Sufficiency of an outside bank and a default penalty to support the value of fiat money: Experimental evidence

We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.     

CANTILLON AND HUME ON MONEY AND BANKING: THE FOUNDATIONS OF TWO THEORETICAL TRADITIONS

The distinction between the ‘classical’ monetary theory and ‘quantity’ theory has been proposed in literature on money and banking. The overall feature of the classical theory of money is that it holds one principle of regulation for each kind of issue (metallic money, bank issues and paper money) whereas the quantity theory applied the causality and proportionality postulates for all kinds of monies. Without claiming to adjudicate the validity of such a distinction, the paper investigates the foundation of each tradition. In this respect, this paper, respectively, examines, and provides a survey of the secondary literature on, Cantillon's Essai and the Hume's Discourses.     

International monetary equilibrium with default

We present an integrated framework for the study of the international financial economy with trade, fiat money, monetary and fiscal policy, endogenous default and regulation. Money is introduced via a cash-in-advance requirement and real trade is endogenous. The standard international finance pricing results obtain. Market incompleteness and positive default in equilibrium allow for the study of the transmission of default through the international financial markets and imply a positive role for policy. Finally, we present an example where, due to the trade-off between the non-pecuniary cost of default and the resulting allocation, a Pareto improvement occurs following an increase in interest rates.     

Adaptive learning and monetary exchange

This paper investigates three classic questions in monetary theory: How can an intrinsically worthless asset, such as fiat money, maintain value as a medium of exchange? What are the short-run and long-run effects of a change in the money supply? What is the social cost of inflation? I answer these questions using a microfounded model of monetary exchange that replaces the rational expectations assumption with an adaptive learning rule. First, I show that monetary exchange is a robust arrangement in the sense that agents are able to learn the stationary monetary equilibrium while the non-monetary equilibrium is unstable under learning. Second, an unanticipated monetary injection has real effects in the short-run because learning the value of money takes time. In the long run, agents successfully learn the value of money, hence money is neutral. Third, under a constant money growth policy, an increase in the growth rate of money increases output in the short-run producing a short-run Phillips curve. A ten percent increase in the money growth rate has a social cost of 0.41 percent of output per year. Alternatively, a ten percent decrease in the money growth rate has a social benefit of 0.37 percent of output per year.     

How have the dependence structures between stock markets and economic factors changed during the COVID-19 pandemic?

This study investigates how the dependence structures between stock markets and economic factors have changed during the COVID-19 pandemic using the dynamic model averaging approach. A series of economic factors such as commodity markets, cryptocurrency, monetary policy, international capital flows, and market uncertainty indices are considered. We find that the importance of economic variables and the sign and size of their coefficients are significantly different from those before the COVID-19 pandemic. The stock markets are most influenced by economic factors during the COVID-19 outbreak.     

DISEQUILIBRIUM BUFFER STOCK MODELS: A SURVEY

Abstract. This paper surveys the growing literature on buffer stock models of the monetary transmission process. The first part indicates the basic issue of how (assumed) exogenous changes in the money supply work their way through the economic system via disequilibrium in the money market. After a brief historical development, buffer stock models are divided into four types depending upon whether the disequilibrium arises in stocks and/or flows, and to whether changes in the money stock are purely exogenous. The empirical implications, including how buffer stock models explain the recent behaviour of money demand functions are given. Theoretical and empirical criticisms of the models are presented in terms of the classification system. The survey concludes that whilst the buffer stock notion is an interesting idea, the current models do not lend themselves to empirical testing, and those models which do have performed poorly.     

Money stock targeting and money supply: An intertemporal optimization approach (with an application to Canada)

We propose a model of the short-term behaviour of the monetary authorities of a small open economy that is willing to stabilize, to some extent, its bilateral exchange rate vis-à-vis a dominant partner. The optimal money supply strategy is derived using intertemporal optimization arguments, in a rational expectations environment, The model is formulated so as to avoid the time inconsistency problem stressed by Kydland and Prescott (1977). It allows econometric estimation of the optimal money supply rule as well as of the parameters of the intertemporal utility function, and of the function that defines the intermediate target money stock. The model is successfully estimated on Canadian quarterly data, using maximum-likelihood techniques.     

国际短期资本流动对货币政策有效性的影响分析——基于VAR模型和脉冲响应函数的研究

采用VAR模型和冲脉效应函数实证分析国际短期资本流动对货币政策有效性的影响分析,结果显示：货币供给量、利率和国际短期资本流动之间具有长期稳定的均衡关系;利率变动和货币供给之间反向变动;国际短期资本流动对货币政策有效性的影响已经显现,然而国际短期资本流动带来的货币供应量的上升被国家货币政策的调控所冲销,而且冲销力度过大;由于我国对资本流动进行管制,因此隐蔽性资本流动对货币政策效果目标的影响不明显;进出我国的国际短期资本的套利动机虽然不显著,但是国际短期资本流动和利率的关联性已经很强。最后,以实证结果为依据,提出相应对策建议。     

The stability of money demand in China: Evidence from the ARDL model

This study examines the demand for broad money (M2) in China using the autoregressive distributed lag (ARDL) cointegration framework. The results based on the bounds testing procedure confirm that a stable, long-run relationship exists between M2 and its determinants: real income, inflation, foreign interest rates and stock prices. Importantly, our results reveal that stock prices have a significant wealth effect on long- and short-run broad money demand; its omission can lead to serious misspecifications in the money demand function (MDF). This finding is consistent with the notion that asset inflation (deflation) has systematic influence on the pattern of monetary aggregates.     

Interbank credit and the money manufacturing process: a systemic perspective on financial stability

Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, eventually requiring exceptional monetary policies by central banks, and guarantee and bailout interventions by governments. Our article develops an interacting heterogeneous agent-based model of interbank credit coordination under minimal institutions. First, we explore the link between interbank credit coordination and the money generation process. Contrary to received wisdom, interbank credit has the capacity to remove the inner limits of monetary system capacitance. Second, we develop simulation analysis on imperfect interbank credit coordination, studying impact of interbank dynamics on financial stability and resilience at individual and aggregate levels. Systemically destabilizing forces prove to be related to the working of the banking system over time, especially interbank coordination conditions and circumstances.

     

Monetary Policy and the Stock Market: Theory and Empirical Evidence

This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy. This is an area of research that has interested monetary and financial economists for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models. If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity.     

Inflationary equilibrium in a stochastic economy with independent agents

We prove the existence of stationary monetary equilibrium with inflation in a “Bewley” model with constant aggregate real variables but with idiosyncratic shocks to the endowments of a continuum of individual agents, when a central bank stands ready to borrow or lend fiat money at a fixed nominal rate of interest and the agents face borrowing constraints. We also find that, in the presence of real micro uncertainty about individual endowments, the rate of inflation is higher (equivalently, the real rate of interest is lower) than it would be in a “certainty-equivalent economy”; to wit, one in which every agent’s endowment is replaced by its expected value. Thus, underlying microeconomic uncertainty and borrowing constraints are shown to generate additional inflation.     

货币供应量对我国股票市场影响的实证研究

本文将货币供应量与沪深股指作为代表变量纳入货币金融系统内进行分析,旨在借鉴较为成熟的金融计量方法实证分析货币供应量对于股票价格指数的互动情况,建立适当的VAR模型以及利用VAR模型进行分析,同时对数据进行乔纳森检验(Johansen检验)和格兰杰(Granger)因果检验,并在此基础上分析货币供应量作为货币政策中介工具作用于股票市场的可控性和可测性,从而研究货币供应量与股票价格指数之间的相关关系,得出货币供应量对于股票市场的一般影响机制,指出我国货币政策的缺陷和存在的问题,提出相应的应对策略与建议。     

Monetary Ratios in a Modern Regime: Why the Monetary Base still Matters

A recent paper Bank of England paper cast doubt on the ‘textbook’ model of the money multiplier. However, this criticism is inconsistent and misleading. It understates the importance of the central bank's control over the monetary base, and how this influences the money supply. The confusion suggests that it would be more fruitful to conduct analysis using the currency‐deposit ratio and reserve‐deposit ratio rather than the money multiplier, and evidence from 1998–2013 is provided. This article explains how these ratios depend on the monetary regime, and the distinction between inside and outside money. Although a modern regime alters the way that money creation occurs, the monetary base still matters.     

Connectedness of commodity,exchange rate and categorical economic policy uncertainties — Evidence from China

This paper provides a fresh perspective to explore the network correlations among commodity, exchange rate, and categorical economic policy uncertainties (EPU) in China. We try to contribute to the literature by examining the spillover mechanism with a relatively novel connectedness network using the monthly data over the period between June 2006 and January 2021. Our results suggest that prior to the recession, China’s commodity price is subject to greater spillovers from the exchange rate than recessions. The domestic commodity prices are more sensitive to monetary policy uncertainty and fiscal policy uncertainty. The occurrence of COVID-19 revises the dominance in the system from monetary policy uncertainty and fiscal policy uncertainty to trade policy uncertainty.     

A dynamic generalization of the tobin model

The paper studies the stability and the non-neutrality of money issues of the neoclassical monetary growth theory when the liquidity preference function and the price dynamics equation are generalized in the Tobin model. Our generalization introduces Tobin's real purchasing power into the liquidity preference function, thereby allowing real balance flows to exert direct income effects. Such effects allow a number of separate cases in the price dynamics behavior, some of which lead to results that differ from the neoclassical propositions. Thus, these propositions are sensitive to the choice of a particular proxy measure of the transactions motives of the demand for money.     

A world trade model with bilateral trade based on comparative advantage

This paper describes an extension of Duchin's world trade model to include the explicit representation of transportation costs, permitting the endogenous determination of bilateral trade flows and region-specific prices. The original model is a linear program that, based on comparative advantage and the minimization of factor use, determines regional production and trade flows as well as world prices and scarcity rents for m regions, n good, and k factors. The new world trade model with bilateral trade achieves its objectives by introducing transportation services and geographically dependent transportation requirements for each traded good and each pair of potential trade partners. The formulation of this model and its major properties are presented, and results from a preliminary analysis with 11 regions, eight goods, four transportation sectors, and six factors of production are reported and compared with corresponding results from the world trade model. On the basis of this comparison, we conclude that transportation costs have little impact on a region's total imports or exports of a given commodity.     

Quantitative easing and the loan to collateral value ratio

We study optimal monetary policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.     

ELECTRONIC CURRENCY IN AFRICA: M‐PESA AS PRIVATE INSIDE MONEY

Electronic monies such as Bitcoin and mobile money have become popular in recent times. However, unlike with bitcoin, attempts to classify M‐Pesa theoretically have been rare. This article classifies M‐Pesa as a privately issued inside money, which evolved as an entrepreneurial response to the lack of traditional monies. It describes the institutional framework within which M‐Pesa and other monies evolved while highlighting how competitive forces led to mutual acceptance of competing inside monies, lower prices as well as greater choice for consumers. The case of M‐Pesa and other electronic monies illustrates the potential even today for entrepreneurial and market processes in money given the right institutional setting, especially in developing countries.     

Monetary policy,global liquidity and commodity price dynamics

This paper examines the interactions between money, interest rates, goods and commodity prices at a global level. Aggregated data for major OECD countries are therefore analysed in a cointegrated VAR framework. Our empirical results for the period ranging from the 1970s to 2008 support the view that, when controlling for interest rate changes and thus different monetary policy stances, money (defined as a global liquidity aggregate) is still a key factor to determine the long-run homogeneity of commodity and goods prices movements.