The relationship between government deficits, money growthm and inflation

We model the time-series relationship between Federal government deficits, base-money growth, and inflation as a trivariate autoregressive process. The technique is a generalization of Hsiao's (1979; 1981) bivariate autoregressive modeling method, but also incorporates several recent contributions by Caines, Keng, and Sethi (1981) and Lutkepohl (1982). The results indicate that for the 1960s, both government deficits and inflation are econometrically exogenous. But, for the 1950s and the 1970s, government deficits, money growth, and inflation are all causally related.     

A note concerning a credit rule for monetary policy

A technique introduced by Friedman is used to analyze the ability of the Federal Reserve to control the money supply. We find that the necessary conditions for control are so restrictive that a constant growth rate for the money stock may not be achievable. We suggest, therefore, a steady growth rate for Federal Reserve Credit.     

Budget deficits,money growth and inflation: the Turkish evidence

The paper investigates the long-run relationships between budget deficits, inflation and monetary growth in Turkey considering two alternative trivariate systems corresponding to the narrowest and the broadest monetary aggregates. While the joint endogeneity of money and inflation rejects the validity of the monetarist view, lack of a direct relationship between inflation and budget deficits makes the pure fiscal theory explanations illegitimate for the Turkish case. Consistent with the policy regime of financing domestic debt through the commercial banking system, budget deficits lead to a growth not of currency seigniorage but of broad money in Turkey. This mode of deficit financing, leading to the creation of near money and restricting the scope for an effective monetary policy, may not be sustainable, as the government securities/broad money ratio cannot grow without limit.     

The effects of public deficits on money growth in the European Union

The impact of government debt on the money supply has been studied for different countries, with an emphasis on developing countries and the U.S. This topic becomes especially interesting in European Union countries that have high public deficits and low inflation rates. It is also very relevant in the monetary union, with a European central bank controlling monetary policy and introducing monetary measures for all the member countries. The main goal of this paper is to analyze if there is any relationship between public deficits and monetary growth in the European Union. The conclusions presented in the previous literature are ambiguous. Some studies concluded that there is little evidence that government debt influences money in some of the member countries.     

Deficit spending,money, and inflation: Some international empirical evidence

An attempt is made, in this study, to examine the monetarist propositions regarding the effects of budget deficits on money growth and inflation for ten industrialized countries. To this end, a two-equation econometric model consisting of the money supply growth and inflation equations has been specified and estimated. Based on the results, it is concluded that, in general, the government budget deficit is not a determinant of money supply growth or of inflation (directly or indirectly). The U.S. is an exception with some statistical evidence of direct and indirect effects of the budget deficit on inflation.     

FEDERAL BUDGET DEFICITS, MONEY, AND EXCHANGE RATES

The dollar's strength during the 1980s appears to many—particularly as reported in the financial press—to have been directly linked to the decade's large budget deficits and the subsequent increase in the stock of federal debt outstanding. The popular argument is that the budget deficit and the growth of federal government credit market demand caused U.S. interest rates to rise over that period, inducing large capital inflows from abroad to finance the deficit. According to the argument, the capital inflows caused the dollar to appreciate. Despite the argument's popularity, the empirical literature does not strongly support it. Evidence on the relationship between the federal deficit and the dollar is at best mixed.
This article reconsiders the effects of federal budget deficits on the exchange rate. The analysis involves estimating a vector autoregressive (VAR) model of exchange rates that includes monetary, fiscal, and price level variables. Within the VAR framework, impulse analysis traces the dynamic response of exchange rates to various budget deficit measures.
The analysis finds that deficits do not directly Granger cause exchange rates, but it also finds evidence of an indirect effect working through the money supply and price level. Moreover, the analysis reveals some evidence that foreign exchange markets are forward looking and react to expected budget deficits. The innovations accounting and impulse analysis also suggest a forward-looking dynamic relationship between deficits and exchange rates, but the relationship is sensitive to the ordering of the variables.     

Politicians, deficits, and monetary policy in the U.S. revisited

This paper reconsiders the evidence regarding the existence of executive and congressional influences on monetary policy in the U.S. Results regarding the source of the federal deficit (cyclical or structural) provide evidence that structural deficits occurring under Democratic presidential administrations have a significant impact on money growth rates, but those occurring under their Republican counterparts may not. Although the evidence regarding cyclical deficits is statistically weaker, their more limited influence on monetary growth rates appears to be similar regardless of whether they occur under Democratic or Republican presidents. This contrasts with previous research which suggests that cyclical deficits influence monetary growth rates under Democratic administrations while structural deficits generated a similar monetary response regardless of which party held the presidency.     

Are the markets for financial assets efficient? : Evidence for the USA, 1974–1988

The analysis in this paper addresses the efficient markets hypothesis as it pertains to the markets for financial assets. Both weak form efficiency and semistrong form efficiency are investigated for three different financial assets - common stocks, preferred stocks and government bonds. For these assets the markets are indicated to be weak form efficient based on monthly data covering the period January 1974 to June 1988. In the case of semistrong form efficiency, the financial assets markets are efficient with respect to the supply of money for the period after October 1979 but not before. This anomaly is attributed to the different procedures used by the Federal Open Market Committee between the two periods for controlling the growth rate of the money supply.     

A note on the sustainability of full employment in the presence of budget deficits

In a recent issue of this journal, Tymoigne and Wray, as well as Palley, discussed whether economies can experience stable full-employment equilibria with persistent public budget deficits. This implies continuous growth of a stock-variable: high-powered money and/or government bonds in the hands of the private sector. Their discussion assumed a stationary state. The question is whether such a situation can be regarded as sustainable over time. This paper argues that a satisfactory solution to the problem can be found only by abandoning the hypothesis of stationary state and considering the effects that different compositions of public expenditure have on the rate of growth. To have a stable full-employment equilibrium with budget deficits, the economy must grow. Since the economy is assumed to be in full employment, the growth of aggregate output must be entirely due to the growth of productivity, which can be realized by changing the composition of public spending in favor of productive expenditures.     

The P* model and Austrian prices

In theP ^* model the price level is determined by the money stock per unit of potential out-put and the long-run equilibrium level of the velocity of money. This article applies this model to Austria. Problems in identifying permanent shocks to potential output and/or velocity lead to the rejection of such models of the price level, but their first-difference version is not so suspect. While evidence is found of a long-run relationship between Austria inflation and money growth, even the first-difference version of theP ^* model is rejected for Austria. Since Austria is a small economy, closely tied to Germany, the article also investigates whether Austrian prices are tied to a GermanP ^* measure. This hypothesis is also rejected, but there is a statistically-significant long-run relationship between Austrian and German inflation. Moreover, Austrian money growth remains significant even in this relationship.This article was written while the author was a Visiting Scholar at the Austrian National Bank. The author is indebted to Fritz Breuss, W. Jahnke, and Dieter Proske for help in obtaining the data used here, and for useful discussions about the data, relevant theoretical issues and results. The comments of the referees on an earlier version are also gratefully acknowledged. The views expressed here are those of the author and are not necessarily those of the Austrian National Bank, the Federal Reserve Bank of St. Louis, or the Board of Governors of the Federal Reserve System.     

An alternative monetary policy target

For most of the period since the mid-1970s, the Federal Reserve has expressed its monetary policy intentions by announcing the target growth rates of three principal monetary aggregates: the simple-sum M1, M2 and M3. However, the sweeping changes and the deregulation in the financial industry have greatly affected the relevance of these traditional monetary aggregates. The unusual behaviour of the simple-sum monetary aggregates has forced the Federal Reserve to stop setting target range for M1. The measuring of monetary aggregates has become a controversial question. This paper constructs the new-benchmark Divisia monetary indexes which reflect ‘moneyness’ more accurately than the old Divisia indexes. I demonstrate that the historical trends of the Divisia monetary indexes are sensitive to the brenchmark rates chosen in constructing these indexes. In addition, I compare the forecasting performance of the new-benchmark Divisia monetary indexes with the simple-sum and the old Divisia monetary indexes in the estimated money demand functions. I find that the new-benchmark Divisia monetary indexes provide the best statis forecasting performance. The result indicate that the new-benchmark Divisia monetary indexes should be considered as alternative measures of money in studying the relationship between money and the economy.     

Deficit financing,liquidity, and the government budget constraint

This article presents a macroeconomic model in which government deficits are bond financed and the stock of bonds may affect both expected income and liquidity. If either of these effects exists, then comparative statics analysis requires the government budget to be balanced. Temporary divergences from a balanced budget and changes in the maturity structure of the government debt may be analyzed in terms of changes in the stock of bonds. It is shown that traditional fiscal and monetary policies may have a perverse effect; that to ensure effective policy, deficit financing and open market operations should be avoided; and that only policies involving a balanced budget or the financing of deficits or surpluses through changes in the stock of money should be undertaken.     

For they know not what they do: an analysis of monetary policy during the Great Moderation

In this article, we develop an empirical framework to show the importance of money during the Great Moderation, while accounting for the fact that monetary policy was exclusively conducted through interest rates. We estimate the impulse response functions and forecast error variance decomposition derived from a structural VAR with a least absolute shrinkage and selection operator–based lag selection. The variance decomposition suggests that a substantial component of macroeconomic variation has been driven by shocks to the money market, which were not only unintended by the Federal Reserve, but worse passed unnoticed allowing those shocks to accumulate over time.     

货币供给内生环境下财政对内需的影响研究

本文首先考察了我国货币供给内生的现实环境,并采用ARDL方法对我国经验数据进行实证检验,验证了我国货币供给的内生性问题,表明税收和政府投资是影响货币供给的内生性因素。在此基础上,从货币供给内生的前提出发,本文构建了扩展的内需增长模型,用SVAR方法考察了财政对我国内需增长率的影响。实证结果显示,税收和政府投资增速提高,均会对内需增长率产生负面影响。同时,本文还探讨了货币供给内生环境下财政对内需的影响机制,认为税收和政府投资会影响货币供给,通过新的影响路径对内需产生负面影响。     

Endogenous Money Supply and the Business Cycle

This paper documents changes in the cyclical behavior of nominal data series that appear after 1979:Q3 when the Federal Reserve implemented a policy to lower the inflation rate. Such changes were not apparent in real variables. A business cycle model with impulses to technology and a role for money is used to show how alternative money supply rules are expected to affect observed business cycle facts. In this model, changes in the money supply rules have almost no effect on the cyclical behavior of real variables, yet have a significant impact on the cyclical nature of nominal variables.Journal of Economic LiteratureClassification Numbers: E32, E42, E50.     

An experimental examination of the house money effect in a multi-period setting

There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, we compare market outcomes across sessions that differ in the level of cash endowment (low and high). Our experimental results provide support for a house money effect. Traders’ bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences. JEL Classification C91 · C92 · D80 The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Fiat money in the Kiyotaki-Wright model

Summary We study versions of the Kiyotaki-Wright (1989) model with fiat money and show that: (1) The use of a low storage cost fiat money may be necessary for specialization and trade, (2) there can be valued fiat money steady states which are indeterminate, (3) there are no nontrivial steady-states in which all trades consist of fiat money for goods, (4) fiat money may be valued even if it is not the least costly-to-store object, and lastly, (5) two fiat monies with different storage costs may both be valued.We thank Randall Wright for comments and helpful discussions.The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.     

Exchange rate regimes and inflation: only hard pegs make a difference

Abstract.  Using data from a large sample of developing countries from 1985 to 2001, we confirm that hard pegs (currency boards or a shared currency) reduce inflation and money growth. There is no evidence that soft pegs confer any monetary discipline, after other factors are controlled for. Inflation triggers regime switches. Under hard pegs, monetary growth is unaffected by fiscal deficits or by inflation shocks. Under soft pegs, as under floats, increased fiscal deficits and positive inflation shocks are associated with higher monetary growth. The apparently slower per capita output growth under hard pegs is explained by their geographical distribution. JEL classification: F41     

Stochastic Relation between Money and Capital in an Economy with Spatially Separated Markets

This paper examines the stochastic relationship between money and capital in an economy with spatially separated markets. The new ingredient of the model is that trades between markets may be desirable but are eliminated by market separation. When this cross-market friction is operative, aggregate capital is negatively correlated with and only with contemporaneous money growth, given past capital stocks. When the cross-market friction is not operative, aggregate capital can be positively correlated with contemporaneous money growth and current money growth has direct predictive power on future aggregate capital through its effect on the distribution of capital among agents. Therefore, in a more fragmented economy, aggregate capital is more likely to be negatively correlated with money growth and more unpredictable by past money growth.Journal of Economic LiteratureClassification Numbers: E40, E50     

Kaldor and Robinson on money and growth

Post-Keynesian theory was developed as an alternative to mainstream neoclassical economics. However, post-Keynesians have not succeeded in getting their message through, partly because of the difficult and controversial economic issues upon which they embarked, partly because they emphasized, both in their monetary and growth analysis, theories that do not radically depart from the mainstream of economics. This paper therefore argues that post-Keynesian economics got off on the wrong foot. Rather than having emphasized the works of Minsky and (the early) Kaldor in money, post-Keynesians should have considered the contributions of Robinson and Kahn. Also, rather than having emphasized the work of Robinson and Harrod on growth, they ought to have given greater emphasis to Kaldor's demand-oriented growth theory. Hence, as a simplification, post-Keynesians should have considered Robinson on money, not Kaldor; and Kaldor on growth, not Robinson.