Rate of profit and interest in a growth theory with endogenous money

This paper attempts to incorporate an endogenous money approachinto post-Keynesian growth theory in order to derive the fullemployment equilibrium rate of interest as well as that of profit.This rate of interest, named the ideal rate of interest, differsfrom the rate of profit in that it is in proportion to a monetaryvariable, not a real variable. Further, the rate of profit alsodiffers from the rate of interest as a premium because it isproductive. The rate of interest could be important in explainingcircumstances in which financial capital has been accumulatedin excess.     

ON THE SUSTAINABILITY OF GOVERNMENT BORROWING IN A DYNAMIC GENERAL EQUILIBRIUM

Abstract.  This paper constructs a dynamic general equilibrium model with money in consumers' utility functions and investigates the equilibrium dynamics of government's debt. The limitation level of the government borrowing for which a dynamic equilibrium and the no Ponzi Game condition are compatible with each other is explicitly derived. The critical level depends on the long-run interest rate, primary balance, money supply etc.     

Financial Deregulation and Stability of Money Demand: The Australian Case

This paper analyses the Australian economy in the post-war period. The analysis examines stationarity and cointegrating relationship among output, interest rate and money. The analysis shows that Australia has had a stable cointegrating relationship among output, interest rate and money during the post-war period although the country deregulated its financial sector in the 1980's. Australia's money demand function fails to reject the hypothesis that the interest elasticity of money demand is 0.5. In addition, one specification of the country's money demand function fails to reject the hypothesis that the income elasticity of money demand is unity. The specification is the Vector Error Correction Model that includes real output, real balances, an interest rate, and a deregulation dummy variable, with the lag length of three.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Central Banking and Post-Keynesian Economics

Abstract

The Post-Keynesian theory of endogenous money has given much attention to the role of the central bank in the money creation process. Circuit theory has neglected this role, in so far as it has focused on the relationship between banks and firms within a monetary production economy. The aim of this paper is therefore twofold. First, it intends to fill this gap in circuit theory, by providing a role for the central bank in settlement of interbank debts. Secondly, it aims at reinforcing the Post-Keynesian analysis of central bank money by considering both the money-purveying and the credit-purveying roles of the settlement institution in the interbank market. The result of this analysis is a more comprehensive theory of endogenous money, where the lender-of-last-resort facilities of a central bank are viewed as an endogenous phenomenon involving both a money creation and a credit operation between the central bank and the domestic banking system. In such a framework, monetary policy consists of setting the base rate of interest at a level that enables banks to limit their bilateral debt position in the interbank market, so as not to disrupt the workings of the payment system by either an illiquidity or an insolvency crisis.     

THE TREATMENT OF INTEREST AND NET RENTS IN THE NATIONAL ACCOUNTS FRAMEWORK1

The contention in this paper is that the present method of treating interest and net rents as transfers rather than as payments for services provided creates problems in the measurement of production by industry and that the difficulties encountered in explaining the treatment of interest items in the different tables of the National Accounts are even more apparent when one views the National Accounts framework as an integrated reflection of economic reality. It is argued that the lending of money arises from the stretching out of the production and consumption process, and the interest charges constitute a charge for the administrative services and risk involved. This is somewhat analagous to the charges for hiring out real goods and services. A similar case is made for the treatment of rents with the exception of imputed net rent where it is contended that economic risk is incurred only when production is undertaken for sale and that there should be no entrepreneurial return where the production is for the use of the owner-producer. It is suggested that an alternative treatment of interest and rents as payments for services is more realistic. Its adoption in the National Accounts would eliminate the need for imputations now made to account for the production of financial intermediaries, as well as the unconvincing explanations put forward for the present treatment of interest on consumer and public debt. Finally, it would serve to integrate the production accounts with the financial flows and the related financial structure.     

A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy

Summary A representative-agent model with money holdings motivated by transactions costs, a fiscal authority that taxes and issues debt, no production, and a convenient functional form for agents' utility is presented. The model can be solved analytically, and illustrates the dependence of price determination on fiscal policy, the possibility of indeterminacy, even stochastic explosion, of the price level in the face of a monetary policy that holdsM fixed, and the possibility of a unique, stable price level in the face of a monetary policy that simply pegs the nominal interest rate at an arbitrary level.In a rational expectations, market-clearing equilibrium model with a costlessly-produced fiat money that is useful in transactions, the following things are true under broad assumptions.- A monetary policy that fixes the money stock may (depending on the transactions technology) be consistent with indeterminacy of the price level—indeed with stochastically fluctuating, explosive inflation.- A monetary policy that fixes the nominal interest rate, even if it holds the interest rate constant regardless of the observed rate of inflation or money growth rate, may deliver a uniquely determined price level.- The existence and uniqueness of the equilibrium price level cannot be determined from knowledge of monetary policy alone; fiscal policy plays an equally important role. Special case models with interest-bearing debt and no money are possible, just as are special cases with money and no interest-bearing debt. In each the price level may be uniquely determined.Determinacy of the price level under any policy depends on the public's beliefs about what the policy authority would do under conditions that are never observed in equilibrium.These points are not new. Eric Leeper [1991] has made most of them within a single coherent model. Woodford [1993], in a representative agent cash-in-advance model, has displayed the possibility of indeterminacy with a fixed quantity of money and the possibility of uniqueness with an interest-rate pegging policy. Aiyagari and Gertler [1985] use an overlapping generations model to make many of the points made in this paper, without discussing the possibility of stochastic sunspot equilibria. Sargent and Wallace [1981] and Obstfeld [1983] have also discussed related issues.This paper improves on Leeper by moving beyond his analysis of local linear approximations to the full model solution, as is essential if explosive sunspot equilibria are to be distinguished from explosive solutions to the Euler equations that can be ruled out as equilibria. It improves on the other cited work by pulling together into the context of one fairly transparent model discussion of phenomena previously discussed in isolation in very different models.We study a representative agent model in which there is no production or real savings, but transactions costs generate a demand for money. The government costlessly provides fiat money balances, imposes lump-sum taxes, and issues debt, but has no other role in the economy. We make restrictive assumptions about the form of the utility function and the form of a transactions cost term in the budget constraint.The model could be extended to include production, capital accumulation, non-neutral taxation, productive government expenditure, and a more general utility function without affecting the conclusions discussed in this paper. Indeed the model I informally matched to data in an earlier paper [1988] makes some such extensions. While such an extended model is more realistic, it is harder to solve. The version in my earlier paper [1988] was solved numerically and simulated. The bare-bones model of this paper allows an explicit analytic solution that may make its results easier to understand.This paper improved following comments from participants at seminars at Yale and the Atlanta Federal Reserve Bank. Eric Leeper and James Robinson were particularly helpful. Comments from Michael Woodford led to important corrections and clarifications.     

AN ALTERNATIVE TO THE CURRENT TREATMENT OF INTEREST AS TRANSFER IN THE UNITED NATIONS AND CANADIAN SYSTEMS OF NATIONAL ACCOUNTS

The United Nations (SNA) and the Canadian (CSNA) Systems of National Accounts treat interest as a factor return to capital. The difficulties arising from the use of this concept cast doubt upon the basic premise. For example if the usual method of measuring value added by the summation of primary inputs is applied to industries mainly engaged in the lending of money, the results show negative production. This has led to the necessity of imputing bank interest in order to avoid negative income originating in the banking industry. Arguments are being put forward to extend this practice to certain other financial non-bank areas as well to offset the negative product emerging with increasing frequency as a result of higher levels of interest transactions.
The proposed alternative is based on the contention that interest paid and received for the borrowing and lending of money should be treated in the same manner as the purchase and sale of other services. For the production accounts, for example, this would mean that interest paid by business would be treated as an intermediate expense of the paying industry and as revenue of the receiving industry. The adoption of this approach would therefore eliminate the need for the imputation of banking services and clear up the ambiguities encountered in treating interest on the public and consumer debt, issues which are also not unrelated to the present treatment of interest.     

Long-run money demand in OECD countries: what role do common factors play?

This article examines the long-run money demand function for 11 OECD countries from 1983Q1 to 2006Q4 using panel data. The distinction between common factors and idiosyncratic components using principal component analysis allows for the detection of cross-member cointegration and the determination as to whether national or international sources are responsible for the non-stationarity of money and its determinants. Indeed, the finding that the common factors are I(1) while the idiosyncratic components are I(0) indicates that cross-member cointegration may exist and non-stationarity in the variables is primarily driven by common international trends. Furthermore, it is found that the impact of income on money demand is positive, whereas it is negative for the interest rate, exchange rate and stock prices. Except for the income elasticity of money demand, all estimated long-run coefficients are larger for the common factors of the variables than for the variables themselves. This article provides evidence that the exchange rate is an important determinant of money demand, whereas the results for the stock prices are ambiguous. Finally, the results of a panel-based error-correction model suggest that several domestic money stocks converge to a common international equilibrium relationship between the common factors.     

A vector error correction model of the Singapore stock market

This article examines the long-term equilibrium relationships between the Singapore stock index and selected macroeconomic variables, as well as among stock indices of Singapore, Japan, and the United States. Upon testing appropriate vector error-correction models, we detected that changes in two measures of real economic activities, industrial production and trade, are not integrated of the same order as changes in Singapore's stock market levels. However, changes in Singapore's stock market levels do form a cointegrating relationship with changes in price levels, money supply, short- and long-term interest rates, and exchange rates. While changes in interest and exchange rates contribute significantly to the cointegrating relationship, those in price levels and money supply do not. This suggests that the Singapore stock market is interest and exchanges rate sensitive. Additionally, the article concludes that the Singapore stock market is significantly and positively cointegrated with stock markets of Japan and the United States.     

THE TREATMENT OF “HOME OWNERSHIP” IN THE CPI*

This paper explores the imputed service price approach to the pricing of the services of consumer-owned-and-used durables in the construction of the consumer price index, using the services of owner-occupied housing as an illustration. A theoretical framework for analyzing this question is first developed. Certain practical problems are then discussed. The conceptual difficulty of constructing an appropriate rate of return on the basis of available data on interest rates and house prices, in the context of inflation, is explored. Two arguments are advanced that statistical agencies ought not to follow the imputed service price approach in pricing the services of owner-occupied dwellings and other consumer durables. On the one hand, nominal interest rates will, in any short period, reflect monetary policy and not any change in the money “rental” of owner-occupied houses. Second, movements in nominal interest rates will also reflect changes in the money price of pure consumption goods, as well as changes in the money price of houses. The argument is extended to other consumer durables and, in the limiting case, to monetary balances, and it is concluded that in all but trivial cases the application of the service price approach leads to price movements of little or no meaning.     

中国经济转型与货币需求

本文采用"从一般到特殊"的动态建模方法对中国经济转型过程中的货币需求函数进行了再估计,通过引入市场化进程相对指数作为衡量经济转型的制度变量考察货币需求、经济增长、通货膨胀、利率和经济转型之间的相互关系。结果发现,尽管1978—2007年间30年的改革开放使得中国的经济体制和金融体系发生了较大的转型,但通过引入适当的制度变量,仍然可以得到稳定的货币需求函数。本文建立的货币需求动态模型证实了经济体制的市场化转型无论长短期都是拉动货币需求增加的因素,通货膨胀是解释货币量的有效外生解释变量,短期内利率变量对实际货币需求影响不显著,但其确实显著地进入了长期货币需求关系。     

Firms’ money demand and monetary policy

Standard New Keynesian models for monetary policy analysis are ‘cashless’. When the nominal interest rate is the central bank's operating instrument, the LM equation is endogenous and, it is argued, can be ignored. The modern theoretical and quantitative debate on the importance of money for monetary policy conduct, however, overlooks firms’ money demand. Working in an otherwise canonical New Keynesian setup, we show that macroeconomic dynamics are critically affected by the firms’ money demand choice. Under the conventional Taylor‐rule framework, we prove that equilibrium determinacy may require either an active interest rate policy, overreacting to inflation, or a passive interest rate policy, underreacting to inflation, depending on the elasticity of production with respect to cash balances. We then develop a numerical analysis to evaluate our theoretical results. We find that macroeconomic stability is more likely to occur under an active, but not overly aggressive, monetary policy stance. We also examine the dynamic effects of forward‐looking feedback rules. We show that, in this policy regime, indeterminacy is likely to be induced by both active and passive rules, even for relatively low productivity effects of money.     

Money demand in the Dominican Republic

This paper investigates a demand for money relationship for the Dominican Republic. The financial system of the Dominican Republic is underdeveloped, and there are no suitable domestic data on the opportunity cost of holding money. Economic links with the USA suggest a possible role for a foreign interest rate effect and a currency substitution effect in the demand for domestic money. A long-run demand for money relationship is developed from the perspective of alternative estimation methodologies, and it is shown that a 'literature standard' specification augmented by foreign monetary variables is robust. The ensuing short-run dynamic model is adequate, stable and suggests an important role for expected inflation, and a real bilateral exchange rate with the USA. A number of policy implications for the Dominican Republic are drawn from the results.     

人民币境外存量、国际收支 与人民币国际化进程*

人民币国际化问题已成为各国学者研究的热点。本文依据弗里德曼货币需求函数设立国内货币需求模型,并基于间接测算法和模型稳定性检验结果,选取1992-2003年的季度数据估测2004-2014年季度人民币境外存量,以此作为人民币国际化的衡量标准。在此基础上运用协整理论、格兰杰（Granger）因果检验、脉冲分析法等时间序列处理方法对我国现有的国际收支结构、经济规模、实际汇率及人民币国际化之间的动态关系进行实证分析。本文研究发现,上述变量之间存在长期稳定的均衡关系,我国经济规模扩大、经常项目顺差和人民币稳步升值有利于推动人民币国际化进程,而资本和金融项目顺差会对人民币国际化产生阻碍作用。因此,在发展国民经济及维持人民币币值坚挺的同时,合理调整我国国际收支双顺差结构也是人民币国际化进程的客观要求。     

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

Causal relationships among economic aggregates in China

Using China's macro data from 1952 to 1989, the stationarity and causality tests to two types of economic aggregates are applied. The first type relates to the conventional money, income and consumption relationship; and the other is associated with the interest rate, money and investment/income relationship as embodied in a financial repression model. Stationarity test results show that a different direction of causality exists when different measurement of price is used. A causal relationship between interest rate, money and investment/income is also found.     

包含货币因素的利率规则及其在我国的实证检验

本文根据新凯恩斯模型和货币需求方程,通过理论分析得到了包含货币因素的最优利率规则。该规则表明,货币增长率稳定性权重或货币需求方程的利率响应系数越大,利率规则的货币增长率响应系数越大,货币政策也就愈积极。然后,本文利用线性回归和门限回归方法及我国统计数据,从市场利率和管制利率两方面对利率规则进行了实证研究。估计结果表明,通胀系数、产出缺口和货币增长率各自的响应系数都大于0,这意味着利率规则能够保证当我国经济运行偏离均衡状态或央行目标时采取正确的政策调整方向,从而保证经济的平稳运行。货币高增长状态下各个变量的系数值都要稍微大于货币低增长状态下相应的系数值。     

A stable demand for money despite financial crisis: the case of Venezuela

The demand for broad money in Venezuela is investigated over a period of financial crisis and substantial exchange rate fluctuations. The analysis shows that there exist a long-run relationship between real money, real income, inflation, the exchange rate and an interest rate differential, that remains stable over major policy changes and large shocks. The long-run properties emphasize that both inflation and exchange rate depreciations have negative effects on real money demand, whereas a higher interest rate differential has positive effects. The long-run relationship is finally embedded in a dynamic equilibrium correction model with constant parameters. These results have implications for a policy-maker. In particular, they emphasize that with a high degree of currency substitution in Venezuela, monetary aggregates will be very sensitive to changes in the economic environment.     

FINANCIAL INNOVATION, INFLATION AND THE STABIHTY OF THE DEMAND FOR BROAD MONEY IN THE UNITED KINGDOM

This note presents an estimate of a demand function for broad money (£M3) for the UK, 1964ii–1985iv. It shows no sign of structural instability due to Competition and Credit Control, and forecasts well for twenty quarters post-sample (1981i-1985iv). A key innovation is the allowance made for financial innovation by including the interest rate available on new, high-interest chequing accounts in the equation.