How money illusions and heterogeneous beliefs affect asset prices

We develop a dynamic asset pricing model with two investors with money illusions and heterogeneous beliefs about some aspects of the economy. The model is tractable and delivers closed forms for all equilibrium quantities. The study shows that money illusion leads the nominal shock risk to generate spillover effects on the real side of the economy and affects all equilibrium quantities, even without inflation disagreement. We find that bond yields increase, but the stock price decreases, as money illusion increases. Bond yield and stock price volatilities increase with fundamental disagreement, while the latter decreases with inflation disagreement. We also discover that the stock risk premium is inverse-U shaped as inflation disagreement increases. Moreover, we find that the optimistic investor holds positions in real bonds and stocks, and shorts the nominal bond to hedge against the risk of market changes, which is in line with the pessimistic investor’s beliefs.     

Credit rationing and threshold effects in the relation between money and output

The possibility that the effect of monetary policy on output may depend on whether credit conditions are tight or loose can be expressed as a non-linearity in the relation between real money supply and output, of which a simple case is a threshold effect. In this case, consistent with the credit-rationing model of Blinder (1987), the monetary variable has a more powerful effect if it is below some threshold than when it is above. Testing for the importance of this threshold is straightforward if the appropriate threshold value is known a priori, but where the value is not known and must be chosen based on the sample, the testing problem becomes more difficult. We apply recently-developed tests applicable in this situation to both US and Canadian data, and find substantial evidence of a threshold effect, particularly in US data. However, the estimated threshold values are high.     

The Instability of the Money Demand Function: An I(2) Interpretation

Some studies have suggested that although money and prices appear to be I(2) processes, real money balances are I(1) and this transformation preserves an important long-run relationship between money and prices. In this paper we present evidence indicating that the success of such a nominal-to-real transformation depends upon the particular monetary aggregate under consideration. It turns out that imposing long-run price homogeneity does not remove all I(2) components from a model of aggregate broad UK M4, but it does prove successful in the case of sectoral components of M4. Since recent research on money demand functions finds more stable relationships between sectoral components of M4 and aggregate demand, our analysis seems to point to a direct link between the existence of I(2) components and the stability of different money demand functions.     

Oil exports and the Iranian economy

This paper presents an error-correcting macroeconometric model for the Iranian economy estimated using a new quarterly data set over the period 1979Q1–2006Q4. It builds on a recent paper by the authors, Esfahani, Mohaddes, and Pesaran (in press), which develops a theoretical long-run growth model for major oil exporting economies. The core variables included in this paper are real output, real money balances, inflation, exchange rate, oil exports, and foreign real output, although the role of investment and consumption are also analysed in a sub-model. The paper finds clear evidence for the existence of two long-run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. The results show that real output in the long run is influenced by oil exports and foreign output. However, it is also found that inflation has a significant negative long-run effect on real GDP, which is suggestive of economic inefficiencies and is matched by a negative association between inflation and the investment–output ratio. Finally, the results of impulse responses show that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.     

Real Balances, the Price Level and the Unit of Account

A bstract It is argued that Patinkin's introduction in his 1956 book of the stability analysis of the price level resulted in great measure from his reading of Wicksell's 1898 Interest and Prices. Both Patinkin and Wicksell based their treatments of the stability of the price level on what Patinkin used to call the "real balance effect." That effect, however, does not operate under Wicksell's assumption of a competitive "pure credit economy", where all transactions are carried out by bookkeeping transfers, and the unit of account is the same unit in which the accounts of banks are kept. In that case, Patinkin showed in the second (1965) edition of his book that the real balance effect–and, by that, the stability of the price level–would still be a feature of the system if profit maximizer banks held reserves, created by the central bank to settle temporary imbalances at the clearinghouse. According to Wicksell, on the other hand, a pure credit economy should consist of a central bank that attracts and remunerates deposits at the same interest rate charged for its loans, plus profit maximizer financial intermediaries that lend money for risky projects. The basic rate of interest set by the central bank decides, accordingly, the price level in such an economy. Wicksell's and Patinkin's approaches differ from the view put forward in the 1980s by the so-called "new monetary economics" that the key to price level stabilization is the separation of the function of money as the unit of account from its function as the medium of exchange in pure accounting systems of exchange.     

The demand for M3 in the euro area

In this paper, an empirically stable money demand model for M3 in the euro area is constructed. Starting with a multivariate system, three cointegrating relationships with economic content are found: (i) the spread between the long‐term and the short‐term nominal interest rates, (ii) the long‐term real interest rate, and (iii) a long‐run demand for broad money M3. There is evidence that the determinants of M3 money demand are weakly exogenous with respect to the long‐run parameters. Hence, following a general‐to‐specific modelling approach, a parsimonious conditional error‐correction model for M3 money demand is derived which can be interpreted economically. For the conditional model, long‐run and short‐run parameter stability is extensively tested and not rejected. Copyright © 2001 John Wiley & Sons, Ltd.     

基于预付账款的贸易融资模式、优势及风险分析——以徽商银行A支行为例

贸易融资业务是商业银行为处于正常产业链中的客户设计的一种新的金融产品,基于预付账款的贸易融资是其中的一种。结合徽商银行A支行的实践,本文探讨基于预付账款的贸易融资模式,分析其优势和相关风险,指出基于预付账款的贸易融资应依托中心厂商、封闭货物流和资金流才能实现客户的有效融资、保障业务行的资产安全。     

Some Potential Linkages for Input-Output Analysis with Flow-of-Funds

Three major, interrelated accounting statements, at the frontiers of quantitative economic analysis, are three interrelated systems, namely: (1) National income and product accounts (NIPA), (2) The input-output tableaux, (IO), and (3) flow-of- funds accounts (FF). The third-mentioned system is somewhat less available and used in only limited areas of macroeconomic analysis. This paper is mainly concerned with use of FF accounting systems. This system shows where financial resources originate, and where they go in support of real capital formation. In this respect, interest rates and other market-based financial rates are of key importance. While much macroeconomic analysis is based on the rates that fit the yield curve, showing the interest rate structure over various maturities of debt associated with a given degree of risk. In contrast, the FF accounts throw light on the whole spectrum of interest rates, across maturities and debt qualities. For example, in analysis of the real estate market and funding of capital formation there, it is important to have a full understanding of the course of mortgage rates of different maturities and qualities. In short, it is necessary to develop a full appreciation of supply and demand forces in the mortgage market, which often is not obviously related to movements of the operative rate for monetary policy, such as very short-term inter bank rates or call money rates. This paper attempts to provide material from the flow-of-funds accounts that would make it possible to analyze the movement of relevant mortgage rates or whatever other rates are needed to understand the financing of capital formation in real estate.     

Performance of empirical Bayes estimators of random coefficients in multilevel analysis: Some results for the random intercept-only model

For a multilevel model with two levels and only a random intercept, the quality of different estimators of the random intercept is examined. Analytical results are given for the marginal model interpretation where negative estimates of the variance components are allowed for. Except for four or five level-2 units, the Empirical Bayes Estimator (EBE) has a lower average Bayes risk than the Ordinary Least Squares Estimator (OLSE). The EBEs based on restricted maximum likelihood (REML) estimators of the variance components have a lower Bayes risk than the EBEs based on maximum likelihood (ML) estimators. For the hierarchical model interpretation, where estimates of the variance components are restricted being positive, Monte Carlo simulations were done. In this case the EBE has a lower average Bayes risk than the OLSE, also for four or five level-2 units. For large numbers of level-1 (30) or level-2 units (100), the performances of REML-based and ML-based EBEs are comparable. For small numbers of level-1 (10) and level-2 units (25), the REML-based EBEs have a lower Bayes risk than ML-based EBEs only for high intraclass correlations (0.5).     

Can money matter for interest rate policy?

In this paper it is shown that money can matter for macroeconomic stability under interest rate policy when transactions frictions are non-negligible. We develop a sticky price model with a shopping time function, which induces the marginal utility of consumption to depend on the (predetermined) stock of money held at the beginning of the period. Equilibrium stability and uniqueness are then ensured by a passive interest rate policy, whereas activeness is associated with an explosive equilibrium. By reacting to changes in beginning-of-period real balances, the central bank can restore stability. Interest rates further depend on lagged real balances even if the central bank acts in an entirely forward-looking way, as under discretionary optimization. If the model is revised such that end-of-period money provides transaction services, money can in principle be neglected for a stabilizing interest rate policy. Discretionary monetary policy is, however, likely to be associated with equilibrium indeterminacy, which can be avoided if interest rates are set contingent on beginning-of-period real balances.     

Monetary Policy and the Stock Market: Theory and Empirical Evidence

This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy. This is an area of research that has interested monetary and financial economists for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models. If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity.     

THE MONETARY CONUNDRUM

The broad money supply, sterling M3, has grown by 14.1 per cent (ie an annual rate of over 30 per cent) over the past six months. Over the same period the narrow money supply definition (M1) has increased by only 4.4 per cent, while the difference between the two money supply measures — broadly speaking, the interest bearing component of sterling M3 — has grown by no less than 23.1 percent. The real economy is showing all the signs of a severe monetary squeeze with stocks and imports falling rapidly, while the balance of payments and the exchange rate are exceptionally strong. Over the past six months, industrial production (excluding North Sea oil) has fallen by 7.9 per cent while wholesale prices have risen by only 4.2 per cent. Thus, there is a double conundrum: the sharply different growth trends in M1 and sterling M3, and the contrast between the explosive growth of sterling M3 and the subdued behaviour of the real economy.
One possible answer to this puzzle, spelt out in more detail in the following pages of this Forecast Release, is that the rate of interest being paid on the interest-bearing component of sterling M3 is now abnormally high. Consequently, the asset demand for the interest-bearing component of sterling M3 is exceptionally large, with the result that both the non-interest-bearing component of the money stock (ie M1) and the real economy are being squeezed Under these circumstances, the short-run behaviour of sterling M3 may not be an entirely reliable guide to the behaviour of the real economy.     

An empirical analysis of transitivity with four scaled preferential judgment modalities

In this paper 6 classes of weak fuzzy transitivity have been considered in a real decision problem: 200 students were asked twice about their future graduation trip, first taking into account only destination, and second considering prices, too. Each group of students compared trips by pairs, where intensities of preference could be shown by 4 linguistic labels represented by numbers from 0 to 1. The results have been analyzed in order to determine the influence of the numbers of alternatives and inherent attributes of the alternatives (destination and money) on the fulfillment of the 6 properties of fuzzy transitivity.Received: 18 February 2002, Accepted: 16 June 2003, JEL Classification: C91The financial support of the Junta de Castilla y León (Consejería de Educación y Cultura, Proyecto VA057/02) and the Spanish Ministerio de Ciencia y Tecnología, Plan Nacional de Investigación Científica, Desarrollo e Innovación Tecnológica (I + D + I) (Proyecto BEC2001-2253) and ERDF are gratefully acknowledged.     

Money and production: A stochastic frontier approach

Considerable controversy surrounds the role of money in the production of goods and services. Previous empirical research has appeared to find that the real money stock affects aggregate output, holding other, more conventional inputs constant. However, the theoretical literature offers no convincing explanation for this empirical finding. One interpretation is that real money balances reduce the extent to which labor and capital are diverted into exchange-related activities instead of being used in production defined in a more narrow sense. To investigate this hypothesis, we estimate a production function augmented with real money balances as an input, using time-series data for the aggregate U.S. economy. A stochastic production frontier is then estimated without real money balances. We use these estimates to establish the presence of technical inefficiency. Finally, we show that the extent of technical inefficiency is negatively correlated with the real money stock. Our results provide a reconciliation between the empirical literature, which finds that real money balances affect output in a production function framework, and the theoretical literature, which suggests that real money balances enhance the technical efficiency of the economy.     

Risk and prices in separable utility functions

Many decision problems involve more than one attribute. Separable multi-attribute utility functions are commonly used to model preferences in such situations. We consider the case in which one attribute can be identified as money. The price at which non-monetary attributes may be substituted by money, the relation of this price to a decision-maker's wealth, and the implications on attitudes toward risk are examined for additively and multiplicatively separable multi-attribute utility functions. In particular, it is shown that additive separability, price independent of wealth and monetary risk-aversion are mutually inconsistent.     

Debt constraints and monetary policy

In the present paper we show how simple monetary policies can mitigate real effects of credit frictions. We consider stationary overlapping generations economies in which consumers are not equally efficient in producing capital and cannot commit to repay loans. The presence of money in itself does not mitigate the real effects of credit frictions. Equilibrium allocations are generally not Pareto optimal unless the returns on money and capital production are identical for more productive consumers. However, printing money and distributing it to young consumers increase their incomes allowing young more productive consumers to produce more capital. Consequently money printing increases output.     

REITs在商业地产发展中的运用

REITs是一种可以使广大中小投资者投资房地产并分享稳定收益的方式。随着我国房地产宏观调控政策作用的不断显现,房地产开发企业所面临的融资条件越来越严格。对于开发投资大,回收期长的商业地产开发来说,发展REITs具有重要意义,不仅能拓宽商业地产开发的融资渠道,还可以分散银行体系的经营风险,防范金融业风险。对国内商业地产开发中存在的问题和在商业地产中引入REITs时开发商应做的准备工作进行了讨论,同时结合美国REITs的经验提出了相关政策建议。     

The new currency boards and discretion: empirical evidence from Bulgaria

In recent years, a number of countries have introduced currency boards (CBs). Gaining in swing and popularity, this new generation CB preserves, to varying degrees, the Central Bank’s ability to function as the lender of last resort (LOLR) and to intervene in case of systemic risk. Recently, Central Bank flexibility has been preserved in different forms in Hong Kong, Argentina, Estonia, Lithuania and Bulgaria. Macro- and microeconomic implications of such departures from orthodox CBs have not been thoroughly studied yet. Theoretically, the introduction of this second-generation CB provides an opportunity for conducting discretionary monetary policy (though certainly not in its typical form). Some major, ensuing questions require answers. What are the new channels of monetary policy? Does an orthodox self-regulating (automatic) mechanism work with second-generation CBs? How are monetary disequilibria in the economy adjusted? We define an automatic mechanism as “the presence of a positive cointegration relationship between the overall balance of payments (BOPs) and the reserve money, and the absence of discretionary variables in the model.” The theoretical hypothesis is checked empirically based on Bulgarian data.     

Money growth and interest rate volatility and the demand for money

In this paper the author empirically examines the effects of both money growth and interest rate volatility measures upon the demand for real balances. The findings of this study suggest that both money growth and interest rate volatility measures are statistically insignificant. However, evidence suggests a structural shift in the demand for money in the post-1979 period. Moreover, there is a noticeable change in the speed of adjustment moving from actual to desired real balances with the adjustment coefficient in the post-1979 period increasing roughly in magnitude nine and half, times the adjustment coefficient in the pre-1979 period.