The Legacy of Knut Wicksell to Capital Theory

Wicksell's contributions to capital theory focused on stationary states in four distinct models intended to account for the time dimension of production in market economies. We now have a better understanding of the true challenges because of two developments: a full theory of intertemporal general equilibria and a methodology for comparative analysis as explained by Hicks. In Wicksell's equilibria, the real interest rate turns out to be equal to the marginal productivity of the volume of social capital, a concept that Wicksell could not master and hence avoided. Challenges remain, particularly regarding the best way to account for complementarities and substitutions over time.     

Near unit root and the relationship between inflation and interest rates: A reexamination of the Fisher effect

Tests of the Fisher effect are plagued by high persistence in interest rates. Instead of standard regression analysis and asymptotic results, methods relying on local-to-unity asymptotics are employed in testing for the Fisher effect with monthly U.S. data covering the period 1953:1–1990:12. These procedures are extensions of a recently presented method (Cavanagh, Elliott and Stock (1995)) based on simultaneous confidence intervals, and they have the advantage of being asymptotically valid whether interest rates are integrated of order one or zero, or near unit root processes. Taking appropriately account of the near unit root problem the findings in most of the previous literature are reconfirmed. There is support for the Fisher effect in the interest rate targeting period (1953:1–1979:10) of the Federal Reserve but not in the 1979:11–1990:12 period. First version received: July 1999/Final version received: April 2000     

Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation

The long-run relationship between nominal interest rates and inflation is examined, allowing for structural breaks and asymmetric mean reversion. From a Threshold AutoRegressive (TAR) test applied to the residuals of the cointegration relationship (while allowing for both a break in the mean of the long-run equation and a smooth regime-transition), there is strong evidence for non-linear mean reversion properties for the real interest rates of the US Treasury Bill market. This suggests asymmetric changes to inflation shocks in the Central Bank's reaction function. The existence of different regimes is consistent with some interpretations of the monetary policies run by the Fed, such as credibility and opportunism.     

Wicksell, Lindahl and the Theory of Public Goods

Wicksell's and Lindahl's ideas on public goods and decisions are reviewed in light of later developments in the theoretical economics literature. I begin by discussing their normative ideals, in particular the notion of justness, and the sources of the difficulties in reaching them. Wicksell's and Lindahl's ideal states, as well as the obstacles that they perceive, are compared to more recent views on free riding and on the behavior of elected representatives. Their views on political bargaining are then related to later concepts, in particular to the core of the economy.     

Widening Wicksell’s conception of political economy: his “thoroughly revolutionary programme”

Abstract

Knut Wicksell’s opinion that political economy is a “thoroughly revolutionary programme” has often been neglected in the literature. Actually, Wicksell aimed at implementing such a programme in order to enlarge political economy as a “practical science”. It is articulated around three main features: a criticism of the marginal theories, the redefinition of society as a whole, and the advent of social justice. Indeed, Wicksell claimed that economic and social problems may be solved only by a complete social reorganisation. Hence, I show that Wicksell’s social reform programme drives his particular view of and approach to political economy.     

Interest rate gaps and monetary policy in the work of Henry Thornton: Beyond a retrospective Wicksellian reading *

Abstract

This paper revisits the theory of interest rates propounded by Henry Thornton (1760 – 1815). Particular attention is paid to Thornton's examination of the inflationary effects of the gap between the Bank of England's discount rate and the current rate of profit. The paper shows that Thornton is also concerned, unlike Wicksell, about the consequences of a gap between the Bank of England's discount rate and the effective bank lending rate on the market for loanable funds, which results mainly from the usury laws. Thornton's analyses offer then a framework for regulating the value of money through adjustments to the bank rate.     

Stock prices and money velocity: a multi-country analysis

What kind of information do stock prices offer for predicting velocity? This paper develops previous work by Milton Friedman for the US economy and shows that in a panel of 25 countries a wealth effect derived from the stock market has negatively influenced the ratio of nominal income to a broad definition of money. Taking quarterly data for the period 1961–1998, the relationship holds in Japan, the UK and Switzerland; in Italy a substitution effect (away from money) has also been operating. Overall, these empirical findings indicate the presence of systematic influences of stock price fluctuations on money velocity and suggest that the repercussions of asset inflation and deflation on the behavior of monetary aggregates should be monitored. First version received: July 1998/Final version received: November 2000     

The state as a creature of money

Recent social theories of money have challenged economic conceptions of it as first and foremost a medium of exchange. Writers such as Geoffrey Ingham and David Graeber have revived the chartalist position that money is essentially a creature of the state, whose primary function is to measure value or debt. In this paper, I argue that this is a wrong turning. I first clarify the conceptual underpinnings of Ingham’s treatment of money as an ‘institutional fact’, a concept drawn from Searle. I clarify the sense in which this argument establishes that the state ‘creates’ money – and show that this sense is quite limited. It is a theory of how something comes to be accepted as money, rather than a theory of why there is money in the first place, and it gives no account of money’s value. Finally, I sketch an alternative way of looking at the relationship between states and money. This recognises that modern states have been shaped in part by strategies with regard to monetary management, with state actors engaging strategically in a system they only partially constitute – so that states are ‘creatures of money’ as much as the reverse.     

The Fisher effect,survey data and time-varying volatility

In this paper we study the Fisher hypothesis using Livingston survey data on inflation expectations. We propose a simple model for the ex-ante real interest rate where the standard deviation of survey forecasts is used to correct for heteroskedasticity. The findings of this paper contradict earlier studies. We find supportive evidence for the Fisher hypothesis that the nominal interest rate and expected inflation move one-for-one both in the short and the long run. Our results also suggest that the change of US monetary policy does not have significant effect on the dynamics of the ex-ante real interest rate such as previous work assumes.     

The Fisher effect: new evidence and implications

Using monthly data in the 1980s and early 1990s, our results do not support the short-run Fisher effect since short-term interest rates are associated with negligible changes in expected inflation. However, inflation and nominal interest rates exhibit common stochastic trends in the long run. Consequently, the correlation between nominal interest rates and inflation rates increases with maturity until they move in a one-to-one relation at long horizon. This is evident by the correlation coefficients of the Johansen test for cointegration that increase with the maturity of US government securities from 2 to 5 years.     

A money demand system for German M3

A small macroeconomic model is constructed starting from a German money demand relation for M3 based on quarterly, seasonally unadjusted data for the period from 1976 to 1996. In contrast to previous studies we build a vector error correction model for M3, GNP, an inflation rate and an interest rate spread variable to represent opportunity costs of holding money. Furthermore, import price inflation is added as an exogenous variable. The model is used to analyze the relation between money growth and inflation by means of an impulse response analysis.We thank Gerd Hansen for soliciting two anonymous referee reports on an earlier version of this article and thereby helping in the editorial process for this volume. We are grateful to him, Timo Teräsvirta, Kirstin Hubrich and the two referees for comments that helped us to improve our paper. Financial support was provided by the DFG, Sonderforschungsbereich 373.     

A systemic approach to modelling and estimating demand for money(ies)

This article uses a consumer theory-based systemic approach to model the demand for monetary liquid asset holdings in Chile. We implement the suggestions and caveats of aggregation theory for the estimation of a demand system for liquid assets (monies) in static, dynamic and time-varying parameters setups. Our results are robust and theoretically consistent with consumer theory restrictions, as a system derived from a utility maximizing framework and a quasi concave utility function. In our estimations, we find stability of interest rate elasticities, in contrast to previous related literature. We also document evidence that long (short) maturity rates are associated to less (more) liquid assets.     

Openness and the Effectiveness of Monetary Policy: A Cross-country Analysis

Abstract

This paper evaluates the relationship between a country's openness to trade and the effectiveness of monetary policy in changing output growth and inflation in 29 different countries. Using quarterly data from the 1957–2003 period, empirical estimates based on individual country specifications show that the direction, significance and nature of the relationship between openness and the effectiveness of monetary policy on output growth as well as inflation vary considerably across countries.     

Hicks on monetary theory and history: money as endogenous money

Hicks was never tired of saying that monetary theory is in history.What he meant was that monetary theory is intrinsically relatedto real events, and more importantly that monetary issues needto be analysed in a dynamic sequential context in which timeplays an essential part. He went on developing a particularsequential analysis: the study of what happens within a singleperiod (‘single-period theory’) and the study ofthe linkages between a succession of those periods (‘continuationtheory’). It is suggested that this distinction providesa useful lesson for modern endogenous money theorists.     

The transmission mechanism of monetary policy: Microeconomic aspects of macroeconomic issues

The article analyzes the transmission mechanism of monetary policy in light of microeconomic theory. We address the influence of microeconomic factors on the transmission of monetary policy while taking into account the contributions of conventional price formation and competition theory and heterodox microeconomic theories, including work inspired by the post Keynesians. We found a multiplicity of results regarding changes in price levels and inflation derived from shifts in demand and costs. These results challenge the conventional view, which postulates a single behavior in the circuit from changes in interest rates to demand, prices, and inflation. We conclude that microeconomic and macroeconomic aspects should be integrated to properly explain monetary policy and analyze its effects and transmission mechanism.     

Monetary policy on interest rates: a retrospective analysis since Thornton

Abstract

In response to the affirmation by certain authors and critics of a recent return to an interest-rate policy that, in their opinion, resembles a throwback to the nineteenth century theory of monetary policy on interest rates, I pose the question of the difficulties of interest-rate policy in a retrospective analysis beginning with the current that founded the short-term interest rate policy within classical analysis and by focusing my discussion on several key authors (Thornton, Banking School, Bagehot, Wicksell, Keynes, contemporary authors such as Woodford). To this end, I study the importance that the interbank money market plays for these authors, which determines the target rate for the central bank.     

Rabbinical perspectives on money in seventeenth-century Ottoman Egypt

Abstract

Episodes of monetary instability in Ottoman Egypt stimulated a discussion of monetary doctrine among Egyptian rabbis. A central issue was the valuation of debts following changes in the value of silver coins. While the leading rabbi of the sixteenth century advocated linkage to gold coins, the rabbis of the seventeenth century adopted valuation by purchasing power and rejected valuation by weight and linkage to gold coins. The rabbis of the seventeenth century differed from their predecessors in two essential respects: they were more critical of traditional Jewish monetary doctrine, and they utilized a much more sophisticated form of economic analysis.     

Fiscal Policy,Monetary Policy and the Mechanics of Modern Clearing and Settlement Systems

Thomas Palley, Eric Tymoigne and Randall Wray recently debated neo-Chartalism in this journal. This article argues that the mechanics of modern clearing and settlement systems is important to understanding this debate. In the neo-Chartalist framework taxes and bond issuance function as part of monetary policy; it is an alternative method for draining reserves to obtain the overnight target rate. Abba Lerner’s Chartalist framework is much clearer on public finance, noting that the federal government can use alternative financing methods to pay for expenditures. Palley’s concerns with central bank ‘money financing’ and inflation are unpersuasive. The Old Keynesian ‘budget restraint– high-powered money relation’ offers limited insight into modern clearing and settlement systems. The article concludes that policymakers should embrace Lerner’s advice and view ‘money printing’ as a normal policy instrument to support functional finance.     

The nature and role of monetary policy when money is endogenous

This paper considers the nature and role of monetary policywhen money is modelled as credit money endogenously createdwithin the private sector. There are currently two schools ofthought that view money as endogenous: one has been labelledthe ‘new consensus’ in macroeconomics, and the otheris the Keynesian endogenous (bank) money approach. The paperfirst explores the analysis of monetary policy in the ‘newconsensus’ macroeconomic model, followed by an examinationof the effectiveness of monetary policy in that analysis. TheKeynesian view of endogenous money is discussed, and the rolefor monetary policy in a Keynesian endogenous monetary policyanalysis is considered, including discussion of the objectivesand instruments of monetary policy.     

Insights on endogenous money and the liquidity preference theory of interest

It is argued that the debate between “structuralist” and “horizontalist” has long been obscured because of inadequate treatment, in both approaches, of the credit-money supply and of the total money supply. As a result, endogenous money models still have serious limitations today. On the one hand, the bank loan markup and the loan interest rate are exogenous in the horizontalist model, which supposes that they do not depend on the money/liquidity market conditions (as if bank loans did not compete with the existing liquidity). On the other hand, although interest rates are endogenous in the structuralist model, they result from inappropriate treatment of the loan supply and money/liquidity supply. This article aims to remove these shortcomings. It offers a theoretical framework and formal modeling where the creditworthy demand for loans determines the bank loan supply, given the central bank refinancing interest rate, while the total supply and demand for liquidity-money determines the markup and the market rate of interest in accordance with Keynes’s liquidity preference theory. In this framework, the post Keynesian theory of endogenous money and Keynes’s “verticalist” view prove to be analytically complementary.