Research Database

Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public must form beliefs over current monetary policy based on historical realizations of money growth rates. Depending on the parameters governing the behaviour of monetary policy, beliefs (and therefore inflation forecasts) may evolve very slowly in the wake of actual regime changes, thereby exacerbating the costs of a disinflation policy. The quantitative importance of slowly adjusting beliefs is evaluated in the context of a computable general equilibrium model.

A traditional explanation for why sovereign countries repay debt is that they want to keep a good reputation so they can easily borrow more. This explanation does not hold if a country has access to an adequate means of savings regardless of the country's past actions. With such access, a country gets only transient benefits from maintaining a good relationship with bankers, and such benefits cannot support borrowing. However, if a country is involved in a myriad of trust relationships, the country's reputation can spill over to a nondebt relationship which has enduring benefits. Such a spillover can allow a country's reputation to support a large amount of borrowing.

COMPUSTAT data on 12,000 firms for the years 1956–1992 indicate that large firms hold less cash as a percentage of sales than do small ones. Whether comparisons are made within or across industries, the elasticity of cash balances with respect to sales is about 0.75. Firms headquartered in counties with high wages hold more money for a given level of sales, a finding consistent with the idea that time can substitute for money in the provision of transactions services. The estimates are consistent with both scale economies in the holding of money and secular declines in velocity.

In Japan, as in the United States, stocks that are more sensitive to changes in the monthly growth rate of labor income earn a higher return on average. Whereas the stock-index beta can only explain 2 percent of the cross-sectional variation in the average return on stock portfolios, the stock-index beta and the labor-beta together explain 75 percent of the variation. We find that the labor-beta drives out the size effect but not the book-to-market-price effect that is documented in the literature. We explore the extent to which these results are an artifact of seasonal patterns in labor-income growth rates as well as asset returns. In Japan, the book-to-market-price characteristic can be adequately captured by a particular factor-beta, as suggested by Fama and French (1993). This is in contrast to the findings reported by Daniel and Titman (1997) for the United States.

When marginal utility of consumption depends on leisure, investors will take this into account when allocating their wealth among different assets. This paper presents a multi-country general equilibrium model driven by productivity shocks, where labor-leisure and consumption are chosen endogenously. We use this framework to study the effect of leisure for optimal international diversification. We find that in the symmetric case the model’s ability to help explain home-bias depends crucially on the level of substitutability between consumption and leisure.