In defense of fiduciary media—or,we arenot devo(lutionists), we are Misesians!

Conclusion Fiduciary media are not fiat money. A monetary system with a commodity standard, competitive banking, and the freedom to use fiduciary media among consenting transactors is consistent with justice, efficiency, and economic stability. It is preferable on these scores both to a system (like today's) where the law has forced money-users to give up gold and gold-redeemable fiduciary media in favor of fiat money, and to a system (like those proposed by 100-percent-reserve advocates) where the law restricts money-users from holding any or some types of fiduciary media.With apologies to Devo, the '80s rock band who used the slogan Are We Not Men? We Are Devo!     

Central banking,free banking,and financial crises

A Summary View In the Keynesian view, the central bank is a part of an extramarket remedy to a market malady. Investment markets are inherently unstable; government control of the economy's money supply is an important element in macroeconomic stabilization policy. The case against central banking—and for free banking—reverses the characterization of both remedy and malady. Free banking is a part of a market remedy to an extramarket malady. Even this stark reversal understates the case for free banking. It would remain valid even if we take the dramatic and chronic fiscal irresponsibility of the Treasury as given. Periodic crises that will inevitably occur in such a debt-ridden economic environment would be more ably countered by the market forces of free banking than by the policy moves of a central bank. But the extent of the Treasury's fiscal irresponsibility is itself dependent upon whether the Treasury can count on an accommodating central bank. Free banking limits the scope of this potential source of instability while at the same time enhancing the market's ability to deal with whatever instabilities that may persist.     

On exogenous money and bank behaviour: the Pandora's box kept shut in Keynes' theory of liquidity preference?

This essay examines Keynes' views on banking behaviour and the relationships between central banks and banks as they evolved from his Tract on Monetary Reform to The General Theory. The objective is to clarify in what sense money may be exogenous in his final work. We identify a distinctly Keynesian position on the money-supply process, featuring money exogeneity due to bank behaviour. Our findings run counter to both neoclassical synthesis view on exogenous money cum passive banks as well as the post Keynesian challenge of endogenous money cum passive banks.     

货币供给内生外生辨析

货币供给究竟是内生的还是外生的,这是货币金融领域始终争论不休的问题。货币数量论从货币数量与物价变动的关系得出货币具有外生性;凯恩斯的货币供给观由于经济环境的改变经历了由内生向外生的转变;后凯恩斯主义者则从信贷货币的产生过程得出货币内生的观点.综观货币发展史,内生与外生之争还有标准的混乱和概念不同等原因。     

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.     

关于货币内生、外生问题的一般理论

货币内生性和货币外生性都是存在的,只是二者的出现分别需要具备一定的条件。货币的内生、外生取决于两方面行为主体的情况:货币需求者和中央银行的经济情况。货币需求者方面的货币内生性取决于货币需求者能否通过货币市场、货币乘数、基础货币满足交易货币。中央银行方面的货币外生性取决于两个方面:第一,中央银行能否控制货币供给;第二,货币供给改变以后能否改变货币需求。当经济由扩张转为收缩,或由收缩转为扩张,货币的内生、外生会有不同的表现,包括对称的货币内生、对称的货币外生以及不对称的各种情况。     

The relationship among money supply, banking lending and aggregate demand in China: 1994–2006

Based on the framework of Bernanke & Blinader (1988) and Walsh (2003), this paper provides a concise analysis for relationship among money supply, banking lending and aggregate demand; and makes an empirical test on relationship among China’s money supply, banking lending and aggregate demand from 1994 to 2006 by adopting the single-equation regressive model and vector autoregressive model in terms of Keynesian structural model and monetarism simplified model. The result shows that money supply and banking lending have both played a driving role on real economy. Because of non-market interest rates, Keynesian structural model cannot explain the transmission mechanism of China monetary policies better than monetarism simplified model. __________ Translated from Jingji kexue 经济科学 (Economic Science), 2008, (1): 5–15     

中国的M_2/GDP(1980—2000):趋势、水平和影响因素

M2 GDP蕴涵了货币需求与国民收入之间的函数关系 ,其水平及变动由货币需求决定。 1 980— 2 0 0 0年间 ,中国的M2 GDP呈上升趋势 ,反映出同期货币需求水平不断上升的现实。除长期走势之外 ,中国的M2 GDP还呈逆周期变动趋势 ,原因在于由谨慎动机引起的货币需求具有逆周期波动的特点。从世界范围内来看 ,中国属于M2 GDP比较高的国家 (地区 )之一 ,但国别比较表明各国 (地区 )并不存在一个标准水平。中国的M2 GDP 2 0年来快速上升 ,从货币层面来看 ,其原因是准货币 GDP快速上升 ;从经济层面来看 ,其原因是 :货币化和居民储蓄存款的投资性质、银行等金融机构金融工具单一、金融市场不发达、银行不良资产比率高。由于M2 GDP水平是由货币需求因素决定的 ,因而不能靠压低货币供应的办法来遏止其上升。     

The causal nexus of money,output and prices in Malaysia

Using Geweke's approach to Wiener–Granger causality,bidirectional causation between money supply and nominal output were detected. Inflation in Malaysia is essentially a monetary phenomenon. The empirical findings suggest that by controlling money supply, the central bank might be able to successfully maintain price stability at producer's level but not at consumer's level unless narrow money stock is bring targeted. Serious attempts by the central bank to tighten money supply could have a strong feedback on real output and even instaneous impact on nominal output     

我国经济周期波动率的成分分解及稳定性研究

随着世界经济周期波动的减缓,我国经济波动也呈现出稳定性趋势.文章通过建立具有货币政策干预的产品市场均衡模型,对我国实际产出波动率进行了成分分解,并将实际产出波动的来源归结为需求冲击、供给冲击和货币冲击的作用.通过这些经济冲击方差序列的度量,又对实际产出波动率进行了冲击方差序列的回归检验,发现我国需求冲击和货币冲击强度的逐渐平稳是经济周期波动率降低的主要原因,而供给冲击对实际产出波动率没有产生显著影响.因此,我国宏观经济调控仍然需要坚持需求管理的政策导向,以保持经济持续稳定增长.     

Can growth-enhanced monetary policy improve welfare when people seek social status?

This paper examines the growth and welfare effects from an increase in the rate of money supply in an Ak type growth model with a relative wealth-enhanced social status motive, production externalities, and liquidity constraints. When only consumption is constrained by liquidity, fast money supply can hasten output growth unless seigniorage revenue is wasted and production externalities do not exist. We find that even though money growth normally promotes economic growth, it does not improve welfare when capital stock is over-accumulated. In general, an optimal monetary policy minimizes seigniorage. Our results also conclude that the optimal monetary policy rarely follows the Friedman rule.     

Further evidence on the credit view: the case of Finland

The present paper provides further empirical evidence on the credit view (i.e., bank credit availability has a positive impact on macroeconomic activity) by investigating the case of Finland. The Finnish economy suffered a severe recession in the early 1990s that was marked by widespread banking crisis and extensive government intervention. Using monthly data for the 1980–1996 period, unrestricted and restricted vector autoregression (VAR) models with GDP, money supply, consumer prices, bank credit, and exports were estimated. It is found that, while money supply had the largest effect on economic output, bank credit exhibited a fairly strong effect on output that exceeded price effects for the most part. Exports had little impact on fluctuations in GDP but did help to explain industrial output changes over time. Based on these results, it is concluded that there is empirical support for the credit view in Finland. By implication, government intervention in Finland to restore safety and soundness during the banking crisis likely limited further damage to the macroeconomy associated with disruption of credit intermediation services.     

An empirical procedure to evaluate monetary management under exogenous changes in the money supply

This article proposes an empirical procedure to evaluate central banks’ monetary management in a presence of exogenous changes in the money supply. Monetary shocks deviate the market interest rate from the target, and the monetary authority decides its optimal intervention in the money market, bearing in mind the benefits and costs of re-establishing its target interest rate. According to monetary management theory, typically a central bank will allow for variation in the interest rate within a range around the target interest rate, thereby intervening in the money market when the interest rate trends toward a point outside that range. In this context, we develop an empirical strategy to analyse central bank’s reactions to exogenous money changes by making a statistical comparison of the actual and the estimated intraday shift in the money supply. We also employ our method to test the reactions of the Brazilian Central Bank to liquidity shifts caused by changes in the Treasury Single Account (TSA) balance. Using different metrics of analysis, the applications of our procedure confirms the predictions of the optimal monetary management theory.     

How justified is abandoning money in the conduct of monetary policy in Australia on the grounds of instability in the money‐demand function?

The role of money in the design and conduct of monetary policy has reemerged as an important issue in both advanced and developing economies, especially since the 2007 global financial crisis. A growing body of recent literature suggests that the causal relationship between money supply growth and inflation remains intact across countries and over time and that this relation is not conditional on the stability of the money‐demand function or whether money is endogenous or exogenous. Moreover, critical for a rule‐based monetary policy is the presence of a long‐run stable money‐demand function, rather than a short‐run money‐demand model that may exhibit instability for many reasons, including problems with estimating a money‐demand model with high‐frequency data. Provided that a stable money‐demand function exists, it could be useful to establish long‐run equilibrium relations among money, output, prices, and exchange rates, as the classical monetary theory suggests. Within this analytical framework, this paper addresses the question of whether money has any role in the conduct of monetary policy in Australia. The conventional wisdom is that the money‐demand function in Australia has been unstable since the mid‐1980s due to financial deregulation and reforms; this led to a change in the strategy of monetary policy for price stability in the form of inflation targeting that ignores money insofar as inflation and its control are concerned. This paper reports empirical findings for Australia, obtained from a longer quarterly data series over the period 1960Q1–2015Q1, which suggest that instability in the narrow‐money‐demand function in Australia was primarily due to the exclusion of variables which have become important in the deregulated environment since the 1980s. These findings are confirmed by an expanded form of the narrow‐money‐demand function that was found stable over the past two decades, although it experienced multiple structural breaks over the study period. The paper draws the conclusion that abandoning the monetary aggregate as an instrument of monetary policy in Australia, under a rule‐based monetary policy such as inflation targeting, cannot be justified by instability in the money‐demand function or even by lack of a causal link between money supply growth and inflation.     

The monetary economics of Jules Dupuit

This paper analyses Dupuit's views on money, bimetallism, free banking and credit. By means of textual and contextual analysis, I argue that Dupuit endorsed the quantity theory based on the neutrality of money. For him, the value of money was determined by supply and demand. The only exception concerned the redistributive effects of gold between trading nations. Dupuit's approach to credit and his views on the issuance of banknotes were distinct from those of most French liberals. He did not consider credit to be capital, and he warned against the overissue of banknotes.     

Impact of foreign prices and interest rates on canadian economy under alternative monetary and exchange rate regimes

The main objective of this paper is to analyze the impact of U.S. short- and long-term monetary policy under both flexible and managed floating systems, using the new CANDIDE Model 2.0. We have also examined the role of domestic monetary policy in the Canadian economy under both fixed and flexible exchange rate systems. The following are some of the important findings of our study:

1. Our results support the traditional view that under the fixed exchange rate regime, monetary authorities cannot successfully pursue an independent monetary policy from its trading partners — an effort to increase money supply will be almost offset by increases in the balance of payments deficit. In contrast, in the flexible exchange rate regime, monetary policy is more effective in producing an increased growth in output and employment. However the increased output growth comes at the cost of higher prices induced by increased wages and a depreciation of the Canadian dollar.
2. Our results suggest that the impact of U.S. interest rates on investment, GNE, employment, productivity, and government debt is less severe in a pure floating exchange rate regime, compared to the managed floating system. However, the impact of U.S. interest rate policy on the Canadian inflation rate is worse in the case of flexible exchange rate regime. Even though real income and inflation are less favourable in both cases, our results indicate a trade-off between output growth and inflation.
3. Our results imply that under a pure floating monetary authorities can determine the long-run rate of inflation in Canada independent of others. However, the United States and Canadian economies are interrelated during the adjustment process, even under the flexible exchange rates, through the terms of trade and the wage-price spiral channels.

     

An activist revival in central banking? Lessons from the history of economic thought and central bank practice

Abstract

We introduce the “minimalist–activist” spectrum as an analytical prism through which to view key aspects of central banking theory and practice. We focus on the activist end of this spectrum, concentrating on economic growth. We explore the theoretical roots of these ideas in the writings of Dennis Robertson. We illustrate central banking practice by detailing some approaches followed by central banks pursuing economic growth and development in the decades following the Second World War. History of monetary thought, monetary theory, and analysis of central bank practices blend together to illuminate key principles and practices of central banking.     

中国货币需求稳定性的实证研究--基于1994-2005年的协整分析

本文以经济改革和金融发展为背景,从经典货币需求理论分析出发,运用协整检验和误差校正模型对我国货币需求的稳定性问题展开研究.分析结果显示,货币需求、国民收入、利率和通货膨胀率之间存在协整关系;我国货币需求主要受收入因素影响而呈现出长期稳定性特征,长期稳定的货币需求对其即期增长的抑制作用不明显,货币需求函数表现出高收入弹性和低利率弹性,而利率的外生性削弱了货币需求对利率的调节作用;基于VEC模型的短期Granger因果检验,支持货币量、利率和货币政策最终目标之间短期均衡关系的存在.     

Monetary and banking policy transmission through interest rates: an empirical application to the USA,Canada, the UK and the Eurozone

The main purpose of this paper is an examination of the pass‐through interest rate transmission from the wholesale rates (central bank and/or money market rates) to the retail rates (deposit and lending rates) of the banking system. Knowledge of the transmission substantially helps us to calculate the pass‐through interest rate margin or mark‐up in the banking systems under examination (USA, Canada, the UK and the Eurozone). The selection of the wholesale interest rate is also an important part of this pass‐through transmission framework because it is related to the money supply process and therefore the central bank's policy capabilities. In the empirical part, a Johansen (1988) cointegration based error‐correction procedure (ECM‐GE) is implemented for the wholesale interest rate selection. Then an LSE–Hendry general‐to‐specific model (GETS) is applied, for the revelation of the banking sector pass‐through interest rate behaviour. In the empirical part, on the issue of the wholesale interest rate selection, the USA and the Eurozone seem to favour the Money Market rate while the UK and Canada favour the central bank policy rate. The results indicate two types of interest rate pass‐through behaviour, with market structure implication – namely, the US and UK banking systems contrasted with Canada–Eurozone.