Cointegration,error correction and the demand for money in Cyprus

This paper applies the recently developed technique of cointegration to estimate the demand for broad money in the case of Cyprus. Cyprus is an example of a country which does not have a sophisticated financial sector and which faced a severe political shock at a certain point in her history. The hypothesis of instability in the demand for money function cannot be rejected if the effects of this shock are not taken into account. In particular, it is argued that there was a once and for all increase in the income elasticity of this function at the time of the shcock. When this shift is accounted for by the introduction of an appropriate variable in the cointegrating regression the hypothesis of instability in the demand for money is rejected. Two dynamic error correction models are then specified with income and consumption as the scale variables respectively. Non-nested tests are carried out which reveal that consumers' expenditure is a more appropriate scale variable than GDP.     

Government expenditure,money supply and unemployment in the USA: an analysis of the pre-war and post-war functional forms

A new frame work to measure the impact of an increase in government expenditure and/or money supply on unemployment is provided. The model and procedures introduced are used to estimate a long-run aggregate demand function for the US economy.     

Money Demand and Purchasing Power Parity (PPP), in the Republic of South Africa

We have examined empirically two important economic relationships, the Purchasing Power Parity (PPP) and the money demand relationship, among the consumer prices, money, output, interest rates, and the nominal rand/dollar exchange rate of the Republic of South Africa (RSA) for the sample period from 1993 second quarter to 2003 second quarter within the frameworks of co-integration and Error Correction Model (ECM). It is established that the strong version of the PPP including the proportionality and the symmetry hypothesis, is supported. The changes in the rand/dollar exchange rates are influenced by the long term trends in the consumer prices of the RSA and the USA. There also exists a well defined money demand function for this period. The broad money demand is influenced by the consumer prices, the GDP and the interest rates. The short-term interest rates are found to be the own rate of return for broad money and the long-term bond yield is the opportunity cost of holding money. The monetary policy works through the short term interest rates.

     

Consumer allocation models: Choice of functional form

The functional form of consumer allocation models should be able to satisfy theoretical properties derived from the theory of consumer demand. The paper sketches four approaches that meet this condition. Of course, also empirical performance matters. Next to naive goodness-of-fit comparison, non-nested hypothesis testing can be employed. The latter technique is applied to a comparison of four versions of differential demand systems: the Rotterdam system, a version of the Almost Ideal Demand (AID) system, the CBS system and the NBR system. These systems are artificially nested in a more general model using scalar weights in contrast to Barten and McAleer (1991) who use matrix weights for this purpose. Annual data over the period 1921–1981 for The Netherlands for four major groups of consumer expenditure have been used for the empirical application. The CBS system dominates the others.     

Important laws governing China's macro-economy

This paper presents economic laws that are valid for China's macro-economy from 1952 to 2013 in spite of the many institutional changes during this period. The laws include a consumption function based on the adaptive expectations hypothesis of Friedman (1957) or the rational expectations hypothesis of Hall (1978), an investment function derived from the accelerations principle and the roles of government expenditure and money supply. It extends the analyses of Chow (1985, 2010 and 2011) to cover longer periods and study additional issues.     

Effects of Changes in Household Size,Consumer Taste & Preferences on Demand Pattern in India

Current research in applied demand analysis has been addressing the twin issues of degree of non-linearity or curvature of the Engel curves and the ability to capture price effects appropriately by the demand system. Further, in addition to income and prices, the role of demographic variables like household size, composition and dynamic aspects like consumer taste & preferences are also being ’ emphasized in recent literature. Continuous efforts are being made to modify the existing models and propose new ones to incorporate the above developments. The purpose of this study is to re-examine the usefulness of the popular linear expenditure system vis-à-vis the two other flexible models viz. Nasse expenditure system, a generalization of the linear expenditure system itself, and the almost ideal demand system in the above context for India.The empirical results indicate wide variation in marginal budget shares and demand elasticities across income groups, rural-urban sectors and alternative models. The household size and consumer taste & preferences are found to be statistically significant. The results confirm the earlier findings that there are significant changes in consumer tastes away from cereals and pulses in favor of other food and nonfood commodities. The results also show that flexible models, which are theoretically superior, gave unacceptable positive price responses for some commodities and violated second order conditions of utility maximization. It is found that some ad-hoc separability restrictions are needed, thereby limiting the flexibility of the model, to get negative own-price responses in these models. But, second order conditions are still violated. The tests of nested hypotheses also confirm the need for inclusion of household size, consumer taste, income group and rural-urban dummies along with their interaction variables in the demand system.

     

Consumer preferences,the demand for Divisia money,and the welfare costs of inflation

This paper uses neoclassical demand theory to calculate the welfare costs of inflation. It considers the demand interactions between money, consumption goods, and leisure, relaxes the assumption of fixed consumer preferences, and addresses the inter-related problems of estimation of money demand functions, instability of money demand relations, and monetary aggregation. It makes full use of the relevant economic theory and econometrics and generates inference in terms of long-run welfare costs of inflation that is internally consistent with the data and models used.     

The permanent income hypothesis in underdeveloped economies:: Additional evidence

Laumas and Laumas find no support for the permanent income hypothesis in recent work on a consumption function for India. However, permanent income has been used not only in consumption but also in demand for money functions. Estimates of demand for money in 10 Asian LDCs indicate that substitution of permanent for current income is warranted. In particular, the estimate for India is improved substantially by the use of permanent instead of current income. Furthermore, the weights obtained from a polynomial lag distribution are almost identical to the Laumas' exponential weights with which they construct permanent income.     

MONETARY TARGETING IN WEST GERMANY,HOLLAND, AND SWITZERLAND

Links between fluctuations in domestic money supplies and subsequent fluctuations in rates of real output have been less visible in Western Europe than in the United States. This paper discusses some of the causes and investigates the stability of the demand for money in West Germany, the Netherlands and Switzerland. In all three countries, temporary changes in short-term interest rates temporarily affect the demand for money. These temporary changes in the demand for money are reflected in temporary blips in the monetary statistics, as agents substitute among various monetary assets. The hypothesis that aggregate demand responds only to longer-lasting changes in interest rates is tested by a two-step procedure. First, the official data on European money supplies are corrected for temporary disturbances caused by temporary changes in domestic interest rates. Second, changes in real activity are regressed on a measure of monetary stimulus, which takes into account the correction for temporary disturbances. This two-step procedure avoids some of the bias present in ordinary estimates of the demand-for-money function. The results show that the links between changes in money and subsequent changes in output are somewhat more tenuous in West Germany, the Netherlands, and Switzerland than in the U.S. but significant effects do exist. These effects are more easily documented when corrected time series for the European money supplies are used.     

Military expenditure and investment in OECD countries, 1954–1973

This paper, using data for 14 large OECD countries between 1954 and 1973, tests the hypothesis that reduced investment has been a major opportunity cost of military expenditure in the postwar period. The share of investment in potential output is made a function of the share of military expenditure, growth rate, and demand pressure. Whether the data are treated as a set of cross sections, time series, or pooled, and under various assumptions about dynamic and error covariance structure, the results indicate a clear negative effect of military expenditure on investment, with a coefficient on military expenditure not significantly different from ?1.     

Conditional and unconditional food demand elasticities in a dynamic multistage demand system

This paper estimates conditional and unconditional demand elasticities in a three stage analysis of consumer demand for food and non-food items in Greece. A dynamic version of the AIDS model is specified and estimated, and full system misspecification tests applied. Correction formulas for price and expenditure elasticities are used to calculate unconditional elasticities from conditional demand sub-systems. All food items rank as price inelastic. Deviations between the calculated conditional and unconditional price and expenditure elasticities are found to be significant, demonstrating the importance of correcting conditional elasticities before they can be used for policy purposes or welfare analyses.     

Further analysis of cross-country comparison of consumer expenditure patterns

The present paper analyzes consumer expenditure pattern within the framework of classical demand theory. We compare the linear expenditure system (LES) with two other demand systems based on utility-maximizing behavior: a generalized linear expenditure system (GLES) and the indirect addilog expenditure system (IAES). Our data consists of annual time series, 1950–1965, for 11 OECD member countries.The main results of this paper are that consumer expenditure patterns can be explained by emperical demand models based on utility-maximizing behavior. Furthermore the GLES model, while not without its share of weaknesses, seems to be more attractive than the IAES and LES models.     

REPRESENTATIVE ECONOMIC AGENT,PROPENSITIES TO SAVE,AND MONEY DEMAND STABILITY

In simple‐sum aggregate money demand studies, long‐run elasticities and the propensities of individuals to save are presumed to be equal and can be depicted by those of the representative economic agent. This study uses panel data to test this hypothesis within the theoretical framework of the inventory‐theoretic transactions approach and finds it fails to hold. At the microeconomic level, money demand functions are not homogeneous, and the impacts of monetary policies on economic activities of households are not as stable as those suggested in aggregate money demand studies.     

Implications of consumer heterogeneity in time-series estimates of US money demand

The money demand function has traditionally been estimated with income and interest rates, typically employing quite lengthy time series. Controversy, however, surrounds the importance of heterogeneous agents in monetary economics and throughout macroeconomics more generally. In particular, if proportions of agents with different traits (and hence, different money demands) are changing over time, ignoring those changes may bias estimated income and interest elasticities. This concern, as well as that of appropriate functional form, is explored here. Controlling for consumer heterogeneity has surprising effects on the estimated elasticities of traditional variables.     

The basic functions of money: An Application of the Input Independence Transformation

Theil's input independence transformation is applied to consumer demand for components of newly defined M-3 to interpret an empirical formulation of the basic functions of money. The results are largely consist with conventional a priori notions, especially regarding importance of liquidity.     

Permanent prices,expected price changes,and the demand for money

This paper investigates the empirical validity of the distinction between measured and permanent prices for cash balance decisions. The use of permanent prices has been advocated by Friedman over twenty five years ago, but the idea has received little attention in the literature. Using Canadian quarterly data, we find that the permanent price hypothesis yields meaningful estimates of the demand for money, but it does not appear to contribute significantly to our understanding of cash balance decisions. A number of assumptions about the relationship between the elasticities of income, price, and price change expectations are tested as well.     

MONETARY ANTICIPATONS AND THE DEMAND FOR MONEY SOME UK EVIDENCE*

The Carr-Darby ‘shock-absorber’ hypothesis, that unanticipated changes in the money supply influence the demand for real money balances but anticipated changes do not, is tested on UK data for narrow money, M1. For comparison with earlier studies on US data we take the (real first order) partial adjustment model as one example of a ‘conventional’ demand for money function. However the Carr-Darby hypothesis is also tested taking a more general autoregressive distributed lag model as the ‘conventional’ demand function. For both ‘conventional’ demand for money functions we find that the shock-absorber hypothesis is not supported for M1 using UK data.     

Advertising in demand systems: testing a Galbraithian hypothesis

In this paper we argue that the influence of advertising upon the inter-product distribution of demand is a system-wide phenomenon which is investigated better through a demand equation system rather than through single equation methods. Attention is focused upon a dynamic version of Deaton Muellbauer's AIDS model modified to include advertising terms. Within this framework using data on consumer's non-durable expenditure in the UK we carry out a preliminary test of Galbraith' hypothesis that advertising may affect the composition of aggregate consumer demand.     

Financial innovation,depository-institution deregulation,and the demand for money

Our hypothesis is that financial innovation and depository-institution deregulation explain much of the seeming instability in the post-1973 money demand. Following a procedure similar to that employed by Hafer and Hein (1982) and Hafer (1982), we conclude that money demand experiences three periods of gradual intercept drift—two down and one up—rather than several one-time shifts. The gradual intercept drift is consistent with our hypothesis of financial innovation and depository-institution deregulation. Furthermore, after accounting for the gradual drift, the resulting full-sample regression are well-behaved.     

Income velocity and non-GDP transactions in the UK

It is widely reported for many countries, including the UK, that income velocity has been highly variable around a declining trend in recent years. This paper advances the following hypothesis. The demand for credit and hence the broad money stock are influenced by total spending in the economy, rather than spending only on newly produced goods and services. Since total spending in the economy has generally increased relative to GDP (mainly because of asset transactions) credit and money have expanded more rapidly than GDP, with the resulting fall in income velocity. Using quarterly data from 1975 to 2008, we estimate a vector error correction with income velocity as the dependent variable and the ratio of total to GDP transactions as an explanatory variable. The results show substantial support for the hypothesis and raise (further) doubts about the information content of broad money aggregates for inflation targeting central banks.