Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring

The Swiss Wirtschaftsring (“Economic Circle”) credit network, founded in 1934, provides residual spending power that is highly counter-cyclical. Individuals are cash-short in a recession, and economize by greater use of WIR-credits. A money in the production function (MIPF) specification implies that transactions in WIR form a stabilizing balance that makes up for the lack of ordinary currency. Thus, unlike the ordinary money, WIR money is negatively correlated with GDP in the short run. This implication is confirmed by empirical estimates. Such credit networks play a stabilizing role that should be considered in monetary policy.     

Money, endogenous fertility and economic growth

This paper analyzes the issue of money superneutrality through an intertemporal optimizing model of capital accumulation with endogenous fertility, i.e. endogenous population growth. Two elements of this setup invalidate money superneutrality: (i) a demand for fertility that depends on real money balances, and (ii) an inverse relation between capital–labor ratio and population growth. Higher monetary growth increases fertility, since it reduces its opportunity cost, and hence diminishes capital intensity, and per capita output. This reverse Tobin effect is matched by an increase in aggregate capital and output growth rates. In this framework, the optimal monetary growth rule is a “distorted Friedman rule”.     

Disequilibrium macroeconomics, money as a buffer stock and the estimation of money demand

Standard explanations of the seeming instability of the money demand in the post-1973 period usually link to stories about financial innovation and deregulation. I propose an alternative hypothesis: Much of the seeming instability occurs because of shifts in monetary policy, either explicit or implicit, in an environment where the Federal Reserve controls a more “exogenous” money stock. My econometric analysis modifies existing methods for estimating markets in disequilibrium and incorporates newly developed cointegration and error-correction modeling. My findings provide support for the buffer-stock interpretation of the money market.     

Control of SO2 emissions from power plants: A case of induced technological innovation in the U.S.

This paper investigates how the details of government actions induce innovation—the overlapping activities of invention, adoption and diffusion, and learning by doing—in “environmental technology,” products and processes that either control pollutant emissions or prevent emissions altogether. It applies multiple quantitative and qualitative measures of innovation to a case subject to several “technology-push” and “demand-pull” instruments: sulfur dioxide control technology for power plants. The study employs analyses of public R&D funding, patents, expert interviews, learning curves, conference proceedings, and experience curves. Results indicate that: regulation and the anticipation of regulation stimulate invention; technology-push instruments appear to be less effective at prompting invention than demand-pull instruments; and regulatory stringency focuses inventive activity along certain technology pathways. Increased diffusion of the technology results in significant and predictable operating cost reductions in existing systems, as well as notable efficiency improvements and capital cost reductions in new systems. Government plays an important role in fostering knowledge transfer via technical conferences, as well as affecting the pattern of collaborative relationships within the technical research community via regulatory changes that affect the market for the technology. Finally, the case provides little evidence for the claim that cap-and-trade instruments induce innovation more effectively than other instruments.     

A note on the speculative demand for money

In the General Theory, Keynes argued that expectations about future bond prices tend to be “sticky”. A rise in bond prices causes more investors to “join the bear brigade” and so increases the aggregate demand for money. Since Tobin's classic article on liquidity preference, this explanation of the downward sloping demand for money curve has largely disappeared from the literature. This note introduces sticky expectations into the Tobin framework. It shows that the existence of such stickiness does not necessarily cause the demand for money to be more elastic because investors have expectations about the variance of future bond prices as well as about their mean. A sufficient condition for a more elastic demand for money under sticky expectations is that the Pratt-Arrow coefficient of relative risk aversion be either constant or decreasing in wealth.     

Perpetual youth and endogenous labor supply: A problem and a possible solution

In the “perpetual youth” overlapping-generations model of Blanchard and Yaari, if leisure is a “normal” good then some agents will have negative labor supply. We suggest a solution to this problem by using a modified version of Greenwood, Hercowitz and Huffman’s utility function. The modification incorporates real money balances, so that the model may be used to analyze monetary as well as fiscal policy. In a Walrasian version of the economy, we show that increased government debt and increased government spending raise the interest rate and lower output, while an open-market operation to increase the money supply lowers the interest rate and raises output.     

International tax arbitrage, tax evasion and interest parity conditions

Using a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for international portfolio investors in an economy with heterogeneous capital income taxation when there is some scope to evade taxes on foreign capital income. We derive tax-modified uncovered interest parity conditions and forward rates similar to the no-tax ones, but augmented by tax-induced “risk-premium” terms; covered interest parity conditions remain unaffected by the introduction of capital income taxes, a consequence of our approach of bounding tax-based arbitrage without restricting arbitrage per se.     

The information content of the divisia monetary aggregates in forecasting inflation in the euro area

The paper investigates the performance of a set of monetary indicators, based on the Divisia money constructed for the euro area, on forecasting euro area inflation. The paper first briefly discusses on the relative information contents of the Divisia aggregates and the simple sum aggregates. The forecasting performance of the former is then examined by means of simulated out-of-sample forecasting. In addition to examining the information contents of the Divisia aggregate constructed for M3 money, the study also examines the performance of the Divisia M1 money to gain evidence on the relative performance between the broad and narrow Divisia monetary aggregates. According to the results, only some of the monetary indicators considered can significantly improve the univariate inflation forecasts. The Divisia M3 money based monetary indicators turned out to perform better than their Divisia M1 based counterparts. The result contradicts some previous evidence on the optimal level on monetary aggregation in the context of broad versus narrow money.      

Balances of payments and exchange markets: A lost correspondence

The article presents an accounting framework capable of consistently describing on a worldwide scale international money (euro-currency) markets. It also shows that, in such a framework, interest rates on international money markets need not be explained by econometric models specific to such international markets, but could simply result from the appropriate aggregation of national econometric models. Finally, the author emphasizes that in a world in which a country's money can be created by the banking systems of other countries, the correspondence between a country's balance of payments equilibrium and the foreign exchange market for its own money is no longer valid.     

Rational expectations and the demand for money: A nonparametric approach

This paper tests the U.S. demand for money for evidence of the effect of rational expectations of the income and interest rate variables that enter as arguments into that function. The data employed are simple-sum and Divisia aggregates, and the nonparametric tests are of the identification and information orthogonality of the various monetary measures. The Akaike Criterion is used to distinguish among the alternative specifications. While non-rationality is the typical result, Divisia aggregates appear to be more “rational” than simple sum. There is evidence of mean-reversion in interest rates as well.     

Abreu–Matsushima Mechanisms: Experimental Evidence

Abreu–Matsushima mechanisms can be applied to a broad class of games to induce any desired outcome as the unique rationalizable outcome. We conduct experiments investigating the performance of such mechanisms in two simple coordination games. In these games one pure-strategy equilibrium is “focal”; we assess the efficacy of Abreu–Matsushima mechanisms for implementing the other pure-strategy equilibrium outcome. Abreu–Matsushima mechanisms induce some choices consistent with the desired outcome, but more choices reflect the focal outcome. Moreover, “strengthening” the mechanism has a perverse effect when the desired outcome is a Pareto-dominated risk-dominated equilibrium.Journal of Economic LiteratureClassification Number: C7.     

Sudden stops, banking crises and investment collapses in emerging markets

We evaluate whether financial openness leaves emerging market economies vulnerable to the adverse effects of capital reversals (“sudden stops”) on domestic investment. We investigate this claim in a broad sample of emerging markets during the period 1976–2002. If the banking sector does not experience a systemic crisis, sudden stop events fail to have a significant impact on investment. Bank crises, on the other hand, have a significant negative effect on investment even in the absence of a contemporaneous sudden stop crisis. We also find that openness to capital flows worsens the adverse impact of banking crises on investment. Our results provide statistical support for the policy view that a strong banking sector which can withstand the negative fallout of capital flight is essential for countries that open their economies to international financial flows.     

The economics of shortage and problems of reform in Chinese industry

This paper employs the economics of shortage framework to examine post-Mao reforms in Chinese state-owned industry. Performance has been disappointing because reforms through 1985 failed to fundamentally alter economic agent behavior. The “soft” budget constraints at the enterprise and local government levels continue to generate “quantity” and “expansion” drives. The resultant inflationary pressures have necessitated administrative interventions and thwarted reform progress. The Maoist legacy of active participation by local governments in economic management is high-lighted as a major obstacle to the elimination of paternalism in state-enterprise relations.     

The research strategy in management of technological innovation

The increasing importance of technology in the application world has imposed high demand on the research community for insightful and useful principles about “management of technological innovation” (MTI). This paper examines the academic legacy in terms of conceptual categories, causal relationships and taxonomy of relevant systems, and asserts from a system perspective that MTI as an applied science is still in its infancy.Based on methodological argument, this paper warns of the danger of hasty compromise of strategically important topics to “popular” definition of “researchability,” and suggests several research guidelines and approaches for this young interdisciplinary discipline:

1. (1)To explore new frontiers, use “proximate variables,” consider contextual factors and causation in broad terms, conceptualize “independently,” and pay more attention to case study method.

2. (2)To understand driving forces, be aware of practice, and focus on internal dynamics.

3. (3)To transcend complexity, adopt a hierarchical structure perspective and state-and-flow concept, and condense findings into configurations.

Finally, this paper urges the formation of an overall research strategy to accelerate the accumulation of MTI grounded knowledge.     

Can Japan succeed in “Chigyo-ka” (intelprise-formation)?

There are two aspects in today's information revolution that started in the late 1970s. The first is an aspect referred to as “the third industrial revolution,” which triggers the transition to the “21st century system of Industrialization.” The information revolution in this sense brings the creation of new “breakthrough industries (new multimedia industries).” And the second aspect of the information revolution possesses the characteristics of both a technological revolution and a social revolution and brings about the arrival of the third phase of the historical evolutionary process of the modern civilization, which proceeds through three phases, namely “militarization, industrialization, and then informatization.”If the bearers of modern industrialization are a “group of enterprises” that have been engaged in the race in order to gain “wealth” (generalized means of exchange/exploitation power), and if these enterprises' activities have been exercised in the world market where their products have been sold, then it is appropriate to call the bearers of informatization a “group of intelprises.” They will be engaged in the race to gain “wisdom” (generalized means of persuasion/induction power), then stages of their activities can be called a “global intelplace” where “sharables,” that is, information and knowledge, will be disseminated. And now, toward the 21st century, the third phase of modernization, which can be called the “informatization/intelprise formation” or the “wisdom game” (intellectualism), is about to begin.Japan's “ie society (a society based on the ie principle—literally, it means “house” but here it is interpreted as cultural principle for organizing a society), which has been going through the process of evolution on the Japan Archipelago, has developed a network-based organization with little stratification within its infrastructure. In this sense, Japanese society can be characterized as a “network-oriented society” in which intelprises and an intelplace in the broad sense have functioned as the essential components of the society since Middle Ages. In general, an intelplace and intelprises that operate actively within this framework serve as the flexible bases for different types of social relations and institutions, such as states and markets and eventually integrate these into the society to a certain extent. In fact, it took place quite regularly during the modernization “in the narrow sense,” or Westernization of Japanese society after the Meiji Restoration. There exist some problems, however. Some of the characteristics found in Japanese society may become obstacles to activities aimed at the sharing and promotion of information and knowledge in the global intelplace and Japanese participation in the “wisdom game.” Badly needed are serious efforts for Japanese intelprise-formation to reduce these obstacles as much as possible.     

Leaders in change : Solar energy owners and the implications for future adoption rates

Information on the characteristics of the initial wave of homeowners who installed solar energy systems is presented and then used to anticipate future solar market penetration patterns. Surveys of these adopters reveal high education and income levels; professional and executive occupations; economic, energy saving, and environmental concern as the principal purchase motivations; and high satisfaction levels. As a group, these individuals conform to the “early adopter” type identified in innovation diffusion research rather than the “innovator” type that would be expected at this early stage of commercialization. This characteristic, the influence of economic motivations, owners' high satisfaction levels, and the findings of other surveys indicate that widespread solar system adoption is probable if the initial high cost barrier can be reduced.     

Rat race, redistribution, and growth

Introducing locally negatively interdependent preferences into a simple AK growth model easily explains the often observed insignificant or positive correlation between distortionary redistribution and growth rates. Positive capital income taxes and lump sum transfers are harmful for growth, but people rationally vote for them in order to reduce “rat race” overaccumulation. A “neutrality proposition” holds if the pivotal voter is the mean voter, as in a representative agent case, but it fails if the pivotal voter is poorer than the average citizen.     

Money,net wealth,and the real-balance effect

This paper deals with two important questions in monetary economics: Is competely produced resource-using bank money part of society's net wealth? Is such money part of the base relevant for the operation of the real-balance effect? We argue that the answer to the first question depends critically on the nature of the asset and not on the market structure of the industry. In particular, we argue that perfect competition in the banking industry is a necessary but not sufficient condition for excluding bank money from society's net wealth. Furthermore, we argue that resource-using bank money is part of the base relevant for the operation of the real-balance effect, regardless of whether or not it is part of society's net wealth.     

Anonymous yes–no voting with abstention and multiple levels of approval

Symmetric (3,2) simple games serve as models for anonymous voting systems in which each voter may vote “yes,” abstain, or vote “no,” the outcome is “yes” or “no,” and all voters play interchangeable roles. The extension to symmetric (j,2) simple games, in which each voter chooses from among j ordered levels of approval, also models some natural decision rules, such as pass–fail grading systems. Each such game is determined by the set of (anonymous) minimal winning profiles. This makes it possible to count the possible systems, and the counts suggest some interesting patterns. In the (3,2) case, the approach yields a version of May's Theorem, classifying all possible anonymous voting rules with abstention in terms of quota functions. In contrast to the situation for ordinary simple games these results reveal that the class of simple games with 3 or more levels of approval remains large and varied, even after the imposition of symmetry.     

When is reputation bad?

In traditional reputation models, the ability to build a reputation is good for the long-run player. In [Ely, J., Valimaki, J., 2003. Bad reputation. NAJ Econ. 4, 2; http://www.najecon.org/v4.htm. Quart. J. Econ. 118 (2003) 785–814], Ely and Valimaki give an example in which reputation is unambiguously bad. This paper characterizes a class of games in which that insight holds. The key to bad reputation is that participation is optional for the short-run players, and that every action of the long-run player that makes the short-run players want to participate has a chance of being interpreted as a signal that the long-run player is “bad.” We allow a broad set of commitment types, allowing many types, including the “Stackelberg type” used to prove positive results on reputation. Although reputation need not be bad if the probability of the Stackelberg type is too high, the relative probability of the Stackelberg type can be high when all commitment types are unlikely.