Competing macro-hypotheses in the United States: A Kalman filtering approach

The empirical validity of alternative views about the short-run determinants of real output growth in the United States is investigated. A nested framework is used to test the macro rational expectations (MRE) hypothesis directly against two competing hypotheses - the neo-Keynesian view that anticipated and unanticpated monetary policy both matter,and Friedman's (1977) proposition that increased inflation uncertainty reduces real output at least temporarily. The unobservable explanatory variables are obtained from time-varying-parameter models of inflation and money growth, which generate forecast errors and their conditional variances consistent with rational expectations under a continuously chaning policy regime. The empirical results strongly support Friedman's view. The MRE hypothesis must be rejected since both anticipated and unanticipated monetary changes matter. The results prove robust across different model specifications and estimation techniques.     

Fiscal policy,welfare, and employment with perfect foresight

The long-run feasibility of expansionary fiscal policy is analyzed in a “fix price” economy under the assumption that individuals are altruistic and have rational expectations. It is found that exclusive reliance on interest bearing debt is a feasible policy only if money is an inferior good. However, feasibility is ensured if the bonds to money ratio is not higher than a certain critical level.     

What to stabilize in the open economy*

We consider the question how “best” to maintain price‐level stability in an open economy, and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed exchange rate; and (c) a policy of explicit commitment to a price‐level target. In each case we assume that policy is conducted by injecting reserves into or withdrawing reserves from the “banking system.” In evaluating the three regimes, we adopt the criterion that the “best” policy should leave the least scope for indeterminacy and “excessive” economic volatility. In a steady‐state equilibrium, the choice of regime is largely irrelevant; any steady‐state equilibrium under one regime can be duplicated by an appropriate choice of the “control” variable under any other regime. However, we show that the sets of equilibria under the three regimes are dramatically different. When all countries follow the policy of fixing a constant rate of money growth, there are no equilibria displaying endogenously arising volatility and there is no indeterminacy of equilibrium. Under a regime of fixed exchange rates, indeterminacies and endogenously arising fluctuations are impossible if and only if the country with the low “reserve‐to‐deposit” ratio is charged with maintaining the fixed rate. Finally, when one country targets the time path of its price level, under very weak conditions, there will be indeterminacy of equilibrium and endogenously arising volatility driven by expectations.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Monetary shocks,exchange rates and trade balances: Evidence from inflation targeting countries

This paper investigates the relationship among monetary policy shocks, exchange rates and trade balances in five Inflation Targeting Countries (ITCs). The investigation is based on Structural Vector Error Correction Models (SVECMs) with long run and short run restrictions. The findings reveal that a contractionary monetary policy shock leads to a decrease in price level, a decrease in output, an appreciation in exchange rate, and an improvement in trade balance in the very short run. Our findings contradict the findings of price, output, exchange rate and trade puzzles that have been found in many empirical studies. Furthermore they are consistent with the theoretical expectations regarding the effect of a contractionary policy. The only long run restriction that we imposed on our models is that money does not affect real macroeconomic variables in the long run, which is consistent with both Keynesian and monetarist approaches.     

Money non-neutrality in a Rational Belief Equilibrium with financial assets

Summary. In Rational Beliefs Equilibria money is generically non-neutral. Given the expectational perspective proposed by the Theory of Rational Belief Equilibrium, we show that one of the most important factors in the emergence of money non-neutrality is played by Endogenous Uncertainty. This, in contrast to the Rational Expectations results of money neutrality and policy ineffectiveness, leads to a scenario in which monetary policy has an impact on the real economy and price volatility. The heterogeneity of beliefs together with the distribution and intensity of agents' states of optimism/pessimism can amplify the real effect of monetary policy and/or generate endogenous fluctuations in the economy which are not explained by any exogenous shock. We claim that money non-neutrality is mostly an expectations driven phenomenon. Indeed, additional assumptions of asymmetry of information and/or unanticipated monetary policy are not needed to explain the real effect of monetary policy as it is customary in the New Classical Theory. Received: May 30, 2000; revised version: December 28, 2000     

Money in the pure consumption loan model

The purpose of this paper is to show how modern techniques of Temporary competitive equilibrium analysis can be applied to models of the “pure consumption loan model” type. One considers Samuelson's simplest model where traders live two periods and where money is the only store of value. It is proved that a temporary equilibrium exists if price expectations are sufficiently independent of current prices. A stationary market equilibrium is shown to exist if there is a set of traders (i) whose total resources are greater when they are young than when they are old, (ii) who are indifferent between present and future consumption. It is proved that this existence theorem still holds if the economy is sufficiently “close” to an economy which has this property. A stationary market equilibrium is shown to be Pareto optimal if all traders hold positive cash balances. It may be inefficient if this condition is not satisfied, for some traders may then be willing to borrow, which they cannot do in this model.     

The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?

Abstract:

This article suggests that current forms of crypto currencies will fail to complement or replace fiat money. We show that fixed-supply coins like bitcoin suffer from an inherently speculative and deflationary design and are not backed by a “We Owe You”. Stablecoins, i.e. coins that rely on flexible supply designs, are also not backed by a “We Owe You” and cannot achieve price stability because they build on outdated monetarist theories. Moreover, the algorithmically planned allocation of new coins, which is characteristic of stablecoins, is not market-based. As such, it is inferior to contemporary ways of money creation. Regarding price stability, we suggest that (crypto) monetary policy needs to overcome the illusionary dichotomy between the real and the financial circuit by accounting for systematic coordinated wage bargaining mechanisms to reflect that firms set prices according to cost-based pricing rules.     

Toward Reasonable Capitalism: The Role of John R. Commons’s Price and Business Cycle Theories

Abstract

John R. Commons thought that prices should be stable and that the law of supply and demand should be controlled by the power of the state through patent law and by protecting bargaining equality. Commons also thought that prices should be stabilized by macro monetary policy. These means would allow the realization of a “reasonable price.” Commons called the objective and measurable value in money, which is determined by a court ruling, “reasonable value.” Analysis of Commons’s price and business cycle theories point toward the realization of both “reasonable price” and “reasonable value” and toward “reasonable capitalism” that can replace banker capitalism.     

The Rose-Wicksell model: Inside money,stability, and stabilization policies

This paper examines a Rose-Wicksell, as opposed to a Stein-Keynes-Wicksell, model of Monetary Dynamics. Here, all money is of the “pure credit,” or “inside,” variety. Suppliers of money (banks) do not suffer from money illusion just as demanders do not; their decision to supply real balances is, likewise, based on profit maximization. The stability properties of the model are derived both in the short and the growth runs. It is shown that if interest is paid on demand deposits and if this rate is manipulated by the Central Bank, according to the rate of inflation, then all sources of instability can be eliminated. Moreover, stabilization of the short run guarantees stabilization of the growth model.     

A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy

Summary A representative-agent model with money holdings motivated by transactions costs, a fiscal authority that taxes and issues debt, no production, and a convenient functional form for agents' utility is presented. The model can be solved analytically, and illustrates the dependence of price determination on fiscal policy, the possibility of indeterminacy, even stochastic explosion, of the price level in the face of a monetary policy that holdsM fixed, and the possibility of a unique, stable price level in the face of a monetary policy that simply pegs the nominal interest rate at an arbitrary level.In a rational expectations, market-clearing equilibrium model with a costlessly-produced fiat money that is useful in transactions, the following things are true under broad assumptions.- A monetary policy that fixes the money stock may (depending on the transactions technology) be consistent with indeterminacy of the price level—indeed with stochastically fluctuating, explosive inflation.- A monetary policy that fixes the nominal interest rate, even if it holds the interest rate constant regardless of the observed rate of inflation or money growth rate, may deliver a uniquely determined price level.- The existence and uniqueness of the equilibrium price level cannot be determined from knowledge of monetary policy alone; fiscal policy plays an equally important role. Special case models with interest-bearing debt and no money are possible, just as are special cases with money and no interest-bearing debt. In each the price level may be uniquely determined.Determinacy of the price level under any policy depends on the public's beliefs about what the policy authority would do under conditions that are never observed in equilibrium.These points are not new. Eric Leeper [1991] has made most of them within a single coherent model. Woodford [1993], in a representative agent cash-in-advance model, has displayed the possibility of indeterminacy with a fixed quantity of money and the possibility of uniqueness with an interest-rate pegging policy. Aiyagari and Gertler [1985] use an overlapping generations model to make many of the points made in this paper, without discussing the possibility of stochastic sunspot equilibria. Sargent and Wallace [1981] and Obstfeld [1983] have also discussed related issues.This paper improves on Leeper by moving beyond his analysis of local linear approximations to the full model solution, as is essential if explosive sunspot equilibria are to be distinguished from explosive solutions to the Euler equations that can be ruled out as equilibria. It improves on the other cited work by pulling together into the context of one fairly transparent model discussion of phenomena previously discussed in isolation in very different models.We study a representative agent model in which there is no production or real savings, but transactions costs generate a demand for money. The government costlessly provides fiat money balances, imposes lump-sum taxes, and issues debt, but has no other role in the economy. We make restrictive assumptions about the form of the utility function and the form of a transactions cost term in the budget constraint.The model could be extended to include production, capital accumulation, non-neutral taxation, productive government expenditure, and a more general utility function without affecting the conclusions discussed in this paper. Indeed the model I informally matched to data in an earlier paper [1988] makes some such extensions. While such an extended model is more realistic, it is harder to solve. The version in my earlier paper [1988] was solved numerically and simulated. The bare-bones model of this paper allows an explicit analytic solution that may make its results easier to understand.This paper improved following comments from participants at seminars at Yale and the Atlanta Federal Reserve Bank. Eric Leeper and James Robinson were particularly helpful. Comments from Michael Woodford led to important corrections and clarifications.     

Inflation targeting and the need for a new central banking framework

This article critically analyzes inflation targeting (IT) both theoretically and empirically. IT came into prominence in the 1990s and 1 central bank after another adopted this regime in the 1990s and 2000s. Proponents of IT mainly argued that IT regime was successful on the grounds that it resulted in lower inflation rates and hence better economic performances. However, inflation rates in the world were in a downward trend from the 1980s well into the 2000s, and both IT and non-IT regimes managed to decrease their inflation rates. In addition, focusing too much on price stability through IT paved the way for permanently higher than necessary interest rates and disinflationary “tight” monetary policy periods when inflation rate was above an arbitrarily targeted level. Tight monetary policy can and do affect the real economy negatively and overemphasizing price stability may hurt the economy in terms of lower potential output, decreasing investment and more unequal income distribution. Post Keynesians offer valuable alternatives within the framework of parking-it approach to the existing monetary policy paradigm. Our main conclusion is that central banks should set the policy interest rate as low as possible and keep it there, in line with Keynesian “cheap money” policy.     

Exchange Rates,Expectations, and Monetary Policy: a NOEM Perspective*

We use a dynamic general‐equilibrium optimizing two‐country model to analyze how the formation of exchange rate expectations shapes the effects of a monetary policy shock in an open economy. We also provide empirical evidence on how traders in foreign exchange markets form exchange rate expectations. Our model implies that the short‐run output effect of a permanent monetary policy shock diminishes if “technical traders” form the type of regressive exchange rate expectations we find in our empirical analysis. If the influence of technical traders is strong enough, a permanent expansionary monetary policy shock can result in a temporary decline of the output in the country in which it takes place. The output effect of a temporary monetary policy shock is magnified when technical traders form regressive exchange rate expectations.     

房价波动、调控政策立场估计及其影响效应研究--基于1998-2014年数据的实证分析

调控政策对房价的反应、立场和影响效应是政府政策设计的重要依据,2007年底金融危机爆发后,调控政策和房价波动都发生了显著变化。文章以2008年为界,构建了三个房价和政策变量的月度时间序列样本：1998-2007年、2008-2014年和1998-2014年,在此基础上,对2008年前后调控政策的反应、立场和影响效应进行了实证分析。结果表明：(1)实际贷款利率和货币供应量在2008年前后对目标变量的反应是交错变化的,货币供应量对房价的反应与假定相反,货币政策并未对房价做出充分反应,而财政和土地政策表现出了较好的反应结果。(2)货币供应量对房价波动的影响最大,是房价持续上涨的重要原因,2008年以来,固定资产投资的影响非常显著,脉冲响应分析发现利率只能在短期内对房价产生负向影响,除土地政策外,货币和财政政策皆会在长期内对房价产生稳定影响。文章的研究为推进房价政策调控和房地产市场健康稳定发展提供了可靠的经验支持。     

Observed expectations,news shocks,and the business cycle

This paper exploits information from the term structure of survey expectations to identify news shocks in a DSGE model with rational expectations.We estimate a structural business-cycle model with price and wage stickiness. We allow for both unanticipated and anticipated components (“news”) in each structural disturbance: neutral and investment-specific technology shocks, government spending shocks, risk premium, price and wage markup shocks, and monetary policy shocks.We show that the estimation of a standard DSGE model with realized data obfuscates the identification of news shocks and yields weakly or non-identified parameters pertaining to such shocks. The identification of news shocks greatly improves when we re-estimate the model using data on observed expectations regarding future output, consumption, investment, government spending, inflation, and interest rates - at horizons ranging from one-period to five-periods ahead.The news series thus obtained largely differ from their counterparts that are estimated using only data on realized variables. Moreover, the results suggest that the identified news shocks explain a sizable portion of aggregate fluctuations. News about investment-specific technology and risk premium shocks play the largest role, followed by news about labor supply (wage markup) and monetary policy.     

流动性影响资产价格与消费价格的传导机制

对我国1998年1季度到2009年1季度的资产价格与消费价格的波动进行实证分析,发现货币供应量增加首先带来房地产价格上升,约两年后,消费价格指数开始上升,说明货币供应通过资产价格再传导到消费价格。在当前流动性再次增加的情况下,要考虑其对资产价格及通货膨胀预期的影响,并可实行分类增加信贷的政策,防止资产价格泡沫化。     

Long-run estimates of money demand: new evidence from East Asian countries and the presence of structural breaks

Conventionally, the money demand function is estimated using a linear regression of the logarithm of money demand on a number of variables. In this article, we aim to estimate the long-run properties of money demand specification for a number of East Asian economies and within a panel framework with the presence of structural breaks. Various country-specific coefficients are allowed to capture inter-country heterogeneities. Consistent with theoretical postulates, it is found that (a) the demand for money in the long-run positively responds to real income and inversely to the interest rate spread, inflation, the real effective exchange rate and the US real interest rate; (b) the long-run income elasticity is greater than unity; and (c) both the currency substitution and capital mobility hypotheses hold. The empirical findings in this article can provide useful policy guidelines to the East Asian countries’ central banks in their quest for price stability. If one of the primary objectives of these countries is to minimize price instability, they should avoid creating unnecessary disequilibrium in the money market, while the employment of cointegration with the presence of structural breaks clearly recommends to central banks to use the supply of money to attain price and macroeconomic stability.     

International finance in general equilibrium

Our purpose in this paper is to unify international trade and finance in a single general equilibrium model. Our model is rich enough to include multiple commodities (including traded and nontraded goods), heterogeneous consumers in each country, multiple time periods, multiple credit markets, and multiple currencies. Yet our model is simple enough to be effectively computable. We explicitly calculate the financial and real effects of changes in tariffs, productivity, and preferences, as well as the effects of monetary and fiscal policy.We maintain agent optimization, rational expectations, and market clearing (i.e. perfect competition with flexible prices) throughout. But because of the important role money plays, and because of the heterogeneity of markets and agents, we find that fiscal and monetary policy both have real effects. The effects of policy on real income, long-term interest rates, and exchange rates are qualitatively identical to those suggested in Mundell-Fleming (without the small country hypothesis), although our equilibrating mechanisms are different. However, because the Mundell-Fleming model ignores expectations and relative price changes, our model predicts different effects on the flow of capital, the balance of trade, and real exchange rates in some circumstances.     

Macroeconomic policy and aggregate fluctuations in a semi-industrialized open economy: Greece 1951–1980

In this paper we model the effects of macroeconomic policy in a semi-industrialized open economy. Greece is our case, but the model could apply to other similar economies with tightly controlled financial markets and comprehensive foreign exchange restrictions, where both the exchange rate and interest rates are administered prices. The model consists of three equations which determine output, the price level and the trade balance. It is largely non-Keynesian, but, through the real exchange rate, it allows for anticipated monetary policy to affect real output. The model is estimated by FIML and its various restrictions cannot be rejected. A policy simulation suggests that even Friedman's x% money growth rule would ensure greater macroeconomic stability in the 1970s than the monetary policy that was actually followed.     

COMMENT ‘A “NEWS” VIEW OF JAPAN'S LOST DECADE’: MONETARY POLICY DURING JAPAN'S LOST DECADE*

In this comment, I first propose a discussion of Braun and Waki's “Monetary Policy during Japan's Lost Decade” paper, by examining their model properties following a technological surprise. I then propose some empirical evidence suggesting that the Japanese lost decade could have been triggered by a downward revision of future TFP growth rather by an unexpected TFP slowdown. I show that a plain RBC model is unable to account for the effect of such a revision in expectation, while a sticky price model along the lines of Braun and Waki, or a flex‐price model with a rich sectorial structure, give more realistic predictions. These results favour a “News” view of the 1990s in Japan. Indeed, a downwards revision of future TFP growth expectations act as a demand shock in the short term, while the actual slowdown acts as a supply shock in the medium and long term.