Monetary anticipations and the demand for money

It has recently been argued that unanticipated changes in nominal money supply should affect the real demand for money, and empirical results which appear to support this hypothesis have been presented. Unfortunately, the econometric techniques used by previous authors yield severel biased estimates. In this paper we show how valid estimates may easily be obtained, and present some illustrative empirical results using U.S. data. These results do not support the conclusions of earlier authors. We find that unanticipated money supply changes do indeed affect the real demand for money, but with the wrong sign, and that anticipated changes also have a significant effect.A consistency test for all models employing the anticipated-unanticipated distinction is also proposed.     

Predicting takeover targets: A methodological and empirical analysis

Several published studies claim that acquisition targets can be accurately predicted by models using public data. This paper points out a number of methodological flaws which bias the results of these studies. A fresh empirical study is carried out after correcting these methodological flaws. The results show that it is difficult to predict targets, indicating that the prediction accuracies reported by the earlier studies are overstated. The methodological issues addressed in this paper are also relevant to other research settings that involve binary state prediction models with skewed distribution of the two states of interest.     

Outside wealth,the demand for money and the crowding out effect

Policy simulations with most large macroeconometric models evidence little, if any, crowding out of private spending from debt financed increases in government expenditures. Examination of the structure of these models reveals that none allows for a wealth effect of debt finance on the demand for money, even though theoretical studies suggest that this wealth effect may cause significant crowding out. This paper provides empirical evidence that increases in government debt held by the public do increase the demand for money; therefore, the fiscal policy simulations of the large macroeconometric models may yield biased conclusions concerning the crowding out effect.     

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.     

人民币境外存量考察:基于季度数据的协整分析和间接估计

本文根据现金需求的影响因素,构建了两个略有差异的现金需求实证模型,运用1992-2000年的季度数据,拟合出我国境内现金需求函数的表达方程,通过对比分析,选择拟合效果较好的模型来预测2001-2008年我国境内人民币需求量,通过扣除本地需求法估算出该段时期内境外人民币的存量。结果显示,2001-2008年间,人民币境外存量从100-300亿元规模开始波动上升,2006年开始呈现大幅增加的态势,达到甚至突破1000亿元;另外,人民币境外存量有较为剧烈的季节波动,这为央行制定货币政策带来一定困难。     

The Effect of Money Shocks on Interest Rates in the Presence of Conditional Heteroskedasticity

Most current empirical work finds no evidence that money shocks lower interest rates. We show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates. Autoregressive conditional heteroskedasticity (ARCH) models find a significant liquidity effect where ordinary least squares (OLS) models do not. The existence of a liquidity effect is found using different models and sample periods when ARCH models are used in estimation, but never when OLS is employed.     

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.     

Adverse-Selection Costs and the Probability of Information-Based Trading

Prior studies offer various empirical models to decompose the observed bid‐ask spread into the adverse‐selection and transitory (order‐processing and inventory‐holding) components. There is limited evidence, however, on whether the spread components estimated from these models indeed measure what they purport to measure. In this study, we show that the estimates of the adverse‐selection component given by these models are positively and significantly related to the probability of information‐based trading (PIN), after controlling for the endogeneity of the PIN and other stock attributes. These results provide direct empirical support for the spread component models examined in the present study.     

American option pricing with discrete and continuous time models: An empirical comparison

This paper considers discrete time GARCH and continuous time SV models and uses these for American option pricing. We first of all show that with a particular choice of framework the parameters of the SV models can be estimated using simple maximum likelihood techniques. We then perform a Monte Carlo study to examine their differences in terms of option pricing, and we study the convergence of the discrete time option prices to their implied continuous time values. Finally, a large scale empirical analysis using individual stock options and options on an index is performed comparing the estimated prices from discrete time models to the corresponding continuous time model prices. The results show that, while the overall differences in performance are small, for the in the money put options on individual stocks the continuous time SV models do generally perform better than the discrete time GARCH specifications.     

Output Gap Estimation and Monetary Policy in China

Using the Bayesian multivariate Beveridge-Nelson decomposition method, this paper estimates China's output gap based on a multivariate dynamic model featuring distinct interactions among real output, inflation, money, and the exchange rate in China during the period 1980-2010. The authors compare the statistical nature and potential forecasting effects of the resulting multivariate gap measure on monetary policy with those of the output gap measures based on univariate models. The empirical results show that only the measure based on the multivariate system significantly predicts monetary policy, which indicates that the output gap estimated by the multivariate system contains more information than the traditional measures for macroeconomic policy adjustments do.     

Are preliminary announcements of the money stock rational forecasts?

We develop a theoretical framework of analyzing preliminary announcements of economic data and then apply this framework to the money stock. We find that preliminary announcements of the money stock are best characterized as measured with classical errors-in-variables. That is, the revision is not correlated with the true value of the series. The revision is, however, forecastable using information available at the time of the preliminary announcement. Our ability to forecast the revision implies that preliminary announcements are not rational estimates of the true money stock.     

The evolution of capital asset pricing models

The capital asset pricing models (CAPM) has been the benchmark of asset pricing models and has been used to calculate asset returns and the cost of capital for more than four decades. Many researchers have tried to relax the original assumptions and generalize the static CAPM. We survey the important alternative theoretical models of capital asset pricing and provide a complete review of the evolution of asset pricing models. We also discuss the interrelationships among these models and suggest several possible directions for future research. Our results might be used as a guideline for future theoretical and empirical research in capital asset pricing.     

Decomposing the effects of financial liberalization: Crises vs. growth

We present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises. Our empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis. We also discuss several models of financial liberalization and growth whose predictions are consistent with our empirical findings.     

THE FUNDAMENTAL DETERMINANTS OF TRADING VOLUME REACTION TO FINANCIAL INFORMATION: EVIDENCE AND IMPLICATIONS FOR EMPIRICAL CAPITAL MARKET RESEARCH

Prior empirical research indicates that trading volume reaction to new information increases with the heterogeneity of investors’ prior beliefs. We examine three potential factors that theoretical models of financial economists show determine trading volume reaction to new information: heterogeneous prior beliefs, differential interpretation, and the consensus effect—the extent to which the information causes their beliefs to converge or diverge. We find that these three factors have a distinct and significant incremental effect on trading volume, thereby suggesting that empirical trading volume models that exclude or fail to control for any of these determinants are misspecified with biased estimated coefficients.     

Alternative bankruptcy prediction models using option-pricing theory

We examine the empirical properties of the theoretical Black–Scholes–Merton (BSM) bankruptcy model. We evaluate the predictive ability of various existing modifications of the BSM model and extend prior studies by estimating volatility directly from market-observable returns on firm value. We show that parsimonious models using our direct market-observable volatility estimate perform better than alternative, more sophisticated, models. Our findings suggest the adoption of simpler modelling approaches relying on market data when implementing the BSM model.     

Monetary Policy and Short-term Interest Rates: An Efficient Markets-Rational Expectations Approach

This paper is an application of efficient markets-rationael xpectations theory to analyze empirically the relationship of money supply growth and short-term interest rates, a hotly debated issue in the literature. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. The empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates.     

Price setting, price dispersion, and the value of money: or, the law of two prices

We study models combining search, money, price posting, and preference shocks. We show how these features interact to influence the price level and price dispersion. First, price-posting equilibria exist with valued fiat currency. Second, although both are possible, price dispersion is more common than a single price. Third, we prove that generically there cannot be more than two prices. We provide intuition for this law of two prices, show it also holds in some nonmonetary search models, and discuss variations of the assumptions under which it may not hold.     

What do economists know about the effect of rent control on housing maintenance?

Economists' views concerning the effect of rent control on the maintenance of controlled apartments are based on extremely simple models of housing markets and rent control ordinances and on casual empiricism. This paper shows that the models are seriously deficient in that they ignore essential features of actual rent control ordinances and important responses to them. When these features and responses are taken into account, the effect of rent control on maintenance of the controlled stock is theoretically ambiguous. The paper also shows that the few systematic empirical studies have serious flaws. Therefore, there is no basis for economists' strongly-held belief that rent control leads to worse maintenance.     

Employer risk-adjustment transitions with inertial consumers: Evidence from CalPERS

Risk-adjustment policies, which transfer money from insurers with healthy consumers to those with sick consumers, are an important tool to contend with adverse selection in health insurance markets. While the steady-state properties of risk-adjustment have been studied extensively, there is less evidence on the transition phase of policy implementation. We study the introduction and removal of risk-adjustment at California Public Employees' Retirement System and show that these changes meaningfully impact premiums via plan differences in enrollee health status. Despite these premium differences, there is limited consumer resorting due to consumer inertia, though new active enrollees respond more fluidly. We show that, with inertial consumers, risk-adjustment changes have substantial distributional consequences, leading to worse outcomes for sicker consumers when removed and vice-versa when implemented. We estimate a model of plan choice with premium sensitivity, brand preferences, and inertia and use these estimates to study the interaction between risk-adjustment policies and the strength of inertia.