Research Database

This paper reexamines U.S. postwar data to investigate if the observed comovements between money, interest rates, inflation, and output are compatible with the money to real interest to output links suggested by existing monetary theories of the business cycle, which include both Keynesian and equilibrium models. We find these theories are incompatible with the data, and in light of these results, we propose an alternative structural model which can account for the major dynamic interactions among the variables. This model has two central features: (i) output is unaffected by the money supply; and (ii) the money supply process is influenced by policies designed to achieve short-run price stability.

This paper describes a Bayesian specification procedure used to generate a vector autoregressive model for forecasting macroeconomic variables. The specification search is over parameters of a prior. This quasi-Bayesian approach is viewed as a flexible tool for constructing a filter which optimally extracts information about the future from a set of macroeconomic data. The procedure is applied to a set of data and a consistent improvement in forecasting performance is documented.

Silberberg [6] and Pauwels [2] have produced and clarified seminal results in the comparative statics of single-agent classical optimization problems. This paper extends Pauwels’ method to derive analogous results for stable Nath equilibria in a subclass of the widely used class of concave orthogonal games defined by Rosen [3]. Application of these results to cost curve shifts in the asymmetric Cournot oligopoly immediately uncovers apparently new comparative statics results.

This paper analyzes the variability of output under money supply and exchange rate rules in an open economy in which the slope of the aggregate supply curve depends on the variances of aggregate demand and market-specific innovations. It demonstrates that results regarding the dominance of one rule over the other when the slope of the aggregate supply curve is constant are reversed when the slope of the aggregate supply curve depends on the variances of innovations and these variances are sufficiently large.

Time consistent optimal plans are defined within the context of a simple, discrete time optimal control framework. Three possible sources of inconsistency are identified and discussed with reference to the literature.

"Summary of Recommendations: . . . Repeal present control by the System over interest rates that member banks may pay on time deposits and present prohibition of interest payments by member banks on demand deposits." Milton Friedman (1960, p. 100) "I conclude that the over-all monetary effects of ceiling regulations are small and easy to neutralize by traditional monetary controls. The allocative and distributive effects are, however, unfortunate. The root of the policy was an exaggerated and largely unnecessary concern for the technical solvency of savings and loan associations." James Tobin (1970, p. 5) The regulation of deposit interest rates has received little support from economists. The same is true for the original rationale for such regulation: that bank competition for deposits generates inherent "instability" in the banking system. This paper develops an "adverse selection" model of banking in which this rationale is correct. Moreover, in this model instability in the banking system can arise despite the presence of a "lender of last resort," and despite the absence of any need for "deposit insurance." However, in the world described, the regulation of deposit interest rates is shown to be an appropriate response to "instability" in the banking system. Finally, it is argued that "adverse selection" models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts.

Different conclusions about the effects of open market operations are reached even among economists using full employment and rational expectations models. I show that these can be attributed to different assumptions regarding (i) the concept of the deficit that is held fixed in the face of an open market operation, (ii) diversity among agents, and (iii) the features generating money demand. With regard to (iii), I argue that plausible ways of explaining the holding of low-return money preclude the kind of perfect credit markets needed to obtain Ricardian equivalence.

A model is presented in which governments can select real expenditure levels which are feasible, hut are sufficiently high that a balanced budget is impossible. Thus governments with large expenditures are committed to inflationary finance schemes. This is the case even though the governments in question have access to lump-sum taxes. In addition, the model can explain why poorer countries tend to make heavier use of the inflation tax than do wealthier countries, and can account for the existence of country-specific fiat monies.