Why does the velocity of money move pro‐cyclically?

The velocity of money usually rises in expansions and falls in recessions This paper explains this pro‐cyclical movement of velocity using two ideas: (i) during business cycles the movement of investment and consumption of durable goods has a larger amplitude than consumption of non‐durable goods and services; (ii) the velocity associated with expenditure on investment and durable goods is much higher than the velocity associated with consumption of non‐durable goods and services, because the former expenditures are synchronized with the attainment of money by economic agents whereas the latter are not. In this setting, the rise in the weight of expenditure in durable goods relative to the weight of non‐durable goods and services, which occurs during expansions, generates an increase in the average velocity of circulation. The opposite happens during recessions and thus velocity moves pro‐cyclically.     

Equilibrium Effects of Superstition in the Housing Market

We investigate the interaction of product quality differentiation and consumer preference heterogeneity in durable goods markets, focusing on the effects of secondary market liquidity and consumer heterogeneity on equilibrium prices. We build an infinite‐horizon dynamic model of the apartments housing market that captures the above features. Some apartments are considered lucky, and some consumers are superstitious. Lucky apartments are valued more highly than non‐lucky ones only by superstitious consumers. Results show that the difference between the lucky apartment price and the non‐lucky apartment price becomes smaller when the secondary market becomes less liquid and when consumers’ preference heterogeneity becomes more persistent as opposed to time‐varying.     

Time Irreversibility in Consumers’ Expenditure: An Analysis of Disaggregated Data

The literature on testing for the presence of cyclical asymmetry in consumers’ expenditure is extended via the application of tests for time irreversibility to UK data subject to a higher degree of disaggregation than considered in previous studies. The empirical findings reported provide support for a positive relationship between the durability of goods and the asymmetric, and specifically time irreversible, behaviour they exhibit at a fine level of disaggregation. Further investigation of the underlying causes of such time irreversibility exhibit pronounced difference according to the degree of durability, in that nonlinearity in the underlying data generating process is a prevalent feature of highly disaggregated durable good expenditures, but is a less marked feature of semi‐durable and non‐durable expenditures. Prominent among the durable and semi‐durable good expenditure categories exhibiting such nonlinearities are expenditures relating to housing fittings and communication equipment. These findings are consistent with threshold effects in inventory control as well as the effects of credit rationing, such that these expenditures are more likely to be made at times when those constraints are eased by income windfalls or by the easing of credit availability, possibly associated with mortgage (re‐) financing.     

Effect of World Fertility Scenarios on International Living Standards

This paper applies a two good, multi‐region Ramsey‐Solow model of the world economy to determine the impact that alternative world fertility rates would have on international capital markets and living standards. Notable features of the model include: relative consumption demands and relative employment efficiencies that vary by age, traded and non‐traded goods, vintage technology, outward‐looking reference consumption, a proportion of non‐optimising rule‐of‐thumb consumers and imperfect capital mobility due to asymmetric information. The model suggests that projected demographic change will imply a flow of international capital from the ageing regions to the younger regions; and that the world interest rate will fall. The lower world interest rate will cause a loss in living standards for ageing regions, the lenders, and a gain for the younger regions, who are borrowers.     

Political Influence of Firms in the Tradables and Non‐Tradables Sectors: A Cross‐Country Analysis

Recent theoretical studies have shown that firms lobby government agencies to influence the structure of trade policies. This article empirically examines whether firms classified as either exporting or import‐competing (i.e. firms in the tradables sector) have differential levels of political influence relative to domestic firms that only produce non‐traded goods (i.e. firms in the non‐tradables sector). We use a rich firm‐level, cross‐sectional dataset from the World Business Environment Survey to achieve this objective. Results from the analysis reveal that exporting or import‐competing firms do have more political influence relative to domestic firms that neither export nor produce import‐competing goods. Market structure, firm age, firm size, government ownership, and dependence on public infrastructure also affect the extent of political influence that firms have.     

Modelling structural change in the UK housing market: A comparison of alternative house price models

This paper develops a new approach to the modelling of house prices in the UK, with housing demand being conditioned directly on consumers' expenditure rather than the determinants of expenditure. Conditioning on consumption ensures that the permanent income measure used in determining the level of consumption is consistently reflected in housing demand. The effects of financial liberalisation on the relative consumption of housing and non-housing goods and services are captured using the average loan-value ratio for first-time buyers. We also allow for financial effects via the real user cost of home ownership. House prices are assumed to adjust so as to clear the housing market. The proposed model is found to have structurally stable parameters across the housing market downturn since 1990. Statistical comparisons with the more conventional models in use at HM Treasury and the Bank of England during the early 1990s provide additional evidence in favour of our proposed approach.     

Is there a quality bias in the Canadian CPI? Evidence from microdata

Rising consumer prices may reflect shifts by consumers to new higher‐priced products, mostly for durable and semi‐durable goods. I apply Bils’ (2009) methodology to newly available Canadian consumer price data for non‐shelter goods and services to estimate how price increases can be divided between quality growth and price inflation. I find that less than one third of observed price increases during model changeovers should be attributed to quality growth. This implies overall price inflation close to inflation measured by the official index. I conclude that, according to Bils’ methodology, the quality bias is not an important source of potential mismeasurement of CPI inflation in Canada.     

ON THE TAXATION OF DURABLE GOODS

This article proposes a dynamic Mirrleesian theory of commodity taxation in the presence of durable goods. A uniform taxation across all goods is suboptimal even when the consumption preferences are separable from labor. If the consumption utility function is strictly concave and durable stocks are adjustable without friction, durable investment should be taxed at a higher rate than the purchase of nondurable goods. With adjustment frictions, the wedge on durable investment depends on substitution effects between durable and nondurable consumption and can be positive or negative. An application suggests that housing investment should face higher tax rates than regular consumption.     

Consumption,Income, and Wealth: Evidence from Age,Cohort, and Period Elasticities

This paper examines the relationship between non‐durable consumption, income, and wealth (housing and financial) allowing explicitly for generational heterogeneity. A framework is proposed to disentangle cohort, age, and period effects and the empirical analysis is based on the U.S. Consumer Expenditure Survey data. We find that there are significant generational differences and the results highlight the range of elasticities implicit in results presented, thus far, by age groups. Moreover, we find supporting evidence of humped shaped age profiles for the elasticity of consumption with respect to income and the importance of financial wealth for those aged 60+. The framework also allows us to generate cohort profiles which draw attention to the negative role of housing wealth for generation X, and period profiles which reinforce the role of financial wealth for the baby‐boom generation.     

THE PECULIAR ECONOMICS OF HOUSING BUBBLES

Home values increase rapidly during housing bubbles generating large capital gains. High loan‐to‐value (LTV) mortgages secured by expected future home values are one way to take advantage of these capital gains. In this article, we use a simple partial equilibrium consumer theory model to explore the implications of high LTV borrowing. We find that sufficiently large expected house price growth leads to an upward‐sloping budget line when households can obtain high LTV mortgages. In this environment, the demand for housing fits neither the conventional theories of consumer goods nor that of investment goods. In fact, increases in the expected future price of housing may reduce current housing demand, whereas decreases in the effective (current) price may lead to households buying smaller homes. Moreover, high LTV loans reduce the effectiveness of monetary policy, but raise the volatility of aggregate demand. Tighter borrowing standards may help lower demand volatility at the expense of shrinking the economy. (JEL E21, R21, E52)     

The Performance Of A Consumption Augmented Asset Index In Ranking Households And Identifying The Poor

Asset ownership indices are widely used as inexpensive proxies for consumption. We show that these indices can be augmented using dichotomous indicators for consumption, which are equally easy to obtain. Using multiple rounds of Living Standards Measurements Study surveys from Malawi, Uganda, Rwanda, Tanzania, and Ghana, we construct indices using different item subcategories and perform a meta‐analysis comparing the indices to per capita consumption. The results show that the standard asset indices, derived from durable ownership and housing characteristic indicators, perform well in urban settings. Yet, in rural samples and when identifying the extreme poor, household rankings and poverty classification accuracy can be meaningfully improved by adding indicators of food and semi‐durable consumption. We find small improvement from using national weights in urban samples but no improvement from using alternative construction methods. With most of Africa’s poor concentrated in rural areas, these are important insights.     

中国住房改革对家庭耐用品消费的影响

中国的住房改革对许多城市家庭形成正的财富冲击。利用CHNS数据,我们发现:同理论预期一致,受益于住房改革的家庭消费了更多的耐用品。特别是,在住房改革的随后几年,其影响更为显著。我们还发现,住房改革对耐用品消费的次序具有影响,经历住房改革的家庭倾向于首先消费生活最必需的耐用品,然后再消费其他耐用品。通过增加家庭的耐用品消费,住房改革对扩大内需和走出当时的通货紧缩产生了积极影响。     

On the Effects of Inflation Shocks in a Small Open Economy

The effects of monetary policies remain always an important topic in macroeconomics. In the literature (closed and open economy), there is no theoretical as well as empirical consensus regarding the effects of monetary policies. In this paper we examine the real effects of inflation in an open economy. Australia is a classic example of a small open economy and is known to exercise inflation targeting. Using quarterly data from Australia and employing vector autoregressive (VAR) analysis, we provide evidence that inflation, both in the short and long run, negatively affects durable and non‐durable consumption and investment, and has a positive effect on the current account. Further, we show that consumption of durable goods is more sensitive than the consumption of non‐durables during the initial periods following inflationary shocks.     

THE TIMING OF UPGRADES*

By using a durable‐goods monopolist model, this paper investigates the timing of upgrades. I consider a three‐period model where the monopolist can upgrade the product in the second and third periods by investing in R&D. I analyse the non‐commitment and commitment cases. In the latter case, the decision on the timing of upgrades is made in the first period in advance. It is shown that the time‐inconsistency problem causes the monopolist in the non‐commitment case to release a new version more rapidly than in the commitment case. Moreover, even in the non‐commitment case, the release of a new version can still be later than the optimum from the social viewpoint.     

High Price Strategy and Quality Signalling

I investigate a high price strategy by a durable‐goods producer for signalling the high quality of goods. It is assumed that two types of monopolists exist: high‐quality and low‐quality. The monopolist's type is assumed to be unknown to consumers in the first period. Before the beginning of the second period, a product reputation established in the past period enables consumers to recognize the real type of the monopolist. I show that there occurs a signalling equilibrium where the high‐quality type monopolist uses a high price strategy. An interaction between the new and old products peculiar to the durable‐goods markets plays an important role in the pricing strategy.     

POPULATION AGEING,CAPITAL INTENSITY AND LABOUR PRODUCTIVITY

This paper analyses the implications of population ageing for the capital intensity of output and, therefore, labour productivity. Population ageing leads to sectoral shifts in demand for goods and services. If such shifts occur between goods that differ in their capital intensity, there will be a change in the average capital intensity of the economy and, therefore, in average labour productivity. In order to gauge the magnitudes of such effects, the present paper reports simulations of a calibrated model with two final goods and two intermediate goods, using data for two Pacific Rim countries for comparison: the United States and Australia. The data for these countries suggest that population ageing will, on average, shift expenditure towards goods with a relatively high capital intensity. The magnitude of the increase in labour productivity according to the simulations is likely to be small, but perhaps not trivial: in the order of 1–4% per annum by 2050. This might partially offset the negative effect of ageing on living standards.     

The Effect of Exchange Rate Volatility on Trade in Durables

Because durable goods have the quality of an asset, risk-averse consumers wan to pay a lower price for durable than for nondurable goods so that they are compensated for the risk of price changes; they require risk premium. Since the exchange rate is a strong source of uncertainty in import prices, exchange rate volatility has a negative effect on the demand for imported durables. In an imperfectly competitive market, the volatility of the exchange rate is predicted to reduce the relative price of imported durables. The prediction is supported by an empirical investigation of US imports.     

MODELLING HABIT PERSISTENCE*

The purpose of this paper is to derive the demand functions corresponding to an intertemporal linear expenditure system in which goods are durable, and in which there are penalty costs for changes in planned stocks. Taste changes over time can be interpreted as changes in the technology converting goods into characteristics.     

The Gain from International Trade in Pool Goods and Private Goods

It is well known that perfectly competitive free trade is potentially beneficial for all countries if all goods are both rivalrous and excludable in consumption (“private goods”) and recently (2011) the proposition has been modified to accommodate non‐rivalrous and non‐excludable goods (“public goods”), as well as non‐rivalrous and excludable goods (“club goods”). In the present paper the proposition is modified again, to accommodate rivalrous and non‐excludable goods (“pool goods”). The primary focus is on ocean fisheries, access to which is shared (not necessarily equally) by all countries. However the central proposition to be established is valid for all international pool goods.     

Subjective mortality expectations and consumption and saving behaviours among the elderly

Abstract Life expectancy is an important factor that individuals have to take into account for saving and consumption choices. The life‐cycle model of consumption and saving behaviour predicts that consumption growth should decrease with higher mortality rates. The aim of this study is to test this hypothesis based on data about subjective longevity expectations from the Health and Retirement Study merged with detailed consumption data from two waves of the Consumption and Activities Mail Survey. This study finds that an increase in subjective mortality by 1% corresponds to an annual decrease in consumption of non‐durable goods of around 1.8%.