Monetary dynamics: a market approach

The behaviour of the short-run responses implied by the identification of a long-run money demand relationship is examined. These responses have recently been interpreted as representing the policy stance of the monetary authority. However, as movements in the monetary aggregate reflect both demand and supply adjustments, estimating the short-run dynamics solely within the money demand relationship may produce biased results. In order to address this issue, the paper explicitly acknowledges the importance of the supply of money function by including the function alongside the demand for money function. While the interaction of the two equations continues to produce the long-run quantity theory result, the additional detail provides more accurate estimates of the individual short-run adjustments within the two equations.     

The ‘compensation’ thesis,as exemplified by the case of the Chinese central bank

This paper extends the theory of demand-led money supply endogeneity to the case of an open economy with a fixed exchange rate. This theory is contrasted to the standard Mundell-Fleming view. In the compensation approach advocated here, central banks are able to set interest rates, even in a fixed exchange rate regime, either because there are automatic market mechanisms that will induce the private sector to act in such a way that changes in foreign reserves will be compensated by opposite changes in central bank claims over the domestic economy, or because the central bank will engage in endogenous sterilization operations in its efforts to enforce its benchmark interest rate. Analyzing the balance sheet of the Chinese central bank, we find that the large rise in foreign reserves on the asset side is compensated by large positive changes in items of the liability side, mainly bonds issued by the central bank. Foreign reserves are not cointegrated with the monetary base, meaning that there is no long-run relationship between foreign exchange reserves and the supply of base money. We also find no long-run relation between foreign exchange reserves and the consumer price index.     

Econometric analysis of bank lending and business cycles in South Africa

This article examines econometric relationships between bank lending and business cycle in South Africa. Two long-run economic relationships are hypothesized between total credit and the variables, namely, coincidental indicators, spread between lending and borrowing rates, money supply, stock price index, inflation and banking sector specific factors included in the model. Of these variables, only coincident indicators, changes in money supply as well as capital, and reserve are found to exert some influence on short-run total credit availability.     

Monetary base and federal government debt in the long-run: A non-linear analysis

Government bonds are usually traded between the financial institutions and the Fed during the open market operations. These operations impact the bank reserves, subsequently influencing the monetary base. The monetary base and government bonds may portray a common trend and government debt could potentially bind the central bank to debt monetization. This paper, using monthly data on federal government debt and the monetary base from 1947:1 to 2018:10, investigates the presence of a long-run equilibrium relationship between the two variables and as to how the long-run equilibrium relationship vary in the short-run. Threshold cointegration tests find evidence of a long-run equilibrium relationship. Estimates of the threshold vector error-correction model find statistically significant evidence of contraction in the monetary base growth in the short-run in regime 1. In regime 2, the growth in the monetary base does not adjust to accommodate faster government debt growth. These estimates find no evidence of debt monetization or otherwise in either of the regimes in the United States. The Fed, by reducing the monetary base, perhaps focuses more on the inflation target. The findings also suggest a potential scenario where the Fed and the fiscal authority are not conjoined with each other in their operations.     

Competition among banks and the pass-through of monetary policy

This paper introduces monopolistically competitive financial intermediaries into the New Keynesian DSGE setting. Modelling bank market power explicitly contributes to understanding two empirical facts: (i) The short-run transmission of changes in money market rates to bank retail rates is far from complete and heterogeneous. (ii) Stiffer competition among commercial banks implies that loan rates correlate more tightly with the policy rate. In my model, the degree of monopolistic competition in the banking sector has a sizeable impact on the pass-through of changes in the policy rate. In particular, a more competitive market for bank credit amplifies the efficiency of monetary policy.     

Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU

We present an empirical analysis of the ‘Credit-Cost Channel’ (CCC) of monetary policy transmission. This channel combines bank credit supply and interest rates on loans as a cost to firms. The thrust of the CCC is that it makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence (1) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, (2) the real effects of monetary policy are larger and persistent. We have applied the Cointegrated Vector Autoregression (CVAR) econometric methodology to Italy and Germany in the ‘hard’ EMS period and in the European Monetary Union (EMU) period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. Simulation of the estimated model also confirms that inflation-targeting by way of inter-bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output.     

The Impacts of Financial Integration on the Linkages Between Monetary Independence and Foreign Exchange Reserves

This paper investigates the short-run and long-run effects of financial integration on the dynamics between monetary independence and foreign exchange reserves using a GMM system estimation involving two-year non-overlapping average data (2000-2011) from 114 countries. The results indicate that the effect of foreign exchange reserves on the monetary independence is intensified by the level of financial integration. This suggests a positive spill over effect from the financial integration to the monetary policy independence. Besides, a positive implication of financial integration on monetary independence could be established when the foreign exchange reserves is at the maximum level. In addition, the comparisons between the mean of foreign exchange reserves and the threshold levels of foreign exchange reserves that neutralise the impact of financial integration indicate that on average, the foreign exchange reserves are sufficient to offset the effect of financial integration. A stable exchange rate will undermine the positive impact of foreign exchange reserves on monetary independence. Finally, the long-run and short-run impacts occur in the same direction. This paper ends with some policy implications and suggestions for future research.     

A long-run,short-run,and politico-economic analysis of the welfare costs of inflation

The long-run, short-run, and politico-economic welfare implications of inflation are assessed in a Bewley model of money demand. All agents produce and consume every period, and hold money to self-insure against idiosyncratic risk. The model is calibrated so the equilibrium monetary distribution shares features with US data. The long-run welfare costs of inflation are shown to be large because inflation reduces the ability of money to mitigate risk. However, the beneficial redistributive effect of inflation is magnified along the short-run transition and reduces the overall costs. These short-run benefits result in a majority-rule inflation rate above the Friedman Rule.     

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.     

Devaluation,Capital Mobility,and Long-Run Equilibrium*

The paper considers a small, fully employed economy with non-tradeables, securities, and money. The paper first analyzes the effects of devaluation and financial controls in the short-run equilibrium on the trade balance, the capital account, and the overall balance of payments. Disequilibria in the capital account and the overall balance of payments cause changes in the stock of securities and money, shifting the short-run equilibrium. The paper investigates the condition for the- uniqueness and stability of the long-run equilibrium under this adjustment process (‘specie flow mechanism’). Finally, the long-run equilibrium effects of devaluation and monetary policies are examined.     

The quantity theory of money and its long-run implications

This paper examines three propositions implied by the quantity theory of money, namely, the neutrality hypothesis, the Fisher hypothesis and the monetary approach to exchange rate determination for six developed countries within a dynamic framework, which incorporates the long-run proposition as its steady-state solution while allowing for short-run deviation from the hypothesized long-run relationships to take place. The joint hypothesis that all three propositions are satisfied simultaneously is supported only for two countries.     

Bank Interest Rate Adjustments: Are They Asymmetric?

This paper is concerned with the asymmetric adjustments between three Australian bank interest rates: a bank bill rate, a loan rate and a deposit rate. A multivariate asymmetric error-correction model is applied to capture the interplay of long-run relationships between the levels of the rates and short-run relationships between the changes in the rates. The empirical analysis, for the sample period 1990:01–2000:04, shows that interest rate adjustments, in response to positive and negative shocks, are asymmetric in the short run, but not in the long run. In particular, the results suggest that banks adjust their loan and deposit rates, in response to a change in the bank-bill rate, at a faster rate during periods of monetary easings (negative changes) than during periods of monetary tightenings (positive changes).     

Dynamics of money, output and price interaction — some Indian evidence

The present study is an attempt to model the dynamic interactions between money, output and prices in a structural vector autoregression framework. The primary concern of the paper is to examine the sources of variations and response of one variable to changes in others in a system of economic variables in the Indian context. Using quarterly data from 1970Q1 to 1990Q4, we find that structural factors, in addition to monetary factors, play an important role in generating and sustaining the process of inflation and fluctuations in economic activity. An increase in money/credit supply is found to increase output and prices in the short-run and prices in the long-run, while a non-accommodating monetary policy is ineffective in controlling inflation even at the cost of substantial output losses, thereby indicating relative rigidities in price movements. Another interesting finding is that the monetary authority responds differently to different price shocks, exercising its leverage in altering the quantity as well as the composition of aggregate money supply. Our findings also indicate that the economy is characterized by relatively large and infrequent shocks to ‘price/cost’-related factors. Finally, our analysis suggests that a simple monetary targeting without adequate ‘supply side’ measures may not be able to serve the objective of maintaining growth with price stability.     

The demand for money in Austria

In this paper, the demand for real money M1, M2, and M3 is estimated for Austria over the time period 1965–96. The modelling takes place within the framework of a small vector autoregression. To estimate the demand for money, two-equation error-correction models are constructed, which contain the short-run dynamics and the long-run economic equilibrium. It is found that a stable money demand exists for all monetary aggregates. The long-run equilibrium of M1, after accounting for a structural break in 1979, can be characterised as a classical type of money demand, with no interest rate effects and an elasticity of one for real GDP. In the case of M2 and M3, we find a unit coefficient on income and a significantly negative influence of a long-term interest rate. The statistical properties of the estimated short-run money demand equations – considering in-sample and out-of-sample tests – are generally very good. First version received: October 1996/Final version received: April 2000     

The role of capital flows in the adjustment of money demand: The case of Finland

The paper models the dual role of money balances as a short-run buffer stock and an asset with a well-specified long-run demand function. The analysis is carried out in an open economy framework. Consequently, there will be an offset to monetary policy in the form of induced capital movements, but in our model, it will be distributed over time even under perfect substitutability of financial claims. Estimates for the parameters of the demand for money function are obtained from a capital flow equation using both unrestricted (OLS) and restricted (nonlinear) estimation methods. The results provide strong evidence in favour of the shock-absorption theory for the adjustment of money demand under money supply changes.     

Nominal uniqueness and money non-neutrality in the limit-price exchange process

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a ??veil?? and trade vanishes. Typically, there is a piecewise globally unique trade-and-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub- optimal) liquidity trap where monetary policy is ineffective; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households?? expectations, and the quantity of circulating money.     

Money Creation in the Eurozone: An Empirical Assessment of the Endogenous and the Exogenous Money Theories

ABSTRACT

The aim of this paper is to strengthen our understanding of the money creation process in the Eurozone for 1999–2016 period, through an empirical assessment of two main monetary theories, namely the (Post Keynesian) endogenous money theory and the (Monetarist) exogenous money theory. By applying a VAR and VECM methodology, we analyse the causal relationship among monetary reserves (or monetary base), bank deposits and bank loans. Our empirical analysis supports several propositions of the Post Keynesian endogenous money theory since (i) bank loans determine bank deposits, and (ii) bank deposits in turn determine monetary reserves.     

Evidence on the cross-country transmission of monetary shocks

The international transmission of monetary shocks between the US and Canada is explored. Focusing on real variables such as consumption, investment, employment, and the bilateral trade balance, along with measures of US and Canadian money, the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries. The long-run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries. Variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run. The short-run analysis provides strong evidence that US monetary shocks affect real activity in both the USA and Canada. The analysis also indicates that Canadian monetary disturbances affect Canadian and US real activity, and that many of these effects are similar in magnitude to the effects of US monetary shocks. The importance of the nominal exchange-rate regime is also discussed.     

Long-Run Elasticities of the Demand for Money in Korea:Evidence from Cointegration Analysis

Most recent studies have employed the cointegration technique to investigate the long-run stability of the demand for money. This study considers the case of Korea. It is shown that in the long-run while Ml monetary aggregate is cointegrated with income, interest rate, and the exchange rate, M2 is not. However, results from error correction models reveal that both Ml and M2 have short-run relationship with their determinants. [E41]     

Limited participation,private money,and credit in a spatial model of money

Summary. The purpose of this paper is to explore the implications of private money issue for the effects of monetary policy, for optimal policy, and for the role of fiat money. A locational model is constructed which gives an explicit account of the role for money and credit, and for limited financial market participation. When private money issue is prohibited, there is a liquidity effect as the result of a money injection from the central bank, but this effect goes away when private money is permitted. Private money issue changes dramatically the nature of optimal monetary policy. With private money, fiat currency is no longer used in transactions involving goods, but currency and central bank reserves play an important part in the clearing and settlement of private money returned for redemption.Received: 5 May 2003, Revised: 1 December 2003JEL Classification Numbers: E4, E5.The author thanks seminar participants at the Federal Reserve Bank of Richmond and Duke University, conference participants at the Texas Monetary Conference at U.T. Austin, February 2002, and the Conference on Recent Developments in Money and Finance at Purdue University, May 2003, as well as Gabriele Camera, Ed Nosal, Will Roberds, and two anonymous referees for their helpful comments and suggestions.