Prediction of the Netherlands' money stock

Summary This article describes the operational procedure for a mechanical monthly forecast of the money stock in The Netherlands for up to twelve months ahead. In addition to time series data of the money stock itself, the procedure uses the information provided by the disaggregation of the money stock into financial assets, sources of money supply and holdership. The forecast from a univariate ARIMA model of the money stock is combined with three different forecasts from vector ARIMA models for the components distinguished by the three ways of disaggregation. The combination weights, which differ for each number of months to be forecasted ahead, are determined by regression analysis.Professor of Economics at the Free University, Amsterdam and staff member of the Econometric Research and Special Studies Department of De Nederlandsche Bank NV, Amsterdam, respectively. This study was completed when the first author was at the Nederlandsche Bank. We gratefully acknowledge the useful comments of a referee on a previous version of this article.     

Are MMMFs money?

Conclusion In the last twenty years, continual financial innovation has led to the increased use of MMMFs as a substitute for checkable deposits. While many technical considerations suggest that it is inappropriate to list MMMFs as money, traditional Austrian thought has emphasized money’s subjective aspects: money is what people think it is. Since the public increasingly uses MMMFs as money substitutes, they are money in all practical respects. Every technical consideration that would restrict the use of MMMFs as a type of money thus crashes against the rocks of practical, everyday experience. While nonbank financial intermediaries can expand this type of money substitute, the Federal Reserve must still provide initial credit for any multiplication to take place. These nonbanks are even more difficult for the Fed to control, for they face no reserve requirements. But, on the other hand, there are more opportunities for leakage from the system, thereby limiting potential credit expansion. Nonetheless, this is an aspect of money that is becoming increasingly important. And if, as seems likely, MMMF expansion stimulates different sectors of the economy than the banking system generally, we should expect to see monetary inflation manifest itself in different ways than previous inflations. The views expressed in this article are those of the author and do not reflect the official policy or position of the United States Air Force, the Department of Defense, or the U.S. Government. The author thanks Bryan Caplan for crucial insights on the topic as well as Pete Boettke and an anonymous referee for specific comments. As usual, all remaining mistakes are his.     

Profits as a rich source of puzzlement

Summary Profits are both a strategic and a little understood income category. Theoretical approaches differ widely. The author says that many different answers are given to at least seven questions: What is meant by profits? What is the level of profits in a given country, say, the Netherlands? Does a profit squeeze exist? What determines profits? Which variables are determined by profits? How should profits be handled in model-building? How can a government influence profits? In surveying some of the answers to these seven questions the author criticizes Wood's theory and discusses the concept of normal profits.Thanks are due to K. Sybesma (CPB), P. G. Hermans (CBS), J. Weitenberg (CPB), M. Edam and J. Griffiths (Law School, Groningen) for helpful comments and corrections and to E. Hoekstra for information retrieval and typing.     

Microfoundations and Hicksian monetary theory

Summary John Hicks was the first economist to use a general equilibrium framework as a foundation for a dynamic macroeconomic analysis. A critical assessment of his work in this area is used to evaluate the contributions of the ‘micro-foundations’ discussions of the 1970’s. It is noted that Hicks’s starting point, the question of the role of money in a general equilibrium framework, is precisely where the current debate has arrived some fifty years later. This delay, and the foundations debate, were due in large part to Hicks’s own attempts to interpret Keynes’s theory in terms of his own, original framework. Suggestions and comments from P. Davidson, O. Steiger, and the editor, as well as the participants of seminars in the University of Bremen and the Economics Institute of the Faculty of Statistics of the University of Rome are acknowledged without implication of responsibility.     

Wealth and the demand for money: Empirical evidence for the Netherlands and Belgium

Summary This paper examines the impact of wealth on the demand for money in The Netherlands and Belgium. The empirical analysis reveals a substantial influence of wealth on the demand for money. For The Netherlands, incorporating wealth effects mitigates the volatility of the monetary picture. For Belgium this is not the case, indicating that interest and inflation rates are very important for understanding the monetary developments.We are indebted to Michel Dombrecht of De Nationale Bank van België for providing the data on wealth for Belgium. Helpful comments by Professors S.K. Kuipers and F.C. Palm are gratefully acknowledged.     

An oligopoly model of free banking: Theory and tests

Summary The paper demonstrates that in an environment of free banking where some agents have imperfect information regarding the circulation and debasement rates of alternative money suppliers, the equilibrium supply of money involves mixed strategies. It follows that the circulation and debasement rates are intrinsically stochastic, but that their averages are below the rates set by a monopoly bank. Empirical tests reveal that these predictions are consistent with the free banking era of the United States. The paper is also relevant for the discussion about the future monetary union in the EC. We are grateful to J. Carlson, D. Jansen, R. van der Ploeg and the referees for their stimulating comments, to L.T. Gordon of the Krannert Economics Library for providing the data, and to J.G. Song for his able computational assistance.     

Jan Tinbergen's Income distribution: Analysis and policies

Summary This paper is a detailed review and critique of Jan Tinbergen'sIncome Distribution: Analysis and Policies. In Part I, the books primary findings and their bases are recounted. This presentation serves as the basis for a number of questions regarding the merits of the overall approach — in particular, the empirical methodology — and the reliability of the findings. These questions are posed in Part II. In Part III, an overall appraisal of the work is offered.North-Holland Publishing Co., Amsterdam, 1975.Professor of Economics and Fellow of the Institute for Research on Poverty, University of Wisconsin-Madison. This article was prepared while the author was a Fellow at the Netherlands Institute for Advanced Study. The work was supported in part by the Netherlands Institute for Advanced Study and by funds granted to the Institute for Research on Poverty at the University of Wisconsin-Madison by the U.S. Department of Health, Education and Welfare pursuant to the Economic Opportunity Act of 1964. Helpful comments on an earlier draft by Hans Daudt, Arthur Goldberger, Victor Halberstadt, Arnold Heertje, and Jan Pen are acknowledged. A discussion with Jan Tinbergen on issues raised in his volume was especially valuable, This review article appeared in a slightly different form in the Winter, 1975 issue of theJournal of Human Resources.     

Monetarism: The issues and the outcome

The paper surveys some main issues in the monetarist-Keynesian debate of the 1960s and 1970s and the outcome of the debate. The debate was not static; the issues changed. At first Keynesians argued that money was largely irrelevant for output and the price level. By the end of the 1970s, issues such as neutrality, the natural rate, and the effect of inflation on nominal interest rates had been settled. Principal remaining issues were the use of money growth as a target, instrument, or indicator of monetary policy and reliance on rules. The paper sketches some of the progress on rules versus discretion in the past 20 years but focuses mostly on the role of money. Some evidence is presented for the U.S. supporting the monetarist position that control of money is useful in a medium-term or rule-based policy to control inflation as now advocated by several central banks.Distinguished Address presented at the Forty-Fourth International Atlantic Economic Conference, Philadelphia, Pennsylvania, October 9–12, 1997. Thanks to Bennett T. McCallum and Robert H. Rasche for helpful comments and to Randolph Stempski for excellent assistance.     

Notes and Communications

Summary This essay explores the occurrence of illusionary images or trompe-l’oeil in economics and their role in economic policy design. In this context four specific examples are discussed, relating to money illusion, the bias in the consumer price index to measure purchasing power, the econometrics of hyperinflation and the measurement of scholarly productivity. Fellow Tinbergen Institute and the Managing editor of De Economist. Until 2001 deputy executive director as well as head of research with De Nederlandsche Bank and from January 2003 professor emeritus in monetary economics, University of Amsterdam. I am grateful to professor J.S. Cramer and dr Peter van Els for their useful comments.     

The global monetaristic variant of the monetary approach to the balance of payments: an empirical study of the Netherlands

Summary The global monetaristic variant of the monetary approach in which the characteristic of the balance of payments being an essentially monetary phenomenon comes to the fore most strongly has been tested. Criticism of a theoretical nature regarding the monetary approach appears not to hold good for this variant. From the characteristics a reduced-form equation for the rate of growth of the stock of international monetary reserves has been derived. Moreover, simultaneous-equation systems have been developed to give substance to a possible mutual influencing of the variables in the money stock equation resulting from a sterilization policy. Estimations lead to a rejection of this variant for the Netherlands.My thanks are due to the members of the International Economics Section of Groningen State University for their comments and suggestions.     

The Bank Lending Channel in the Netherlands: The Impact of Monetary Policy on Households and Firms

This paper presents empirical evidence of the existence of a bank lending channel in the Netherlands by analyzing the responses of different borrower groups to a contraction of monetary policy. It is found that corporate loans are depressed only after a lapse of over a year, whereas household loans decrease almost instantly due to an interest rate rise. However, since the latter reaction is not accompanied by a fall in consumer expenditure, the bank lending channel is probably not very important for the transmission of monetary policy in the Netherlands. It appears that households, as well as banks and firms, tend to buffer monetary policy shocks through adjustments in liquid financial instruments.We would like to thank the managing editor, two anonymous referees as well as R. Lensink (University of Groningen), E. Sterken (University of Groningen), P. Vermeulen (ECB) for their comments, and J. Kakes (the Netherlands Bank) for his research assistance     

The distribution of Seigniorage in The Netherlands

Summary This paper investigates the revenue from money and its distribution between the government and the central bank. An accounting framework is developed taking explicit account of stock and flow aspects of monetary revenue. Application of this framework to data for The Netherlands shows that although the overall revenue from money in the period 1949–1989 was sizeable, the central government did not really benefit from its monetary monopoly.Helpful comments by M.M.G. Fase and two anonymous referees are gratefully acknowledged.     

On black market exchange rate and demand for money in developing countries: The case of Nigeria

This paper examines the hitherto unexplored question of the effects of the black market exchange rate expectations on the domestic demand for money in Nigeria. This study finds that real income and expected inflation rates are the appropriate scale and opportunity cost variables for the demand for money function in Nigeria. The results also suggest that depreciation in black market exchange rate exerts a significant negative impact on the domestic demand for money. A policy implication of this research is that since a depreciation of the black market exchange rate tends to decrease the demand for money, it should be taken into account in the execution of monetary policy. The authors would like to thank an anonymous referee for helpful suggestions which substantially improved the quality of the paper. This research was supported in part by a summer research grant from the College of Business Administration, University of New Orleans.     

The needs for international monetary reserves,exchange rate flexibility,and joining a currency area

Summary The needs for reserves, exchange rate flexibility and monetary policy are derived, the need being the result of an optimization problem. The level of domestic production, its variance and that of the domestic price level have been chosen as criteria of the benefits and costs. The effectiveness and costs of balance of payments adjustment, which appear to be co-determinants of the needs, are expressed in the parameters of an economic model. This shows that the need for reserves displays a one-to-one relation to quantities of the demand for money and to the balance of payments disturbance. Only the latter is a meaningful criterion for joining a currency area. Helpful comments by Mr. G. J. Lanjouw and a referee are acknowledged. This article is a revised and extended version of Jager (1977).     

Reverse-lag reserve accounting,bank behavior,and monetary control: A formal analysis

Conclusion The fundamental conclusion of the analysis contained in this paper is that Laurent's claims concerning the potential monetary control enhancements of the adoption of a reverse-lag reserve accounting system are correct. This result conflicts with those reached by other studies of the monetary control properties of RLA, because the model of RLA used in this paper has been based on an analysis of the microeconomic behavior of banks. The conclusion that monetary control could be improved by adoption of RLA vindicates Laurent's [1984] argument that a “microbank analysis” is fundamental to understanding correctly the workings of an RLA system. An important qualification that prohibits a conclusion that RLA clearly is superior to lagged or contemporaneous accounting is that the monetary control enhancements resulting from adoption of RLA are mitigated to some extent by the existence of the Federal Reserve discount window. Indeed, the relative desirability of RLA as compared to alternative reserve accounting systems cannot be evaluateda priori in the presence of a discount window. Any serious consideration of RLA would need to be prefaced by a careful study of the relationship of the money stock to bank borrowing in an RLA setting. The final version of this paper was written while the author was a visiting economist at the Board of Governors of the Federal Reserve System. This paper has benefited considerably from comments and suggestions by Robert Laurent, Kenneth Kopecky, Daniel Friel, Chris Waller, Elmus Wicker, and participants in a seminar at the Federal Reserve Bank of Chicago and in the Indiana University Money and Banking Seminar. Initial work on this topic was supported by an Indiana University Summer Faculty Fellowship. Any errors are the author's responsibility, and any views expressed in the paper do not necessarily reflect those of the Board of Governors of the Federal Reserve System or its staff.     

The october 1979 federal reserve policy shift: An analysis using variance decomposition

Conclusions Subsequent to the announced October 1979 policy shift, many economists voiced doubt about whether the Federal Reserve was sincerely committed to the execution of an NBR's targeting strategy. However, the charge that the central bank continued to accommodate as vigorously after the announced policy shift as before is not borne out by these results. Pre- and post-1979 comparisons of the FFR and NBR decompositions suggest a conscious policy alteration aimed at tightening control over NBR while allowing the FFR to respond to money market conditions.The evidence also indicates continuedM1 endogeneity in the second period, with feedback occurring between this variable and the FFR. While the measuredM1 aggregate used in the VAR's does not allow a precise identification of money demand forces, it is reasonable to relate this endogeneity to the erratic shifts in money demand which are known to have occurred over the 1979–82 period.Thus, while the analysis does indicate the central bank did alter its behavior with respect to the NBR policy instrument, the results do not show the Fed was able to control the volatility ofM1 over the NBR targeting period.Funded by the NTSU Office of Research, grant no. 34475. Ken Smith and Doug McMillin offered helpful comments. The usual caveat applies.     

The demand for money in the Netherlands revisited

Summary This article presents an analysis of demand for money in The Netherlands, both at the aggregate level and the sectoral level. Special attention is devoted to the distinction between short and long run demand. Deviations of the long-run relationships are modelled by means of the error correction mechanism. The elasticities for aggregate demand are consistent with the findings for the money demand by the household and business sectors and correspond reasonably well with those derived from other studies. The estimated equations describe the rise in theM1- andM2-ratio in the 1980s in a satisfactory way, although forM2 from 1987 onwards there is a discrepancy between actual and fitted values. The disaggregated analysis shows that the behaviour of the business sector seems to be responsible for this.The authors are indebted to Professor S.K. Kuipers for his comments on an earlier draft.     

On the validity of the quadratic utility approach in mean-variance portfolio analysis: An empirical test

Summary This paper empirically compares the quadratic utility approach and the negative exponential utility approach within the framework of portfolio analysis. Estimates for the subjective variance-covariance matrix are obtained using the two models under consideration. The two approaches have been compared through these estimates and also by their forecasting ability. The quadratic utility approach appears to be inferior. This paper relies heavily on parts of my University of Essex Ph.D. thesis (Bhattacharyya, 1975). I am grateful to Professors Bergstrom and Parkin for their help, comments and encouragement. Mr. R. E. Bailey's help and advice is also gratefully acknowledged. In addition, the comments of the referee of this journal helped me to improve on my earlier draft. Any error remaining is mine.     

Does Money Have a Role in Monetary Policy for Price Stability under Inflation Targeting in Thailand?

This paper deploys Thai quarterly data for the study period 1999q1–2014q4 to econometrically investigate the proposition that money growth is an important, if not the sole, determinant of inflation under inflation targeting and that the money growth-inflation relation is not conditional on the stability of the money-demand function. The autoregressive distributed-lag (ARDL) bounds-testing results suggest that, across the study period, the Thai money stock (narrow or broad), real output, prices, interest rates and exchange rates maintained a long-run equilibrium relationship. The associated error-correction model of inflation confirms the cointegral relationship among money (narrow or broad), real output, prices, interest rates and exchange rates. It also suggests that money growth has a significant distributed-lag impact on inflation. The presence of this money growth-inflation relationship was associated with a stable narrow money-demand function, whereas the broad money-demand function remained unstable. These results for the study period are consistent with the view that the causal relationship between money growth and inflation holds in Thailand under inflation targeting when the Bank of Thailand deploys a short-term policy interest rate, rather than a monetary aggregate, as the instrument of monetary policy and that this relationship is not conditional on the stability of the money-demand function.     

Structural adjustment: A survey of the issues and options

The article raises and attempts to answer questions such as: adjustment for what purpose? to what shocks? of what factors or forces? by whom? who loses and who benefits from adjustment? and adjustment how? It also discusses the question of adjustment when? The distinction between external and internal shocks is rejected as neither helpful for the allocation of blame nor for the justification of raising finance. An analysis of the impact on the poor is sketched out. After a brief discussion of the role of the market and government intervention in adjustment policy and the fallacy of aggregating country policies, there follows a discussion of the double paradox of conditionality: why should a donor impose conditions that are in the best interest of the recipient, and why, instead of paying for getting good advice, is the recipient rewarded with extra money? Ten possible reasons are given. The paper ends with proposals as to how to overcome the conflict between national sovereignty and assuring that donor money is well spent.