Money,interest rates,and risk

This paper analyzes the role of the risk in the form of the volatility of open market interest rates as a factor in the demand for money. We demonstrate, using an inventory theoretic model of money demand, that increases in interest rate volatility will increase the demand for money. We then present empirical evidence that the demand for money has been influenced by alterations in the volatility of open market rates using standard specifications of the demand for money.     

Fiscal Consequences of Paying Interest on Reserves

We review the role of the central bank's balance sheet in a textbook monetary model and explore what changes if the central bank is allowed to pay interest on its liabilities. When the central bank (CB) cannot pay interest, away from the zero lower bound its (real) balance sheet is limited by the demand for money. Furthermore, if securities are not marked to market and the central bank holds its bonds to maturity, it is impossible for the CB to make losses, and it always obtains profits from being a monopoly provider of money. When the option of paying interest on liabilities is allowed, the limit on the CB's balance sheet is lifted. In this case, the CB is free to take on interest‐rate risk – for example, by buying long‐term securities and financing those purchases with short‐term debt that pays the market interest rate. This is a risky enterprise that can lead to additional profits but also to losses. To the extent that losses exceed the profits of the monopoly operations, the CB faces two options: either it is recapitalised by Treasury or it increases its monopoly profits by raising the inflation tax.     

Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks

The paper sets the neoclassical monetary business cycle model within endogenous growth, adds exchange credit shocks, and finds that money and credit shocks explain much of the velocity variations. The role of the shocks varies across subperiods in an intuitive fashion. Endogenous growth is key to the construction of the money and credit shocks because these have similar effects on velocity, but opposite effects upon growth. The model matches the data's average velocity and simulates well velocity volatility. Its Cagan-like money demand means that money and credit shocks cause greater velocity variation, the higher is the nominal interest rate.     

Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?

In this paper I compare a traditional demand oriented model of bank lending with its focus on short-term interest rates in the money market, to a non-traditional capital budgeting model of bank lending based on movements in share valuations for the Euro area. Using non-nested hypothesis tests, omitted variables tests, and Granger Causality tests, I reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions (MFI's) in the Euro area. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions and allocation of resources in Europe. One possible policy implication of this research is that the central bank should try and stabilize stock prices in order to achieve their goal of stabilizing bank lending and the economy.     

Money, banking, and monetary policy

An important function of banks is to issue liabilities, like demand deposits, that are relatively safe and liquid. We introduce a risk of theft and a safe-keeping role for banks into modern monetary theory. This provides a general equilibrium framework for analyzing banking in historical and contemporary contexts. The model can generate the concurrent circulation of cash and bank liabilities as media of exchange, or inside and outside money. It also yields novel policy implications. For example, negative nominal interest rates are feasible, and for some parameters optimal; for other parameters, strictly positive nominal rates are optimal.     

Uncertainty,Inflation, and Welfare

This paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk, in a microfounded search‐theoretical monetary model. We calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness. We show that in the presence of imperfect insurance the estimated long‐run welfare costs of inflation are on average 40% to 55% smaller compared to a complete markets, representative agent economy, and that inflation induces important redistributive effects across households.     

Financial market participation and the apparent instability of money demand

This paper uses multi-period cross-sectional data on financial assets holdings to shed light on the postwar stability of money demand in the United States. I first present a new measure of the evolution of financial market participation, by relating participation to the extensive margins of money demand, and quantify the influence of wealth on participation decisions. I then relate the increase in participation to the period of “missing money” and to the subsequent higher interest rate elasticity of monetary aggregates. The paper indicates that time-series estimations of money demand relationships are inherently flawed and tend to inappropriately suggest instability.     

Money Market Pressure and the Determinants of Banking Crises

This article develops an index of money market pressure to identify banking crises. We define banking crises as periods in which there is excessive demand for liquidity in the money market. We begin with the theoretical foundation of this new method. With the newly defined crisis episodes, we examine the determinants of banking crises using data complied from 47 countries. We find that slowdown of real GDP, lower real interest rates, extremely high inflation, large fiscal deficits, and over-valued exchange rates tend to precede banking crises. The effects of monetary base growth on the probability of banking crises are negligible.     

利率决定理论——利率市场化理论基础之一

利率市场化是指金融机构在货币市场经营融资的利率由市场供求来决定。它包括利率决定、利率传导、利率结构和利率管理的市场化。推进利率市场化的理论基础涉及利率决定理论、利率传导理论以及剖析利率结构和利率管理的金融发展理论。本文重点介绍了利率决定相关理论的核心思想,这些理论包括古典利率决定理论、马克思的利率决定理论、凯恩斯利率决定理论、可贷资金论以及IS—LM模型等。研究表明,平均利润率、资金的供求关系、通货膨胀率、央行的货币政策、国际金融市场利率等都会影响一国利率水平。     

Short-run money demand

The conventional wisdom holds that the short-run demand for money is unstable. This paper challenges the conventional view by finding a stable demand for M1 in U.S. data from 1959 through 1993. The approach follows previous work in interpreting long-run money demand as a cointegrating relation, and it uses Goldfeld's partial-adjustment model to interpret short-run dynamics. The key innovation is the choice of the interest rate in the money demand function. Most previous work uses a short-term market rate, but this paper uses the average return on “near monies”—the savings accounts and money market mutual funds that are close substitutes for M1. This choice helps rationalize the behavior of money demand; in particular, the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies.     

Revenue maximizing inflation

A classic monetary policy result is that revenue maximization entails setting the inflation tax rate equal to the inverse of the interest semi-elasticity of the demand for money. The standard approach underlying “Cagan's rule” is partial equilibrium in nature, treating money demand as being given from outside the model and abstracting from the real effects of inflation. This paper reconsiders the question of the revenue maximizing inflation rate in a general equilibrium framework with a labor-leisure choice, where money is held because it reduces transactions costs. In this framework, the revenue maximizing inflation tax rate is lower than that implied by Cagan's rule.     

Financial innovation,new assets,and the behavior of money demand

Two fundamental changes in US banking regulations have affected the behavior of money demand (M1). The first authorized checkable deposit accounts paying explicit interest rates. The second allowed these rates to be market determined. The theoretical literature does not directly address the impact of these events, suggesting that they are primarily an empirical issue. However, the empirical literature has yet to agree on the impact of financial innovation on money demand; for example, several studies report an increase in the elasticity of money demand, several others report a decline. This paper uses a Lancaster-type choice model to analyze formally the expected impact of these two changes on the demand for money. The model derives specific conditions under which (i) the demand for money increases as new assets are introduced and (ii) the impact of either the introduction of new assets or the elimination of interest rate restrictions on the elasticity of money demand.     

Money demand heterogeneity and the great moderation

A forward-looking model of the demand for money based on heterogeneous and sluggish-portfolio adjustment can simultaneously account for the low short-run and high long-run semi-elasticities reported in the literature. The parameter estimates from the model for the short-run and long-run interest semi-elasticities are 1.04 and 13.16, respectively. A simulated version of the model suggests that the Great Moderation can be partially attributed to financial innovations in the late 1970s. When moving toward a more flexible portfolio, the model can account for almost one-third of the observed decline in the volatilities of output, consumption, and investment.     

On the Interaction between Transfer Restrictions and Crediting Strategies in Guaranteed Funds

Guaranteed funds with crediting rates for fixed periods determined by a pension provider or insurance company are common features of accumulation annuity contracts. Policyholders can transfer money back and forth between these accounts and money market accounts that give them features similar to demand deposits, and yet they frequently credit a higher rate than the money market. Transfer restrictions are commonly employed to prevent arbitrage. In this article, we model the interaction between company and policyholder as a multiperiod game in which the company maximizes risk-neutral expected present value of profits and the policyholder maximizes his expected discounted utility. We find that the optimal strategy on the part of the company is to credit a rate higher than the money market rate in the first period to entice the policyholder to invest in the guaranteed fund. The company then credits the floor in the remaining periods as the policyholder transfers out the maximum amount. This does better for the policyholder in low interest rate environments and worse in high interest rate environments and acts as a type of “interest rate insurance” for the policyholder.     

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.     

Money,Bargaining, and Risk Sharing

We investigate the dual role of money as a self‐insurance device and a means of payment when perfect risk sharing is not possible, and when the two roles of money are disentangled. We use a variant of Lagos–Wright (2005) where agents face a risk in the centralized market (CM): in the decentralized market (DM) money’s main role is as a means of payment, while in the CM it is as a self‐insurance device. We show that state‐contingent inflation rates can improve agents’ ability to self‐insure in the CM, thereby improving the terms of trade in the DM. We then characterize the optimal monetary policy.     

Why are excess returns on China’s Treasury bonds so predictable? The role of the monetary system

It is well documented that the time-varying bond excess returns can be explained by predetermined variables such as information in the term structure and macro economic variables. Recent studies suggest that demand and supply of bonds influence bond excess returns. We extend the literature and find that monetary system attributes affect return dynamics in the bond market. By introducing a theoretical model to forecast excess returns on Treasury bonds in the context of China’s unique monetary system, this paper attributes the predicted components of bond excess returns mainly to the inflexible term structures of official interest rates set by China’s central bank.     

The Intraday Price of Money: Evidence from the e‐MID Interbank Market

We provide empirical evidence, based on tick‐by‐tick data for the e‐MID euro area interbank market covering 2003 and 2004, that the overnight interest rate shows a clear downward pattern throughout the operating day. Thus, a positive hourly interest rate (half basis point) implicitly emerges from the intraday term structure of the overnight rate. Such a pattern was not detected in the mid‐1990s: we explain this evolution as an outcome of the recent trend toward real‐time settlement. The estimated intraday interest rate is lower than in the United States: this is due to the different cost of central bank daylight credit.     

Divisia Monetary Aggregates,the Great Ratios,and Classical Money Demand Functions

King et al. ( 1991 ) evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar U.S. macroeconomic data. They find a common stochastic trend in a three‐variable system that includes output, consumption, and investment, but the explanatory power of the common trend drops significantly when they add money balances and the nominal interest rate. In this paper, we revisit the cointegration tests in the spirit of King et al., using improved monetary aggregates whose construction has been stimulated by the Barnett critique. We show that previous rejections of the balanced growth hypothesis and classical money demand functions can be attributed to mismeasurement of the monetary aggregates.     

The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets

We develop a model to analyze monetary policy implementation with multiple Federal Reserve liabilities and superabundant reserves. The analysis demonstrates the Federal Reserve's tools including interest on excess reserves (IOER), overnight reverse repurchase agreements (ON RRP), and term deposits should allow the Federal Reserve to raise the short‐term interest rates to any desired level. We find the contribution of each the increase in the IOER and ON RRP offering rates in firming money market rates suggested by the data during the December 2015 policy tightening event is remarkably similar to the effect of each tool implied by the calibrated model.