General equilibrium, markets, macroeconomics and money in a laboratory experimental environment

Summary. This paper reports on the use of laboratory experimental techniques to create relatively complete economic systems. The creation of these market systems reflects a first attempt to explore the nature of inherently interdependent environments and to assess the ability of simultaneous equations equilibrium models like the classical static general competitive equilibrium model, to predict aspects of system behaviors. In addition, the impact of the quantity of a fiat money was studied. The economies were successfully created. Classical models capture much of what was observed. Received: May 21, 1996; revised version: May 21, 1997     

General equilibrium, markets, macroeconomics and money in a laboratory experimental environment

Summary. This paper studies a version of war of attrition where two agents with private information make irreversible investment decisions in continuous time. It analyzes a monotone equilibrium where the amount of delay in the timing of decisions is a monotone function of the strength of ones private signal: an agent with a clear signal makes a prompt decision, whereas an agent with a weak signal delays a decision to gather more information from the move of the other agent. Equilibrium delay is characterized under different assumptions about the number of investment options available.Received: 4 October 1996, Revised: 16 May 1997, JEL Classification Numbers: C72, D82, L13.Masaki Aoyagi: I am very grateful to an anonymous referee of this journal for helpful comments. I also thank seminar participants at the University of Tokyo and Kyoto University.     

Currency substitution, portfolio diversification, and money demand

Abstract .  We extend the Thomas (1985) dynamic optimizing model of money demand and currency substitution to the case in which the individual has restricted or no access to foreign currency denominated bonds. In this case currency substitution decisions and asset substitution decisions are not separable. The results obtained suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of currency substitution. Applying this approach to six Latin-American countries, we find evidence of currency substitution in Colombia, Dominican Republic, and Venezuela, but not in Brazil and Chile.     

Currency substitution,financial innovations and money demand: a note

This note presents some Finnish evidence on the importance of currency substitution and financial innovations for money demand. It is also shown that conventional demend for money specifications which do not take these factors into account are clearly misspecified and produced unreasonable results. The problem is particularly acute for narrow concepts of money.     

Consumer expenditure,the demand for money,and the Hall hypothesis

Although a considerable amount of work has been conducted on the validity of the Hall hypothesis, as applied to consumer expenditure, there has been negligible empirical work on the Hall hypothesis as applied to the demand for money. In this paper the Hallian hypothesis is applied to consumer expenditure and the demand for money using quarterly data for six countries.     

Leakages from the money demand function

The performance of alternative scale variables is explored in a simple demand function for narrow money. Sequential test establish consumers' expenditure as the preferred measure. The implications for fiscal policy and the paradox of thrift are outlined.     

Permanent prices,expected price changes,and the demand for money

This paper investigates the empirical validity of the distinction between measured and permanent prices for cash balance decisions. The use of permanent prices has been advocated by Friedman over twenty five years ago, but the idea has received little attention in the literature. Using Canadian quarterly data, we find that the permanent price hypothesis yields meaningful estimates of the demand for money, but it does not appear to contribute significantly to our understanding of cash balance decisions. A number of assumptions about the relationship between the elasticities of income, price, and price change expectations are tested as well.     

Cointegration,error correction and the demand for money in Cyprus

This paper applies the recently developed technique of cointegration to estimate the demand for broad money in the case of Cyprus. Cyprus is an example of a country which does not have a sophisticated financial sector and which faced a severe political shock at a certain point in her history. The hypothesis of instability in the demand for money function cannot be rejected if the effects of this shock are not taken into account. In particular, it is argued that there was a once and for all increase in the income elasticity of this function at the time of the shcock. When this shift is accounted for by the introduction of an appropriate variable in the cointegrating regression the hypothesis of instability in the demand for money is rejected. Two dynamic error correction models are then specified with income and consumption as the scale variables respectively. Non-nested tests are carried out which reveal that consumers' expenditure is a more appropriate scale variable than GDP.     

The break-up of a currency union increases the demand for money

A Baumol type model of money demand is employed to predict a discrete jump in steady-state money holdings following the introduction of foreign exchange transactions costs. Such an increase was observed following the 1979 break-up of the Irish-United Kingdom currency union.     

Revisiting the demand for money model: money and loans in selected manufacturing industries

Using a dynamic infinite horizon optimizing model, it is shown that the empirical demand for money equation employed by a generation of applied monetary researchers is a reduced form model of the dynamic Euler equations for real money balances. The Euler equations derived in this paper focus on the finance capital for the firm and consist of real money balances (M1) and real business loans (F1) for selected manufacturing industries. By employing explicit structural dynamic specification and sectoral disaggregation, the question of how firms close the gap between desired real money balances and actual real money balances is examined. Model consistent ‘desired’ levels of money balances and business loans are found to depend not only upon the usual transactions variable and interest rate but also upon relative prices and a technology index. Moreover, the speed in closing the gap between desired and actual money balances (loan balances) is estimated using annual two-digit Standard Industrial Code data for durable and non-durable industries. Non-durable industries tend to close the gap faster than durable industries by as much as 25% in a given year.     

Specific complements and the demand for money in Australia

Clements and Nguyen, using Australian data, found that money, durables, and other consumption are specific complements. This letter applies a Nasse-type model to the same data and describes the associated preference independence transformation in order to interpret the results.     

Modelling money demand for a panel of eight transitional economies

In this article, we estimate money demand functions for a panel of eight transitional economies, using quarterly data for the period 1995:01 1995 to 2005:03. We find that real M1 and real M2 and their determinants, namely real income and short-term domestic interest rate, are cointegrated, both for individual countries as well as for the panel. Long-run elasticities suggest that consistent with theory, real income positively and nominal interest rate negatively impact real money demand. Our test for panel Granger causality suggests short-run bidirectional causality between M1 and M2 and their determinants. Finally, our tests for stability of the money demand functions reveal more cases of unstable money demand functions when M2 is used as a proxy for money demand.     

Wealth and the demand for money in the European Union

This study presents the results of an empirical analysis of the demand for money in the European Union as a whole over the period 1971–1995, with a particular focus on the impact of financial wealth. The empirical evidence shows a substantial impact of wealth on the demand for M2 and M3, whereas no influence of wealth on the demand for M1 is found. This finding may explain the remarkable increase of the broad monetary aggregates over the last decade or so. This means that taking into account the growth of wealth, the monetary expansion has been fairly modest. The evidence thus indicates that the strong increase of M2 and M3 should be attributed to portfolio investment considerations rather than to an expansionary monetary policy.Helpful comments by two anonymous referees, the participants in the Workshop on Money Demand at the Humboldt Universität and Hans Lunsing gratefully acknowledged.     

On the demand for money in the United States

One of the current issues in the literature on the demand for money is whether the adjustment of actual to desired money holdings is in real or nominal terms. This paper tests the real against the nominal adjustment hypothesis using United States data. Comparisons are made among simple sum and Divisia aggregates (of M1, M2, M3, and L) and with Spindt's monetary velocity (MQ) aggregate. The results strongly support the nominal adjustment hypothesis, but they do not reveal a single uniformly best monetary aggregate.     

Hayek, Keynes, and modern macroeconomics

The Great Recession seems to be creating a change in the trend of macroeconomic thinking. Prior to the financial crisis of 2008, dynamic stochastic general equilibrium (DSGE) models dominated the macroeconomics literature without any apparent challengers on the horizon. Since then, however, we have seen an increasing interest in macroeconomic models that address the state of confidence (??animal spirits??), complexity, cognition, and radical uncertainty. Most of the renewed interest in animal spirits, complexity, cognition, and radical uncertainty has come from a more or less ??Keynesian?? perspective. We discuss the potential to emphasize these elements from a more ??Hayekian?? perspective and argue that Austrian approaches to macroeconomics along these lines are more likely to resonate with mainstream economists than in years past.     

Broad money demand and financial liberalization in Greece

This paper develops a constant, data-coherent, equilibrium correction model for broad money demand (M3) in Greece over 1976–1994. The aggregate M3 was targeteduntil recently, and current monetary policy still uses such aggregates as guidelines. In spite of financial innovation, financial liberalization, and large fluctuations in the inflation rate, the estimated model is remarkabli stable. Dynamics are important, with price and income elasticities being much smaller in the short run than in the long run. The model provides a better understanding of the portfolio consequences of financial innovation and the effects of monetary policy in Greece.The authors are staff economists in the Division of International Finance, Federal Reserve Board, Washington, DC 20551 USA, and the Research Department, International Monetary Fund, Washington, DC 20431 USA, respectively. They may be reached on the Internet at ericsson@frb.gov and ssharma@imf.org. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting those of the Board of Governors of the Federal Reserve System, the International Monetary Fund, or other members of their staffs. We wish to thank the Bank of Greece for providing the data; Sophocles Brissimis, Nicholas Paleocrassas, and George Simigiannis for offering insights into institutional aspects of the Greek financial system; and Richard Agénor, Caroline Atkinson, Adi Brender, Julia Campos, Dimitri Demekas, David Hendry, Katarina Juselius, Tim Lane, Helmut Lütkepohl, Jaime Marquez, Jürgen Wolters, and two anonymous referees for useful comments. An earlier version of this paper appeared as Ericsson and Sharma (1996). All numerical results were obtained using PcGive Professional Versions 8 and 9: see Doornik and Hendry (1994a, 1994b, 1996, 1997) and Hendry and Doornik (1996). The data may be obtained from the Internet, http://wotan.wiwi.hu-berlin.de/ oekonometrie/engl/data.html     

On the empirical specification of the European demand for money

This paper tests several aspects concerning the specification of an empirical demand for money function for the European Monetary Union. The econometric results show that wealth is a statistically significant determinant for the demand for money. A homogeneous sample period is statistically established, and a demand equation for liquid assets (other than strict money) is presented. A new method to weight and add national variables is also suggested to obtain European aggregates. The main policy implication is that monetary aggregate targeting should not be the main basis for monetary policy implementation.     

Effects of financial innovations on the money demand function: a Canadian evidence

A money demand function for the Candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants. Two sets of estimation results have been analysed: the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations. The estimated equations have been used to generate ex-post simulations and forecasts. The results suggest that innovations have displaced the money demand function in the early 1980s. It also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function.     

Wealth effects on money demand in the euro area

We investigate the determinants of money demand (M3) in the euro area, considering that this variable remains an important co-determinant of monetary policy making by the European Central Bank. Regressing the real stock of M3 on real GDP, interest rates and wealth variables (real housing and stock prices) within an error-correction framework provides evidence of positive wealth effects on money demand in the long run. Correcting for this wealth effect, money demand in the euro area has grown almost exactly in line with the official reference value of 4 1/2% per annum. This article builds on research that was conducted in preparation of the annual OECD Economic Survey of the euro area and reported in Boone et al. (2004). The authors thank their colleagues in the Economics Department and the European Central Bank and two anonymous referees for their valuable comments. The authors assume full responsibility for any remaining errors and omissions. The opinions expressed in this article do not necessarily represent those of the OECD or its member countries