The stability of long-run money demand in the United States: A new approach

In this paper, we search for cointegration relation and determine the location of the changes in the long-run money demand in the US. We use the same data set as the previous studies and find that there are two regime changes.     

Indicators of business environment,institutional quality and foreign direct investment in Gulf Cooperation Council (GCC) countries

This paper empirically investigates the effect of five business environment indicators and four measures of institutional quality on FDI inflows in GCC countries. The empirical results reveal that the time required to start a business, the time required to enforce a contract, the time required to register a property and the time required to resolve insolvency are negatively and statistically significantly correlated with FDI inflows. Our findings also confirm that political instability and absence of democracy, in fact, encourages FDI inflows. We conclude that the business environment strongly matters for FDI inflows into the GCC countries.     

Error-correction based panel estimates of the demand for money of selected Asian countries with the extreme bounds analysis

This paper uses the extreme bounds analysis (EBA) of Leamer (1983, 1985) to analyze the robust determinants of the demand for money in a panel of 17 Asian countries for the period 1970 to 2009. These robust determinants are found to be unit root variables. Therefore, cointegration between these variables is tested with a recent time series panel method developed by Westerlund (2007). This method uses the error-correction formulation and has more power against the null of no cointegration. The results show that there is a well-defined long-run demand for money. Using the lagged error correction term from the estimated cointegrating equation, the short-run dynamic relationships are estimated. This paper, thus, suggests some useful guidelines to estimate other relationships with panel data.     

The vanishing role of money in the macro-economy: An empirical investigation for India

The recent de-emphasizing of the role of “money” in both theoretical macroeconomics as well as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a monetary phenomenon. Empirical evidence has, however, been accumulating pointing to an important leading indicator role for money and credit aggregates with respect to long term inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal anchor for inflationary expectations, from their influence on the term structure of interest rates and from their affecting transaction costs in markets. Our paper attempts to assess the informational content role of money in the Indian economy by a separation of these effects across time scales and frequency bands, using the techniques of wavelet analysis and band spectral analysis respectively. Our results indicate variability of causal relations across frequency ranges and time scales, as also occasional causal reversals.     

Measuring business cycles: A temporal disaggregation model with regime switching

In this paper, we propose a temporal disaggregation model with regime switches to disaggregate U.S. quarterly GDP into monthly figures. Alternative to the existing literature, our model is able to capture the nonlinear behaviors of both aggregated and disaggregated output series as well as the asymmetric nature of business cycle phases. To demonstrate the applicability of the proposed model, we apply the model with a Markov trend component to U.S. quarterly real GDP. The results suggest that the combination of a temporal disaggregation model with Markov switches leads to a successful representation of the data relative to the existing literature. Also, the inferred probabilities of unobserved states are clearly in close agreement with the NBER reference cycle on a monthly basis, which highlights the importance of nonlinearities in business cycle.     

Measuring income elasticity for Swiss money demand: What do the cantons say about financial innovation?

Recent time-series evidence has re-confirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.     

Currency demand,new technology,and the adoption of electronic money: Micro evidence from Japan

We estimate currency demand functions conditional on electronic money adoption with household-level survey data from Japan under an Instrumental Quantile Regression framework. Contrary to theoretical predictions, our results suggest that users of electronic money hold more currency than non-users.     

Hysteresis in unemployment for 17 OECD countries: Stationary test with a Fourier function

In this empirical study, we apply stationary test with a Fourier function proposed by Becker et al. (2006) to re-examine the hysteresis hypothesis in unemployment for 17 OECD countries over the 1960 to 2009 period. The hysteresis in unemployment is confirmed for most of these 17 OECD countries, with the exception of Australia, Canada, Finland, France, Sweden and the USA, when Becker et al.'s (2006) stationary test with a Fourier function is conducted.     

Correcting for the endogeneity of pro-environment behavioral choices in contingent valuation

In contingent valuation studies, observed behavioral choices often enter as independent variables in the willingness to pay function. However, these variables may be endogenously determined when the error term in the behavioral model is correlated with the error term in the willingness to pay model. We investigate the effects of correcting for the endogeneity of a variable, namely membership status in environmental organizations that proxies unobservable characteristics of the respondents. Jointly modeling the membership variable and the willingness to pay response yields an estimate for the effect of the former that contradicts previous findings but is intuitive and agrees with theoretical expectations.     

Dynamic persistence in the unemployment rate of OECD countries

Previous studies use a variety of increasingly advanced unit root tests to determine whether Blanchard and Summers (1986) hysteresis theory of unemployment or the classical ‘natural’ rate theory of Friedman (1968) and Phelps (1967, 1968) is most relevant for a given country. However these tests all specify a unit root under the null hypothesis against a stationary alternative, such as in the paper by Lee and Chang (2008), making the two theories of unemployment mutually exclusive over the sample period. This paper moves away from this dichotomy by allowing for switches between hysteresis and the natural rate theory using the recently developed test of Leybourne, Kim and Taylor (2007). We find that in countries like the United Kingdom, the natural rate theory is detected in the post-World War Two period of stabilisation: the time leading up to the seminal works of Friedman and Phelps. Hysteresis is found over the First World War and Great Depression periods, and in the period from the 1970s; a time characterised by rising trade union power. We also compute numerical measures of persistence using grid-bootstrap estimates of the autoregressive parameter, following Hansen (1999).     

Implications of military stabilization efforts on economic development and security: The case of Iraq

The United States used a combination of economic, political, and military means to effect change in Iraq. Most notably, the United States used a buildup of security forces, the “surge”, as an intervention to stabilize Iraq. This article uses structural change tests to determine the effect of the intervention on security and economic metrics of success. There appears to be compelling evidence that several events may have had a direct influence on security variables with the surge being one of the events. There is little to suggest that the surge was the primary intervention that enhanced economic development and political order.     

On the endogeneity of Cournot-Nash and Stackelberg equilibria: games of accumulation

We characterize equilibria of games with two properties: (i) Agents have the opportunity to adjust their strategic variable after their initial choices and before payoffs occur; but (ii) they can only add to their initial amounts. The equilibrium set consists of just the Cournot-Nash outcome, one or both Stackelberg outcomes, or a continuum of points including the Cournot-Nash outcome and one or both Stackelberg outcomes. A simple theorem that uses agents’ standard one-period reaction functions and the one-period Cournot-Nash and Stackelberg equilibria delineates the equilibrium set. Applications include contribution, oligopoly, and rent-seeking games.     

Threshold Dynamics of Short-term Interest Rates: Empirical Evidence and Implications for the Term Structure

This paper studies a nonlinear one-factor term structure model in discrete time. The short-term interest rate follows a self-exciting threshold autoregressive (SETAR) process that allows for shifts in the intercept and the variance. In comparison with a linear model, we find empirical evidence in favour of the threshold model for Germany and the US. Based on the estimated short-rate dynamics we derive the implied arbitrage-free term structure of interest rates. Since analytical solutions are not feasible, bond prices are computed by means of Monte Carlo integration. The resulting term structure captures stylized facts of the data. In particular, it implies a nonlinear relation between long rates and the short rate.     

On estimation of the CES production function—Revisited

Estimation of the non-linear Constant Elasticity of Scale (CES) function is generally considered problematic due to convergence problems and unstable and/or meaningless results. These problems often arise from a non-smooth objective function with large flat areas, the discontinuity of the CES function where the elasticity of substitution is one, and possibly significant rounding errors where the elasticity of substitution is close to one. We suggest three (combinable) solutions that alleviate these problems and improve the reliability and stability of the results.     

External military threat and the response of the member states of the Gulf Co-operation Council (GCC)

The study shows that procurements of traditional arms by two countries have the possibility of moving together over time. This is demonstrated with reference to Iran and the member states of the Gulf Co-operation Council (GCC) for the period 1961- 1996. Acquiring arms by the member states of the GCC is shown to be only a response to the perception of their leaders to the external threat posed by Iran throughout the varying regimes that have ruled Teheran. In the light of the recent emergence of macroeconomic problems such as unemployment in the economies of the GCC coupled with the ineffectiveness of the financially exhausting build-up of arms as a military deterrent policy, one important implication of the study is that the priority of the GCC leaders will have to turn to a more effective deterrent policy such as acquiring nuclear technology rather than engaging in a costly and unsuccessful Arab military alliance as experienced in the 1970s.     

Will the (German) NAIRU Please Stand Up?

Abstract. This paper deals with a critical assessment of the ‘non‐accelerating inflation rate of unemployment’ (NAIRU) for Germany. There are quite a few obstacles to perceiving the NAIRU as an easy‐to‐use analytical instrument: the possibility of a non‐vertical Phillips curve, the occurrence of shocks and hysteresis effects, and the (mis‐)measurement of important variables, cointegration issues and a time variability of the NAIRU. A new attempt is made to estimate a NAIRU for Germany using direct measures of inflationary expectations. However, by any method, the NAIRU is very hard to determine and subject to considerable arbitrariness.     

Non-linear causality between the stock and real estate markets of Western European countries: Evidence from rank tests

Using the non-parametric rank tests proposed by Breitung (2001), we set out in this study to determine whether any non-linear long-run equilibrium relationship exists between the stock and real estate markets of Western European countries. We go on to adopt the threshold error-correction model (TECM) to determine whether a similar relationship is discernible possibly non-linear functions of the log-price of these two markets. The findings clearly point to the existence of long-run unidirectional and bidirectional causality between the real estate market and the stock market in regions both above and below the threshold level. Finally, we find the existence of both wealth and credit price effects in the real estate markets and stock markets of Western European countries, which thereby offer financial institutions and individual investors in their construction of long-term investment portfolios within these two asset markets.     

Unveiling the objectives of central banks: Tales of four Latin American countries

We estimate the stabilization objectives of four Latin American countries that have implemented a flexible inflation targeting regime recently: Brazil, Chile, Colombia and Peru. In doing so, we develop a New Keynesian dynamic stochastic general equilibrium model for these economies and estimate their structural parameters through Bayesian methods. To infer the stabilization objectives in each country, we assume that central banks set monetary policy optimally. Our main results highlight that the central banks in these four countries have a high preference for stabilizing inflation, but do not have the systematic objective of stabilizing the exchange rate. This result is robust to assuming either commitment or discretion in the optimal policy. Also, in contrast to the case of commitment, assuming discretion in the optimal monetary policy increases the preference for interest rate smoothing, making it comparable to a preference for inflation stabilization. Finally, except for the case of Peru, the monetary policy under discretion has a better empirical fit in these countries than the one under commitment.     

Evidence of Stock Returns and Abnormal Trading Volume: A Threshold Quantile Regression Approach

This paper presents a capital asset pricing model‐based threshold quantile regression model with a generalized autoregressive conditional heteroscedastic specification to examine relations between excess stock returns and “abnormal trading volume”. We employ an adaptive Bayesian Markov chain Monte Carlo method with asymmetric Laplace distribution to study six daily Dow Jones Industrial stocks. The proposed model captures asymmetric risk through market beta and volume coefficients, which change discretely between regimes. Moreover, they are driven by market information and various quantile levels. This study finds that abnormal volume has significantly negative effects on excess stock returns under low quantile levels; however, there are significantly positive effects under high quantile levels. The evidence indicates that each market beta varies with different quantile levels, capturing different states of market conditions.     

The sources of the U.S. money demand instability

The structural stability of money demand relations has been the issue of a substantial number of empirical studies. In most studies for the U.S. structural breaks were found in the 1970s and the 1980s. In the present study a money demand function is specified in error-correction-form which involves realM1, realGNP, the deflator and a short-term interest rate. Using flexible least squares it is shown for the U.S. that the long-run coefficients ofM1, GNP and the interest rate are relatively stable over a period of more than 30 years while the deflator does not enter the relation. The instability of the relation is mainly due to changes in the short-term dynamics.The author thanks Martin Moryson for outstanding research assistance. The computations were performed with a GAUSS program written by the late Wolfgang Schneider.