations in economic and financial conditions and various banking regulations, along with the central bank's approach to policy, have combined to alter the excess reserve function and the relationship between bank reserves and the money supply. Empirical work presented suggests that the "demand" for excess reserves has indeed undergone structural change. Thus, the study indicates that conventional approaches to commercial bank behavior and the demand for excess reserves need to be reworked.     

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.     

SOME EVIDENCE ON THE ALCHIAN AND ALLEN THEOREM: THE THIRD LAW OF DEMAND?

This paper examines empirically the Alchian and Allen proposition that shipping charges induce consumers to opt for higher quality goods. We show in a household productions framework why this holds whether goods or buyers travel. Using a large sample of individual consumption data for football games, we find that buyers who travel the farthest, purchase the best tickets. In the end, we believe that the Alchian and Allen theorem is so broad and pervasive that it qualifies as the third law of demand.