Wealth effects on money demand in the euro area

We investigate the determinants of money demand (M3) in the euro area, considering that this variable remains an important co-determinant of monetary policy making by the European Central Bank. Regressing the real stock of M3 on real GDP, interest rates and wealth variables (real housing and stock prices) within an error-correction framework provides evidence of positive wealth effects on money demand in the long run. Correcting for this wealth effect, money demand in the euro area has grown almost exactly in line with the official reference value of 4 1/2% per annum. This article builds on research that was conducted in preparation of the annual OECD Economic Survey of the euro area and reported in Boone et al. (2004). The authors thank their colleagues in the Economics Department and the European Central Bank and two anonymous referees for their valuable comments. The authors assume full responsibility for any remaining errors and omissions. The opinions expressed in this article do not necessarily represent those of the OECD or its member countries     

Productivity,real exchange rate,and aggregate demand: An empirical exercise applied to Brazil from 1960 to 2011

This research analyzes, from a post Kaleckian perspective, the interactions among the aggregate demand, the real exchange rate, productivity, and real wages in the Brazilian economy from 1960 to 2011. It adopts the longstanding perspective that demand is the driver of capital accumulation and economic growth. The research comprises the following steps: (a) a critical assessment of the growth regime literature, with a particular emphasis on issues related to productivity and the real exchange rate; (b) understanding the relationship between the real exchange rate and the productivity and growth regimes; (c) proposing a theoretical model that relates the real exchange rate, productivity, and the growth regime; and (d) an empirical test of the interaction between the real exchange rate, productivity, and the growth regime. Theoretically the study develops a model showing the interactions between the aggregate demand, the real exchange rate, productivity, and real wages. Furthermore, this research attempts to address the lack of theoretical and empirical studies about the relationship between the aggregate demand, the real exchange rate, productivity and real wages.     

Absorptive capacity of demand in sports innovation

We propose a stylized and tractable neo-Schumpeterian model of sectorial transformations in which demand-side knowledge constraints inhibit innovation diffusion and industrial change, causing structural instability. Evolutionary competition in the model implies that innovation can overshoot the absorptive capacity of demand, leading to a slowdown in sectorial dynamism and even to structural collapse. Closed-form analytical results prove the existence of a unique stationary state in the dynamic model that is (globally) asymptotically stable. We show how the dynamic paths and the stationary rest-point depend on the trade-off between innovation and demand absorptive capacity parameters. To illustrate the plausibility and relevance of our results, we examine the Australian windsurfing industry in which diminished demand absorptive capacity (in the terms of the model) was a factor underlying sectoral collapse. We discuss how development of absorptive capacity of demand presents a collective action problem for an industry sector, and the role of demand-side factors as constraints in industry and innovation policy.     

Aggregate demand, the wage gap and unemployment in LDC's

This paper begins with the Todaro framework which relates LDC urban unemployment to the existence of an urban-rural wage gap. An explanation of the wage gap is developed from aggregate demand conditions in the urban sector, providing a Keynesian theory of LDC unemployment. Various policies to alleviate LDC unemployment are considered. Aggregate demand policies are most certain of success when the response of urban output to these policies is low, a situation which has usually been held to invalidate demand policies in LDC's. Import substitution policies promote unemployment and should be reversed or even replaced by rural sector subsidization.     

收入再分配对我国居民总消费需求的扩张效应

本文研究我国收入再分配与居民总消费需求的关系。文章利用分组的家庭户数据,用三种方法度量居民消费支出,估计了各收入组的边际消费倾向差异。研究中还将变量间的长期动态关系和通货膨胀因素纳入分析范围。研究结果表明,中国的收入分配显著影响了居民消费。根据本文的模拟计算,即使中低收入阶层的收入份额只有微弱的提高,也可以增加数百亿元的居民消费需求。因此,缩小居民收入差距,加大居民收入再分配的力度,壮大中等收入者的队伍,提高农民收入,对刺激我国居民消费需求具有积极作用。     

Aggregate labor market fluctuations under news shocks

The standard RBC model fails to replicate the relationship between aggregate hours worked and average productivity. We propose a DSGE model that incorporates habit formation preferences, capital adjustment costs, and news shocks to solve the puzzle implied in the standard RBC model with only technological shocks. The aggregate labor supply curve is shifted due to the wealth effect caused by the variation of consumption under a news shock. Moreover, capital adjustment costs help amplify the variation of consumption, and thus the movement of the aggregate labor supply curve under the news shock. Also, the aggregate demand curve will be shifted, as it operates in the standard RBC model after the realization of the news shock. As a result of the joint movement of the aggregate labor supply curve and aggregate labor demand curve under the news shock, the model achieves a relationship quite close to the empirically observed relationship.     

The inflationary bias of real uncertainty and the harmonic Fisher equation

Summary. We argue that real uncertainty itself causes long-run nominal inflation. Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We show that the equilibrium long-run rate of inflation is strictly higher, on almost every path of endowment realizations, than it would be if the endowments were constant.Indeed, we present an explicit formula for the long-run rate of inflation, based on the famous Fisher equation. The Fisher equation says the short-run rate of inflation should equal the nominal rate of interest less the real rate of interest. The long-run Fisher equation for our stochastic economy is similar, but with the rate of inflation replaced by the harmonic mean of the growth rate of money.Received: 25 February 2005, Revised: 26 May 2005, JEL Classification Numbers: C7, C73, D81, E41, E58.An earlier version of this paper “Inflationary Bias in a Simple Stochastic Economy,” as a 2001 Cowles Foundation Discussion Paper No. 1333.     

Limited asset markets participation, monetary policy and (inverted) aggregate demand logic

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While ‘moderate’ participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the ‘IS’ curve changes sign, the ‘Taylor principle’ is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the ‘Great Inflation’ period.     

Democracy, collective action and intra-elite conflict

We analyze a model where there is uncertainty about the future power of two ex-ante symmetric elites to appropriate surplus, and ex-ante surplus sharing agreements are not binding. We show that in an oligarchy, the stronger elite appropriates the entire available surplus, whereas a democracy results in a more balanced surplus allocation between the two elites. In a democracy, the newly enfranchised non-elite organize to act collectively, so that the weaker elite can credibly threaten to form a coalition with the organized non-elite against the stronger elite. Such a threat ensures that the more balanced surplus sharing proposal chosen by majority voting is renegotiation-proof. Therefore, sufficiently risk-averse elites unanimously choose democracy as a form of insurance against future imbalances in relative power. We emphasize that franchise extension to, and low cost of organizing collective political activity for, the non-elite are both necessary features of a democracy. Our formal analysis can account for the stylized facts that emerge from a comparative analysis of Indian and Western European democracies.     

Aggregate demand, food prices, and the underlying rate of inflation

With the inflation rate rising in the 1970s, the concept of an underlying rate of inflation became increasingly popular. The rationale for subtracting out food and fuel price increases was straightforward: such increases were viewed as reflecting special supply-side factors likely to be temporary and reversible or, at worst, one-time rises in relative prices with no lasting effect on the inflation rate. This paper presents empirical evidence that raises serious questions about these assumptions and procedures. More specifically, shifts in aggregate demand have a statistically significant cumulative effect on food prices and this effect increases quantitatively as food moves from the farm to the retail level. The cumulative effect of demand on food prices was also found to have increased over time (as farmers' value-added declined) and demand appears to effect prices more quickly at the wholesale level than at the retail level.     

A macroeconomic model of aggregate supply and demand for the UK

In this paper we publish for the first time the econometric model of the UK economy recently developed at City University Business School (CUBS). The differentiating feature of the CUBS model is its concern with the ‘supply side’ and its attempt to estimate an aggregate production function. The model distinguishes between markets in goods and services, labour, capital, money and foreign exchange.     

On the escalation and de-escalation of conflict

We introduce three extensions of the Hirshleifer–Skaperdas conflict game to study experimentally the effects of post-conflict behavior and repeated interaction on the allocation of effort between production and appropriation. Without repeated interaction, destruction of resources by defeated players can lead to lower appropriative efforts and higher overall efficiency. With repeated interaction, appropriative efforts are considerably reduced because some groups manage to avoid fighting altogether, often after substantial initial conflict. To attain peace, players must first engage in costly signaling by making themselves vulnerable and by forgoing the possibility to appropriate the resources of defeated opponents.     

Multilateralism and military Keynesianism: Completing the analysis

Kalecki’s analysis of military Keynesianism highlights the difficulties of managing aggregate demand in one country, without coordination with trading partners. Military Keynesianism is effective as a means of reflation because, unlike civilian public works, it induces similar expenditure by political rivals. In this way it overcomes some of the trade difficulties that arise if aggregate demand expands in only one country.     

Converting social conflict: Focal points and the evolution of cooperation

We examine the ability of focal points to transform situations of potential conflict into situations of cooperation. In performing this function, focal points convert “worst-case scenarios” into “better-case scenarios,” which are easier for political economic systems to handle. Focal points thus contribute to the ability of political economies to perform well in the face of less than ideal conditions, enhancing systemic robustness. JEL Code P0     

Aggregate cigarette demand and regional differences in China

National educational level, final consumption expenditure, average propensity to cigarette consumption (APCC) and cigarette price are adopted to research the regional and national aggregate cigarette demand of China. Under the condition that the effects of anti-smoking education in the Chinese current educational system are not remarkable, the theoretical model shows that cigarette demand will increase with the increase of national educational level. Empirical analysis points out that cigarette demand increases with the increase of educational level. Estimates also suggest that cigarette price, consumption expenditure and APCC will affect cigarette demand significantly, and that there are great differences for cigarette demand by region.     

Stable alliance formation in distributional conflict

This paper develops a positive analysis of alliance formation, building on a simple economic model that features a “winner-take-all” contest for control of some resource. When an alliance forms, members pool their efforts in that contest and, if successful, apply the resource to a joint production process. Due to the familiar free-rider problem, the formation of alliances tends to reduce the severity of the conflict over the contestable resource. Despite the conflict that arises among the winning alliance's members over the distribution of their joint product, under reasonable conditions, this effect alone is sufficient to support stable alliance formation in a noncooperative equilibrium.     

British tourism demand elasticities in Mediterranean countries

We use the almost ideal demand system (AIDS) model developed by Deaton and Muellbauer (1980) to estimate tourism demand elasticities for a number of Mediterranean countries (Cyprus, Greece, Italy, Malta, Portugal, Spain and Turkey) in relation to tourists originating from the United Kingdom during the period 1963 to 2009. Using the restrictions imposed by theory, we find that the model is able to explain developments in market shares reasonably well, despite the large and at times sudden changes in market shares over the sample period. Our share estimates indicate that while Spain and Portugal managed to keep a stable market share over time, Malta and especially Italy lost market share to Cyprus, Greece and Turkey. Overall, we observe that Italy and Spain have the lowest own-price elasticities, whereas Greece, Portugal, Spain and Turkey are expenditure inelastic holiday destinations. We also improve over the traditional treatment of the AIDS model in the literature by studying the stability of the estimated elasticities over time using recursive estimates. The results indicate that some elasticities are indeed time varying and highlight the potential pitfalls of assuming fixed and stable elasticities over a long period, as is customary in the tourism literature.     

Bargaining power, effective demand and technical progress: a Kaleckian model of growth

Following the Kaleckian tradition, this paper presents a demand-ledgrowth model in which the distribution of income is fully endogenised.This is done by introducing claims on income by workers andfirms. The bargaining power of these two groups affects, throughdistribution, the patterns of accumulation and inflation. Inturn, the bargaining power of workers is affected by the rateof change of employment. The paper discusses the model's static and dynamic implications,including the effects of exogenous and induced technical progress.The model confirms all the typical Kaleckian results, includingthe fact that increases in real wages may lead to acceleratingaccumulation as well as inflation. It also produces a new result:it is possible that an increase in the rate of change of labourproductivity may not lead to an increase in the rate of changeof employment.     

Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

Summary. A pure endowment overlapping generations economy can be inefficient because of insufficient risk sharing. The introduction of an outside asset by a government or the existence of a clearing house can remedy the inefficiency by allowing some intergenerational risk sharing. While the typical outside asset is fiat money, many alternative financial mechanisms, such as social security, risk-free government bonds, mispriced deposit insurance, and income insurance can serve the same function as fiat money. Hence there are many equivalent financial mechanisms that provide intergenerational insurance. In the presence of uncertainty, there are several concepts of Pareto optimality that can be appropriately applied in an overlapping generations setting. I examine the risk-sharing arrangements associated with two different concepts of optimality, including how these arrangements are financed. The results are related to, and in some instances an extension of, the equivalence results obtained by Chamley and Polemarcharkis (1984), Weiss (1977), and Wallace (1981).Received: 4 March 2003, Revised: 30 January 2004JEL Classification Numbers: E40, E44, D51.P. Labadie: I would like to thank the participants of the Economic Theory Symposium Recent Developments in Money and Finance at Purdue University, May 2-4, 2003 and an anonymous referee for comments on this version. I am grateful to Bruce Smith for comments on an earlier version.