Why interest rates react to money announcements: An explanation from the foreign exchange market

When the Fed announces a money supply greater than had been expected, interest rates rise. Why? One explanation is that the market raises its estimate of the future rates of money growth and inflation, and bids up nominal interest rates. We offer contrary evidence: on such days the dollar appreciates, not depreciates. An alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the Fed will reverse in the future. The anticipated future tightening raises today's real interest rate, causes a capital inflow, and appreciates the dollar, the result in fact observed.     

Equilibrium implications of interest rate smoothing

We introduce a macro-finance model in which monetary authorities adjust the money supply by targeting not only output and inflation but also the slope of the yield curve. We study the impact of McCallum-type rules on capital growth, the volatility of interest rates, the spread between long- and short-term rates, and the persistence of monetary shocks. Our model supports the Federal Reserve's choice to incorporate financial data in their policy decisions and expand the monetary base to decrease the nominal interest rate spread at the cost of lower expected long-term growth.     

Tight money and inflation: Further Results

The Sargent-Wallace results on inflationary effects of monetary restraint are considered in a Sidrauski money growth model when the utility function is unrestricted except for separability. Temporary monetary tightening will eventually lead to higher inflation when the deficit is fixed only if the elasticity of money demand with respect to the money growth rate is less than unity. It is also shown that for inflation to rise immediately further requires the elasticity with respect to the nominal interest rate to be no less than unity.     

Money,interest, inflation and growth in Turkey

This paper estimates a two equation model of inflation and growth in Turkey over the period 1950–1977. Inflation is determined by the difference between the rates of change in nominal money supply and real money demand. The short-run growth function consists of an expectations augmented Phillips curve, to which a credit availability effect is added. Under Turkey's disequilibrium institutional interest rate and exchange control systems, the real supply of domestic credit is determined, in large part, by real money demand which is, in turn, influenced by the real deposit rate of interest. The central bank can use both the nominal money supply and the nominal deposit rate of interest as policy instruments for stabilisation purposes.     

Macroeconomic Implications of Term Structures of Interest Rates Under Stochastic Differential Utility with Non-Unitary EIS

This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary elasticity of intertemporal substitution (EIS, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and inflation. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors (in particular, inflation expectation). Notably, we show that, if (1) the EIS is less than one, (2) the agent is comparatively more risk-averse relative to time-separable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected inflation is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.     

Money Supply and Capital Accumulation on the Transition Path Revisited

Fischer (1979) and Asako (1983) analyze the sign of the correlation between the growth rate of money and the rate of capital accumulation on the transition path. Both plug a constant relative risk aversion utility (based on a Cobb–Douglas and a Leontief function, respectively) into Sidrauski's model—yet return contrasting results. The present analysis, by using a more general CES utility, presents both of those settings and conclusions as limiting cases and generates economic figures more consistent with reality (e.g., the interest rate elasticity of the money demands derived from those previous works is necessarily 1 and 0, respectively).     

THE BEHAVIOR OF U.S. SHORT-TERM INTEREST RATES SINCE OCTOBER 1979

Short-term interest rates in the United States have been “too high” since October 1979 in the sense that both unconditional and conditional forecasts, based on an estimated vector autoregression model summarizing the prior experience, underpredict short-term interest rates during this period. Although a nonstructural model cannot directly answer the question of why this has been so, comparisons of alternative conditional forecasts point to the post-October 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short-term interest rates. This finding is consistent with the authors' earlier conclusion, based on analysis of a small structural macroeconometric model, that the high average level of interest rates has been due to a combination of slow growth of (nominal) money supply and continuing price inflation, which together have kept real balances small in relation to prevailing levels of economic activity.     

产出弹性、替代弹性与经济增长的关系分析——基于西部地区面板模型的经验研究

本文以我国西部10个省份为研究对象,研究了资本—劳动替代弹性与经济增长之间的关系。结果发现:劳动的产出弹性、资本—劳动替代弹性均不断上升,而资本的产出弹性持续下降。资本—劳动替代弹性与经济增长互为因果关系。资本—劳动替代弹性的冲击对经济增长的影响程度较小,而经济增长的冲击对资本—劳动替代弹性的影响程度较高。     

A Clower constraint model of unbacked money

The stylized monetary facts — (1) money growth causes inflation, (2) inflation is bad, (3) money demand depends upon the nominal interest rate, (4) the real interest rate equals a parametrically fixed rate of time preference, and (5) investment depends upon the real interest rate — are produced in a Grandmont-Younes modified Clower constraint model of money. Inflation is distorting, but is no one's intertemporal rate of substitution. Inflation discourages trade, but not investment. As a by-product the Friedman hypothesis, that the optimal deflation equals the rate of time preference, is confirmed in the model.     

International evidence on misspecification of the standard money demand equation

This paper tests the proposition that the interest rate in the standard money demand equation acts as a proxy for the expected change in interest rates. If this is true, the interest elasticity in the standard equation will depend on the expectations process for interest rates. Using cross-country data, we find that there does exist a relationship between the observed interest elasticity in the standard equation and the predictability of future interest rates from current interest rates.     

Does money matter in developing economies? Some evidence from the Solow estimator

Building on the Solow seminal approach for estimating the output elasticity of money stock and on Startz's (1984) implementation of it, this article explores the role of money in the production process in Kuwait, Saudi Arabia, and the United Arab Emirates. Due to lack of necessary data on interest rates in these countries, we use alternative measures of credit constraints as proxies. In contrast to Startz's conclusion for the U.S., our empirical results systematically reveal significant output elasticities of money in each of the three developing countries under study. This is consistent with the neoclassical monetary theory and its incorporation of real money balances as an important input in the production function. Moreover, as the McKinnon-Shaw hypothesis contends, money appears to be complementary to physical capital in the three developing countries. Hence, policy-makers must not hinder the development of their money (financial) markets if they desire to promote economic growth.     

Inflation Taxation and Welfare with Externalities and Leisure

This paper examines how inflation taxation affects resource allocation and welfare in a neoclassical growth model with leisure, a production externality and money in the utility function. Switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income, but increases consumption, labor, capital, and output. The net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution. While it is always negative without the externality, it is likely to be positive with a strong externality and elastic intertemporal substitution.     

Monetary randomness and investment

This paper develops a neoclassical model in which the behavior of the money supply affects investment by affecting the real distribution of asset returns. Investment depends on wealthholders' demand for capital. A stochastic money growth rule influences portfolio choice by affecting the distribution of the inflation rate. The variance of inflation matters to wealthholders because of the existence of assets with returns that are not indexed to changes in the price level: money and bonds which are contracted in nominal terms. In a rational expectations environment, asset demands will thus be sensitive to the distribution of the money growth rate. Our principle conclusion is that an increase in the variance of the money growth rate lowers investment, which complements Tobin's (1965) result that an increase in the mean stimulates capital accumulation. The paper also represents a step toward incorporating an asset market into a macroeconomic model in a manner which takes account of Lucas' (1976) criticism of econometric policy evaluation. All variables in the model, including asset return distributions, are functions of technology, preferences and the money supply rule. Further, expectations are rational.     

Are expectations of inflation rational? or Is variation of the expected real interest rate unpredictable?

The joint hypothesis developed and tested in this paper is that the nominal interest rate is a rational expectation of the real interest rate plus the inflation rate and that variation of the expected real interest rate is unpredictable on the basis of information used in the test. This test is applied to quarterly data on three-month United States Treasury bills of 1954 to 1973. The information used in the tests includes, besides past interest rates and inflation rates, past growth rates of the source base, the money supply, and real GNP. Some of the tests allow for a positive marginal tax rate, which changes the results little. The hypothesis is generally consistent with the data, which provides support for the proposition that predictable changes of the money supply do not affect expected real interest rates over periods as short as a quarter.     

Money and inflation in the euro area: A case for monetary indicators?

This paper examines inflation indicators for the euro area by studying the relationship between inflation, output, money and interest rates, using data spanning 1980–2001. The central finding is that both the output gap and the real money gap (the difference between the real money stock and the long-run equilibrium real money stock) contain considerable information regarding future inflation. In contrast, the Eurosystem's money-growth indicator (the difference between nominal money growth and a reference value), the prominent “first pillar” in its monetary strategy, contains little information about future inflation, and no information beyond that contained in the output and real money gaps. The predictive performance of the output gap has improved compared to that in a previous version of this paper, most likely because of better estimation methods.     

Convergence,capital accumulation and the nominal exchange rate

This paper develops a flexible price, two-sector growth model with a nominal side to study the role of the exchange rate in transition dynamics. We adopt a standard small open economy model with traded and nontraded goods, where the engines of growth are exogenous productivity improvements and capital accumulation. We enhance this standard framework by adding a preference for real money holdings, captured by money-in-the-utility. We follow Schmitt-Grohé and Uribe (2003) and assume that the interest rate on bonds issued by the small open economy is debt-dependent, and interpret it as a simple financial friction. We show analytically that the choice of the exchange rate regime influences the transition dynamics of a small open economy through the balance sheet of the central bank. We then calibrate the model to explore the quantitative significance of our results. We find that the choice of the exchange rate regime has significant and lasting effects on prices, consumption, investment and sectoral allocations, and the composition of financial assets.     

MONEY SUPPLY ANNOUNCEMENTS AND INTEREST SENSITIVE STOCKS

Much of the money announcement literature provides evidence that there is a significant response of nominal interest rates to unexpected changes in the money stock, especially in the October 1979-October 1982 period. These money announcements provide a proxy for unexpected interest rate changes which can be used in a novel test for the interest sensitivity of stocks. Using the response of disaggregated stock price data to money announcements, we reach two major conclusions. First, that the interest rate response observed in the money announcement literature was predominantly a change in real rates. Second, an unusual group of stocks are excessively sensitive to these real rate changes and many groups of stocks that might logically have been expected to be sensitive are not.     

教育财政如何影响家庭人力资本投资:事实、机制与政策含义

建设高质量教育体系是实现高质量发展的基础,教育财政在其中发挥了重要作用。本文将微观层面的家庭教育支出数据与教育财政数据匹配,基于教育投入产出框架,考察了2009—2017年我国政府和家庭教育投入之间的关系。结果表明,我国政府和家庭教育投入之间存在显著的互补关系。进一步分析表明,校内教育对人力资本积累的贡献度以及校内、校外教育特征差异是影响两者之间替代弹性的重要因素。我们发现,对校外教育市场的管制可有效降低政府和家庭教育投入间的互补性,这对我国教育财政如何实现建设高质量教育体系以及家庭支出减负两大目标的相容具有一定启示。     

The micro elasticity of substitution and non‐neutral technology

This article provides evidence on the micro capital‐labor elasticity of substitution and the bias of technology. Using data on US manufacturing plants, I find several facts inconsistent with a Cobb‐Douglas production function, including large, persistent variation in capital shares. I then estimate the elasticity using variation in local wages, and several instruments for them, for identification. Estimates of the substitution elasticity using all plants range between 0.3 and 0.5, with similar estimates across industries. I use these elasticity estimates to measure labor augmenting productivity, and find that labor augmenting productivity is highly persistent, and correlated with exports, size, and growth.     

International currency substitution and the income velocity of money

This paper presents new empirical evidence on the degree to which international currency substitution destabilizes domestic money demand. It also provides an explanation of some apparent discrepancies among previous empirical studies of currency substitution. This explanation hinges on the distinction between the elasticity of currency substitution and the cross-elasticity of money demand. A large (small) value of one elasticity does not imply a large (small) value of the other. A large cross-elasticity is required for currency substitution to destabilize domestic money demand. The empirical evidence presented here is consistent with the view that these cross-elasticities are typically small.