Money as a Potential Anchor for the Price Level: a Critique of the P* Approach

A number of recent articles have attempted to restore the use of a simple measure of the money supply as an indicator of future price levels and to re-establish a causal link from money to prices. Most notably Hallman, Porter and Small (HPS) (1989a), (1989b) originated the approach using US data and Hannah and James(1989) have applied it to the UK The approach broadens the traditional idea of a constant velocity of money by introducing the notion of V* and Q*, the long-run value of velocity and income. These are then used to define P from the traditional quantity theory of money as the long-run equilibrium price level. The analysis then proceeds to estimate a standard Error Correction Model (ECM) for price determination with the levels effect given by (P-P*)t-1. The conclusion drawn is that 'a measure of money that determines the long-run future level of prices is useful in determining the proper monetary policy for attaining price stability. We have shown, through the construction of P*, that M2 can serve as this determinant for the price level' (Hallman, Porter and Small (1982a) p. 23).
We argue in this paper that the P* approach is flawed. It is certainly more complex than traditional monetarist approaches but the fundamental questions of causality are in no way either affected or resolved. The P* analysis is a variant on more conventional cointegration analysis (Engle and Granger (1987), Johansen (1988), Hall (1989)) and we argue that the Johansen framework allows us to address the question in a formal and more complete way. When this approach is applied to the US data used by HPS, we find that while the P* relationship does indeed represent a cointegrating one, it does not have a causal link with prices but rather the causality runs from prices to money - this result conforms well to the work of Hendry and Ericsson (1990) or Hall, Henry and Wilcox (1990), which use this form of relationship to model the demand for money.     

Dualism in Part-Time Employment

This paper draws on open-ended interviews of managers to characterize two distinct types of part-time employment in service industries. "Secondary" part-time employment displays the typical characteristics of a secondary labor market; "retention" part-time jobs are primary labor market jobs. Some predictions of this model are tested on Current Population Survey data.     

Asset-pricing Puzzles and Incomplete Markets

The representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets. The model features two types of agents who differ up to a nontradable, idiosyncratic component in their endowment processes. Numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone. Restrictions on the variability of intertemporal marginal rates of substitution ( Hansen and Jagannathan (1991) ) are used to argue that incomplete markets, as modeled here, cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory.     

The transition to an advanced organic economy: half a millennium of English agriculture1

All organic economies were subject to constraints upon growth for reasons familiar to the classical economists, but their relative success in coping with these constraints differed substantially. This is visible both when comparing different areas at the same point in time and when comparing the circumstances of a given economy at different points in time. In this article the state of the English economy in 1300 is compared with its state in 1800. At the former date the balance between output and population was unfavourable. A run of poor harvests spelled grave and widespread suffering. Five hundred years later this had ceased to be true. The particular focus of the article is upon the significance of a rising level of productivity per head in agriculture, not simply in supplying food but in providing the raw materials and energy needed if industry and transport were to expand. In the circumstances of an organic economy both were heavily dependent upon the ‘surplus’ made available by a productive agriculture after meeting the needs of the population for food.