Seasonal Cointegration and Long‐Run Neutrality of Money in the USA

Using the notion of seasonal cointegration and a monetarist model, this paper re‐examines the long‐run monetary neutrality hypothesis, based on the seasonally unadjusted quarterly data of the US over the period 1959Q1–2004Q4. The results indicate that money is cointegrated with price at all possible frequencies while real output is cointegrated with price only at an annual frequency. The cointegration between money and price at the zero frequency, and non‐cointegration between real output and money at all possible frequencies, suggests that money affects nominal but not real variables in the long run.     

Testing long-run neutrality using intra-year data

Previous tests of the long-run neutrality hypothesis have generally relied on annual time series data. This paper analyses the long-run neutrality of money in Australia using different sources of intra-year data, which permits an examination of the effects of seasonality and the robustness of previous empirical results. A reduced form ARIMA model is used with both quarterly seasonally unadjusted and adjusted Australian real GDP and nominal money supply to test the neutrality hypothesis. Using two measures of money stock, namely M1 and M3, it is shown that the hypothesis is supported using M1 as the measure of money supply, while it is rejected using M3. Recent trends and developments in the money and credit markets in Australia provide a possible explanation of the sensitivity of the outcome to the measure of money stock employed in the analysis.     

Sensitivity of consumption to income and to government purchases: some specification and estimation issues

The paper derives a nonlinear error-correction model (ECM) for consumption and shows that existing models that are based on quadratic utility, combine permanent income and current-income consumption, and nest (or could nest) the hypothesis of substitutability between private consumption and government purchases are special cases of the ECM. The importance of some econometric issues that have not received proper attention in the literature is demonstrated by estimating the models using US aggregate quarterly data, 1953:1-1992:4. The evidence suggests that the ECM produces more reliable estimates than do the existing restrictive models.     

Co-breaking,cointegration, and weak exogeneity: Modelling aggregate consumption in Japan

This paper aims to estimate a parsimonious data-congruent model for aggregate real consumption in Japan using quarterly data over the past two decades. Testing co-breaking, cointegration and weak exogeneity plays an important role in pursuing the model reduction. It is demonstrated that co-breaking removes a deterministic shift caused by the collapse of the bubble economy in Japan in the early 1990s. Multivariate cointegration analysis then reveals that inflation plays a critical role in accounting for the long-run behaviour of the aggregate consumption. Further analysis finds that inflation and aggregate income are weakly exogenous with respect to a set of parameters of interest. Finally, a parsimonious data-congruent model for the aggregate consumption is estimated conditional on the set of weakly exogenous variables.     

A cointegrated structural VAR model of the Canadian economy

This paper implements a cointegrated structural VAR model of the Canadian economy using quarterly data over the period 1964–1994. The dynamic properties of the estimated model are compared to the predictions of a simple textbook macro model. Four long-run equilibrium relationships are tested: (i) consumption–income; (ii) consumption–wealth; (iii) money demand; and (iv) the Fisher equation. The empirical results obtained are generally consistent with the predictions of the textbook model's long-run implications, although level shifts are observed in the consumption/income and the wealth/income ratios. Similarly it is found that there was an increase in the ex post real interest rate, implying a level shift in the Fisher relation, following the Bank of Canada's policy change towards a stable price level target.     

Note on a model of Chinese national income determination

A macroeconomic model of Chow (1985) explaining aggregate consumption by the permanent income hypothesis of Robert Hall and aggregate investment by the accelerations principle was found to fit Chinese annual data from 1952 to 1982 well. This note shows that the same model can successfully explain Chinese annual data from 1978 to 2006.     

Status, affluence, and inequality: Rank-based comparisons in games of status

We examine the effects of changes in the income distribution in an economy where agents' utility depends both on consumption and on their rank in the distribution of conspicuous consumption. We introduce a new methodology to compare the behavior of agents that occupy the same rank in the two different income distributions but typically have different levels of incomes. Here, an increase in incomes of the least endowed improves their welfare, yet it also increases social competition, making those in the middle to be worse off—even if they have higher incomes as well. As social competition can be lowered by spreading agents apart in income space, we find that an increase in incomes for all, augmented by (weakly) increased income dispersion, constitutes a sufficient condition for Pareto-improvement. We also show that one can have an increase both in income and relative position but still be worse off.     

Welfare effects of the euro cash changeover

Using merged data from the British Household Panel Survey (BHPS) and the German Socio-Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in post-government household income of more than 30% is needed to compensate for the clear decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are higher for persons who have difficulties with the new currency. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.     

Monetary effects of a consumption tax

Abstract. This paper analyzes the short-run effects of a consumption tax increase (VAT or national sale tax) on aggregate demand. Because it increases the prices paid by consumers relative to the prices received by suppliers, a consumption tax affects the supply of real money balances, in addition to reducing expenditures. Hence, when a consumption tax replaces an income tax so as to maintain a balanced government budget, the net effect can plausibly be contractionary.     

The impact of oil prices on income and energy

The major determinant of real income growth in Korea is real oil prices, followed by money supply, exchange rates, energy consumption, and government spending. Over the longer horizon, the effects of exchange rates, oil prices, government spending, and money supply become more pronounced. For energy consumption, the most important factor is oil prices, followed by exchange rates, government spending, money supply, and income. For the association between energy consumption and real income, energy consumption influences real income growth only through energy consumption, while real income affects energy consumption only through the error correction term. The findings of the study thus suggest that the level of economic activity and energy consumption mutually influence each other.     

Consumption,co-integration and varying coefficients: the Australian evidence

An aggregate consumption function incorporating random coefficient approach is estimated to investigate the changing pattern of consumer response in Austrialia using quarterly data from 1959: IV to 1990: IV. The methdology applied is that of Hidreth and Houck (1968), Singh et al. (1976) and Hoque (1991). The largenge multiplier test, as suggested by Breush and Pagan (1979), supports the hypothesis of randomness in the response coefficients. Our Study indicates strong dependence on the first-difference of income and that consumers respond quite slowly to short-run fluctuations. This is because consumption and income have been found to be integrated of order one and co-integrated. Thus, as error correction model has been estimated following Engle and Granger (1987).     

Some evidence on the influence of income uncertainty on aggregate consumption

Recent theory suggests uncertainty in income influences consumption expenditures. With disposable income modeled as a random walk plus drift, an econometric technique for estimating the moments of a dependent variable is used to test this hypothesis by producing a series of consistent estimates of the variance of disposable income. Using quarterly post-World War II data and a well-known specification of the consumption function, the standard deviation of income has a negative and statistically significant influence on consumption. The influence of the standard deviation of income on consumption is of the same order of magnitude as that of contemporaneous wealth on consumption.     

Modelling money demand for a panel of eight transitional economies

In this article, we estimate money demand functions for a panel of eight transitional economies, using quarterly data for the period 1995:01 1995 to 2005:03. We find that real M1 and real M2 and their determinants, namely real income and short-term domestic interest rate, are cointegrated, both for individual countries as well as for the panel. Long-run elasticities suggest that consistent with theory, real income positively and nominal interest rate negatively impact real money demand. Our test for panel Granger causality suggests short-run bidirectional causality between M1 and M2 and their determinants. Finally, our tests for stability of the money demand functions reveal more cases of unstable money demand functions when M2 is used as a proxy for money demand.     

FINANCIAL INNOVATION AND THE DEMAND FOR MONEY: EVIDENCE FROM THE PHILIPPINES

This paper tests whether financial innovations in the Philippines distorted the long-run relation between real money balances, income and interest rates. Using data for the monetary base, M1 and M3 over the period 1980–1998, we cannot reject the hypothesis that there does not exist a standard money demand relation between M1 and M3, real income and interest rates. However, when we allow for the impact of financial innovations, this finding is reversed for M1. Estimates of ECM models for these measures also show that financial innovations impacted real money balances for M1, but not M3. This evidence supports the Philippine central bank's choice of a monetary aggregate as its policy instrument to achieve its policy objectives. [E41, E58]     

Trends in real income in Britain: A microeconomic analysis

Trends in real national income are typically assessed using aggregate indicators such as GDP per capita, or mean household income, whereas the income distribution literature focuses on trends in income inequality. By contrast this paper takes an integrated approach to real national income measurement; it uses methods incorporating both size and distributional considerations, and applies them to household income microdata in order to measure changes in real income in the U.K. during the 1980s. A parametric class of decomposable real income indisces is proposed which complements quasi-ordering methods such as rank and generalised dominance criteria by telling us how much real income increased over the period (if at all). The indices are also additively decomposable by population subgroup, a property which helps reveal who the gainers and losers were. The analysis also draws attention to the normative and statistical issues raised by the presence of a few very small incomes.     

Money disillusion and stagflation

In the conventional income-expenditure model with rigid wages, the aggregate supply curve is upward sloping. Increases in demand therefore imply increases in real output and employment. We demonstrate here that this conclusion depends on the form of money illusion implied by the rigid wage assumption. If we assume instead that labor supply is more sensitive to price increases than to wage increases, the aggregate supply curve is negatively sloped, and the conventional policy multipliers are thereby reversed. In the second section, we show that this result also follows if labor supply depends on the expected real wage.     

The income–pollution relationship and the role of income distribution: An analysis of Swedish household data

The main purpose of this study is to analyze the relationship between pollution and income at household level. The study is motivated by the recent literature emphasizing the importance of income distribution for the aggregate relation between pollution and income. The main findings from previous studies are that if the individual pollution–income relationship is non-linear, then aggregate pollution for, say, a whole country, will depend not only on average income, but also on how income is distributed. To achieve our objective we formulate a model for determining the choice of consumption of goods in different types of household. Furthermore we link the demand model to emission functions for various goods. The theoretical analysis shows that without imposing very restrictive assumptions on preferences and the emission functions, it is not possible to determine a priori the slope or the curvature of the pollution–income relation. The empirical analysis shows that, given the model used, the pollution–income relation has a positive slope in Sweden and is strictly concave for all three pollutants under study (CO₂, SO₂, NO_x), at least in the neighbourhood of the observed income for an average household. We also show that altering the prevailing income distribution, holding average income constant, will affect aggregate emissions in the sense that an equalization of incomes will give rise to an increase in emissions. One implication is then that the development of aggregate pollution due to growth depends not only on the income level, but also on how growth is distributed.     

The permanent income hypothesis and the real interest rate

A test of the permanent income hypothesis that allows a variable and uncertain real interest rate is derived. Using quarterly post-war U.S. data, the permanent income hypothesis is rejected.     

IS MONEY THE MEASURE OF WELFARE IN RUSSIA?

The transformation of a non-market to a market economy ought to change fundamentally the significance of money incomes for welfare. Whereas in a stressful non-market economy such as the former Soviet Union, non-monetized resources could substitute for money income and promote welfare, in a modern market economy money income should be a good proxy for household welfare. This article tests the extent to which Russians are now in a modern market economy by analyzing data from nationwide Russian surveys in January, 1992, and April, 1994. Modern influences are increasingly important as a determinant of the distribution of money incomes, but not as an influence upon household welfare. The "randomness" of temporary disruptions of welfare is in accord with Rawlsian principles of equity.     

Credit card debt and consumption: evidence from household-level data

This research investigates the relationship between credit card debt and consumption using household level data. This is a departure from the previous studies which have used aggregate measures of consumption and general debt such as the Debt Service Ratio or total revolving credit. We use a detailed monthly survey of credit card use to impute credit card debt to respondents from the Consumer Expenditure Survey sample. In contrast to some earlier studies using aggregate data, we find a negative relationship between debt and consumption growth. Our work shows that a $1000 increase in credit card debt results in a decrease in quarterly consumption growth of almost 2%. Investigations are also made into effects of debt within different age categories and into the impact of expected income growth on the debt–consumption relationship.