Money, capital, and real liquidity effects with habit formation

Abstract.  The money in utility model is reconsidered in the presence of endogenous labour and habits. With standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money, the model exhibits superneutrality in the steady state. Nevertheless, habits give rise to real liquidity effects in the short run. After an increase in the nominal interest rate, employment falls, resulting in a fall in capital accumulation and in the short‐ and long‐term real interest rates. The adjustment of the capital stock is non‐monotonic. Employment and the short‐ and long‐term real interest rates may also adjust non‐monotonically. JEL classification: E22, E52, E58     

Integration or Independence? An Alternative Assessment of Real Interest Rate Linkages in the European Union

The relationship between national real interest rates provides a valuable insight into the extent of economic and financial integration between countries. This paper tests for long‐run parity in ex post real interest rates among the major European Union (EU) countries over the period 1979–2003. The empirical investigation, however, is based on an alternative approach. Strong parity is determined by whether or not the first largest principal component (LPC), based on real interest rate differentials with respect to a chosen base country, is stationary. The qualitative outcome of the test is invariant to the choice of base country, and compared with alternative multivariate tests for long‐run parity, this methodology places less demands on limited data sets. Strong evidence of onshore parity occurs during 1979–1990 and 1993–2003 with the half‐life of a deviation to parity that varies towards 6 months. There is no evidence of long‐run parity among EU members during 1990–1993 despite the easing of remaining capital controls in 1990. Parity is rejected for a sample of non‐EU countries throughout the study period.     

Finance–Growth Nexus and the P‐bias: Evidence from OECD Countries

Recent studies provide new empirical evidence confirming that financial development is linked to economic growth in OECD countries. Using new dynamic panel regression techniques, these appraisals indicate that within the group of high‐income countries stock market size as a measure of financial advancement contributes significantly to overall economic activity. Applying the same advanced techniques, this paper questions this conclusion by showing that the findings of these studies seem to be not only not robust with respect to adding new observations but also likely to be plagued by a severe price bias which belittles the information content of the used financial indicator (stock market capitalization). We provide evidence that anticipative price effects (i.e. expectations of future growth, reflected in current stock prices) may be driving the statistical relationship between stock market activities and economic growth in high‐income countries to a much larger extent than recent analyses of the finance– growth link in OECD countries suggest .     

Greek Monetary Economics in Retrospect: The Adventures of the Drachma

This paper enumerates the adventures of the drachma step by step, dividing its story into seven parts. Specifically, its main purpose is to present some historical perspective on the behaviour of the monetary and fiscal policies pursued in Greece during the period from the early 1830s until the introduction of the euro. For Greece, the lessons of historical experience are very important. Since the formation of the modern Greek state, government officials have striven – sometimes making hard efforts – to keep abreast of international monetary developments. This was because they understood that the participation of a peripheral, poor and inflation‐prone country with a weak currency and an underdeveloped money market, like Greece of the time, in a monetary club of powerful economies could improve her international credit standing and imply important benefits in terms of exchange rate and monetary stability, and long‐term foreign borrowing .     

Seasonality, Cointegration, and Forecasting UK Residential Energy Demand

Much of the short‐run movement in energy demand in the UK is seasonal, and the contribution of long‐run factors to short‐run forecasts is slight. Nevertheless, using a variety of techniques, including a recently developed estimation procedure that is applicable irrespective of the orders of integration of the data, we obtain a long‐run income elasticity of demand of about one third, and we are unable to reject a zero price elasticity. An econometric model is shown to provide superior short‐run forecasts to well‐known seasonal time series models ex post , but is inferior to Box‐Jenkins SARMA models when the determinants themselves have to be forecast. However, the relatively short data sample and small number of forecasts suggest caution in generalising these results.     

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

股票价格、实体经济与货币政策研究——基于我国1997-2011年的经验证据

本文运用格兰杰因果关系检验和向量自回归方法分析了1997年1月至2011年6月我国股票价格、GDP、通货膨胀率和货币政策的关系,实证结果表明,在中国,股票价格对通货膨胀的效应为正向,即股市上涨能带动通货膨胀水平的上涨。股票市场对GDP的影响短期内主要表现为替代效应,长期来看,则是财富效应和投资效应占主导;同时,货币供应量和利率对股票价格均有影响,但影响均不显著。通过格兰杰因果关系检验发现,利率变动导致货币供应量和股票价格发生变化。而货币供应量的变化影响着通货膨胀,也一定程度影响利率和股票价格。通过广义脉冲响应发现,中国人民银行紧缩性的利率政策并不能抑制股票价格上涨。增加货币供给短期内能够推动股市上涨,但长期对股市仍没有效果。     

Financial Factors and the Empirical Behavior of Money Demand: A Case Study of Malaysia

The paper analyses the roles of financial factors in the behavior of M1 and M2 demands for Malaysia. The focus is on the possible changes in the elasticities of the M1 and M2 money demands in the environment of financial innovations and on the influence of real stock prices on the holdings of monetary assets. Our results reinforce existing studies that find the presence of the long-run M1 and M2 money demands and structural instability in the dynamic specification of the M1 demand. However, we are able to identify stable error-correction model for the post-1986 M1 demand and for the M2 demand. Our results also indicate the reduction in the Long run income and exchange rate elasticities of the money demands. Meanwhile, the interest rate sensitivity of the demands becomes more inelastic. Lastly, we document the significance of real stock prices in influencing the demand behavior, indicating the dominance of the wealth effect over the substitution effect. [E41, E44]     

Does “hot money” drive China's real estate and stock markets?

The paper investigates the extent of the impact from “hot money” or speculative capital inflow on the fluctuations of China's real estate market and stock market. The results indicate that hot money has driven up property prices as well as contributed to the accelerating volatilities in both markets due to its enormous size and its short-term characteristic of investing. In particular, we find that hot money ranks as the second largest contributor in the fluctuations of China's real estate prices. In the “risky” regime, which corresponds to more inflows and higher volatility of hot money, the effects are even more prominent.     

Policy Rules and Monetarist Arithmetic

This note demonstrates the existence of an important equilibrium path overlooked in the literature on monetarist arithmetic. Pleasant monetarist arithmetic is possible when the interest‐elasticity of money demand exceeds unity. In this case, tight money may lead to a transitory increase in seigniorage, the retirement of government debt, and lower inflation in both the short run and the long run. The set of equilibrium paths is sensitive, however, to the form of the policy rule. Pleasant monetarist arithmetic is not an equilibrium if the policy rule fixes the share of the fiscal deficit financed by seigniorage. Both pleasant monetarist arithmetic and the tight‐money paradox are equilibrium paths when the government's commitment to low money growth is conditional on inflation remaining below its previous level.     

Decentralized Policymaking in a Long‐run Growth Model with Seigniorage and Taxes

The paper introduces decentralized policymaking into a game‐theoretic model with output growth through capital accumulation, and in which the determination of taxes, seigniorage and the long‐run growth rate of the economy reflects the strategic interactions between the government, the central bank and the private sector. The paper investigates, among other things, the impact on the long‐run growth rate of a higher degree of inflation aversion of the central bank and a higher degree of inefficiency in the tax system.     

Money velocity and asset prices in the euro area

Monetary growth in the euro area has exceeded its target since several years. At the same time, the money demand function seems to be increasingly unstable if more recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In fact, a rise in the income elasticity after 2001 can be observed, and may reflect the exclusion of real and financial wealth in conventional specifications of money demand. This presumption is explored by means of a cointegration analysis. To separate income from wealth effects, the specification in terms of money velocity is preferred. Evidence for the presence of wealth in the long run relationship is provided. In particular, both stock and house prices have exerted a negative impact on velocity after 2001 and lead to almost identical equilibrium errors. The extended error correction model is stable over the entire sample period and survive a battery of specification tests.

The recent boom–bust cycle: The relative contribution of capital flows, credit supply and asset bubbles

We use an estimated open economy DSGE model with financial frictions for the US and the rest of the world to evaluate various competing explanations about the recent boom–bust cycle. We find that the savings glut hypothesis is insufficient for explaining all aspects of the boom in the US. Relatively strong TFP growth and expansionary monetary policy are also not able to explain fully the volatility of corporate and in particular residential investment. We identify bubbles in the stock and housing market as crucial. Concerning the downturn in 2008/2009, the fall in house prices and residential investment only plays a minor role. Mortgage defaults have more explanatory power, especially in a specification of the model with a segregated equity market. Finally, the bursting of the stock market bubble was at least as important in this recession as in 2001. Because of various negative shocks hitting the economy at the same time in 2008/2009 and continued positive technology growth, not only the real interest rate declined but inflation fell rapidly and left insufficient room for monetary policy to play a similar stabilising role as in previous recessions.     

Capital flows to an emerging financial market in Turkey

Increased globalization in financial markets implies that the percentage of all shares under foreign ownership in domestic stock markets has been rising. Speculative attacks on the foreign exchange market in February 2001 led to deep economic crisis in Turkey. This article will explore various indicators of the financial crisis in Turkey based on a macro-model. The foreign share of the domestic economy is a key variable to establish the degree of vulnerability during a financial crisis. An empirical investigation shows that the percentage of shares owned by foreigners on the Istanbul Stock Exchange (ISE) has been increasing since 1995 and is currently about 50 percent of the total. Furthermore, the general index of stock market prices in 1999 was at its highest level since 1995. This would imply that the general price index of the stock market is another strong indicator of an impending financial crisis. An empirical investigation of Turkish data based on a theoretical model is presented in this paper. An unexpected capital outflow would certainly cause exchange rate fluctuations, balance of payments problems, and international debt crisis. Hot money inflows boost share prices and keep the real exchange rate high. However, short-term stay of capital implies a sudden capital outflow that creates financial crisis, which results in international debt crisis. This in turn leads to a further increase in loans from the International Monetary Fund (IMF). Relatively high stock market prices may suggest an impending financial crisis. Using Turkish stock market price data, an impending financial crisis can be statistically predicted.     

How do banks set interest rates?

This paper studies cross-sectional differences in banks interest rates. It adds to the literature in two ways. First, it analyzes systematically the micro and macroeconomic factors that influence the price-setting behaviour of banks. Second, by using banks’ prices (rather than quantities) it provides an alternative way of disentangling loan supply from loan demand shift in the “bank lending channel” literature. The results suggest that heterogeneity in the banking rates pass-through - depending on liquidity, capitalization and relationship lending - exists only in the short run.     

Asset pricing theory and the valuation of Canadian paintings

Abstract.  The valuation of Canadian paintings is analysed empirically. Using a sample of auction prices for major Canadian painters for the period 1968–2001, we run hedonic regressions to analyse the influence of various factors, including painter identity, on auction prices, as well as to construct a market price index. This index is used in a second‐stage analysis in which we analyse the properties of Canadian art viewed as an investment asset. We apply standard asset pricing theory, as incorporated in the capital asset pricing model (CAPM), to the analysis of price movements in the market for Canadian paintings.     

Monetary policy arithmetic: reconciling theory with evidence

Abstract.  Empirical evidence indicates that, in countries with low inflation rates, a permanent decrease in inflation rate either has no impact on capital stock and output (superneutrality) or causes them to fall moderately. Existing budget arithmetic models of monetary policy cannot deliver superneutrality. In this paper, we conduct a budget arithmetic analysis of monetary policy using a money demand specification – money in the utility function – that is new to this literature. We find that one simple assumption about utility from money delivers superneutrality, while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence. JEL classification: E60, E13     

THE MONEY DEMAND FUNCTION FOR THE EURO AREA: SOME EMPIRICAL EVIDENCE

This paper sets out to re‐examine the money demand function for the euro area. Traditional specifications often yield unsatisfactory results: instability of short and long‐term coefficients; relatively large differences between estimated and actual value of variables; and significant changes in the number of long‐term relationships, etc. Using a standard Vector Error Correction Model, we find that the usual specification is indeed unstable. However, introducing a European equity price gives rise to a more stable system. Furthermore, recursive estimates confirm the relative stability of long‐term coefficients. Estimates of the real money gap, based on the money demand equation including equity prices, point to moderate, albeit persistent, excess liquidity in the euro area in recent years. The real money gap contains information about future inflation but this content may have diminished since 2001.     

Population ageing and inflation with endogenous money creation

This paper models a mechanism through which population ageing may induce a deflationary process. We propose an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. The model links demographic factors, such as fertility rates and longevity, to prices. We show that lower fertility rates lead to smaller demand for credit and lower money creation, which in turn cause a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed; they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.     

中国股票市场与经济增长关系的实证研究

股票市场与经济增长一直是近年来的热点问题,在国外的相关研究中,大多数认为股票市场通过其功能作用促进了经济增长,而我国情况又如何呢?我们在前人的研究成果上,对股票市场与经济增长关系运用协整分析和格兰杰检验作实证分析。结果显示,换手率和上市公司数目增长率与经济增长不具有协整关系。而资本率和交易率与经济增长具有协整关系,但他们不是经济增长的格兰杰原因;反之,则成立。因此,加强法制建设,规范股票市场,使其发挥应有的作用是当前的关键所在。