Monetary Dynamics Research Articles

Deficit finance and monetary dynamics in Brazil and Mexico

The paper develops a model of seigniorage in an open economy, linking inflation, the government budget and the external balance. It introduces financial markets and interest rates in the traditional Cagan style model of inflationary dynamics and it evaluates the experiences of Brazil and Mexico. The model relates inflation in the 1980s to interest payments on the external public debt. The paper also argues that inflationary finance has been combined with very fast growth of domestic debt, setting the stage in Brazil for unsustainable domestic debt growth in the Sargent-Wallace style. The Collor Plan stopped this process, temporarily.

Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling

Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling

Nobel Laureate: The Many Other Allais Paradoxes

Maurice Allais is know for the 1952 “Allais paradox,” but other very important parts of his work remain virtually unknown to most economists. As Paul Samuelson (1983) wrote, “Had Allais' earliest writings been in English, a whole generation of economic theory would have taken a different course.” Perhaps the Nobel award will encourage economists to examine his work more closely. Let me first give a quick portrait of Maurice Allais, and then list some of his major contributions to the theory of markets, to the theory of capital, to decision making under risk and to monetary dynamics.

A propos du concept de monnaie

There is no agreement between economists about the definition of money. The authors indicate the necessity of a transhistoricai definition of the concept of Money. A relevant definition must take account of the wide range of monetary practices and forms which can be observed through time and space. The only two functions of money are account and payment ; the store function is not a specific one. In our societies, monetary dynamics rely on a game between State's power and market practices. With metal, Money, embeded in a fixed price coin, first has a political feature ; with credit, merchants tend to create payment and account instruments requiring authorities'final ratification to get close to Money.

The Term Structure of Interest Rates and the Demand for Money during the Great Depression

New estimates of the term structure of interest rates are used to investigate movements of and along the U.S. money demand function during the period 1920-38. The entire term structureand not just its short end-is found to be important to the interwar demand for money function. Therefore, the low short-term interest rates of the early 1930s cannot be identified as evidence of easy money. Instead, the widened spread between shortand long-term interest rates is evidence of the liquidity crisis proposed by Friedman and Schwartz, F&S, (10) in their explanation of the Great Depression. This finding critically depends on use of new, correctly-measured term structures of interest rates. The received estimates, which are widely recognized to be crude approximations, mask the important role played by the term structure in the monetary dynamics of the inter-war period.

Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation

Hyperinflationary processes usually occur in countries with extremely large budget deficits. In models of inflationary finance with rational expectations (e.g., Buiter [1987]), large budget deficits cannot lead to hyperinflation. The purpose of this paper is to reconcile the standard theoretical model with the stylized facts. It shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model, large budget deficits are indeed the main reason for hyperinflation. The paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing. Copyright 1989 by Ohio State University Press.

Phillips Curves and Hayekian Triangles: Two Perspectives on Monetary Dynamics

Phillips Curves and Hayekian Triangles: Two Perspectives on Monetary Dynamics

Perfect foresight models and the dynamic instability problem from a higher viewpoint

Dynamic macroeconomic models incorporating perfect foresight expectations can display a dynamic instability of the saddle point type. So that unless the initial values happen to place the system on the stable arm of the saddle point, the economic variables will diverge ever more from the equilibrium. We consider the dynamic instability problem in a simple model of monetary dynamics which is non-linear and assumes adaptive expectations which are characterized by an expectations time lag. This model is shown to have a stable limit cycle. By considering perfect foresight as the limit as the expectations time lag tends to zero we are able to view the perfect foresight model from a dimension higher than that from which is it is normally viewed. We are thus able to see that the stable limit cycle continues to exist for the perfect foresight model as well. In this framework there is no longer a dynamic instability problem since whatever the intial values time paths are tending to the stable limit cycle.

MODELLING THE DEVELOPING ECONOMY: THE PHILIPPINES

MODELLING THE DEVELOPING ECONOMY: THE PHILIPPINES

Some aspects of the monetary economics of Richard Cantillon

This article examines several key aspects of the monetary economics in Richard Cantillon's Essai sur la Nature du Commerce en Général (1755 viewed from a modern monetarist perspective with special focus on monetary dynamics. After establishing the quantity theory framework of Cantillon's analysis, the article reviews the following aspects of his work: his theory of monetary disequilibrium; his analysis of the open economy; his treatment of the interest rate; his treatment of expectations and information; and his analysis of monetary induced business fluctuations and the use of monetary policy.

Expectations of the myopic perfect foresight' variety in monetary dynamics Stability and non-neutrality of money

Myopic perfect foresight — along with clearance of markets — is permitted in a dynamic monetary model. It is shown that when the model is extended to do justice to expectations and to explicitly consider a loans market, momentary solutions are shown to exist and they can be stable. Moreover, short-run equilibrium is stable if and only if momentary equilibrium is stable. Furthermore, assuming stability of momentary equilibrium, only some mild additional conditions are needed for stability of growth equilibrium. The results are related to recent developments on stability and on neutrality of money, by showing that if money is neutral Friedman's model is unstable, but if the model is stable money cannot be neutral.

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 of Monetary Dynamics: Comment

This paper develops a dynamic model that integrates the Keynesian IS-LM model with the Friedman-Phelps natural rate hypothesis and the Cagan adaptive expectations model. Behavioral relationships in the economy are represented by a system of differential equations that determines the time response of endogenous variables to a change in the rate of monetary growth. In the short run, an increase in the rate of monetary expansion produces a decline in the interest rate and a higher level of real output. But, in the long run, there is no effect on real output, and both the rate of inflation and rate of interest increase by the amount of increase in the rate of monetary growth. Studying the dynamic properties of the system gives conclusions previously reached by Friedman. If the monetary authority chooses to control the nominal money supply or the inflation rate (the price level), the system is stable. If the monetary authority attempts to peg either real money balances, the real or nominal interest rate, or real income, the system is unstable. On the other hand, a desired long-run level for the nominal interest rate or for real money balances can be achieved indirectly by choosing the appropriate rate of inflation.

The monetary dynamics of hyperinflation: A note

The monetary dynamics of hyperinflation: A note

Monetary Dynamics, Growth, and the Efficiency of Inflationary Finance

One of the main arguments against government expansion of the money stock at a high rate to finance expenditures is based on the social cost of wealth redistribution and economic disruption caused by unanticipated inflation.l Another argument is based on the excess burden of inflation as a tax on real cash balances. This latter social cost was analyzed for hyperinflation in a stationary economy by Martin Bailey in 1956 [2] . Bailey's classic analysis examined the efficiency of inflationary finance (in comparison to alternative sources of revenue) in alternative static-equilibrium situations without allowing for the effects on the excess burden or the revenue flow of dynamic adjustments of real balances and the rate of inflation in the transition from one static equilibrium to another. One

Short-Run Adjustments of an Individual Bank

Most dynamic theories of the monetary policy mechanism, and reserve position doctrine in particular, specify a homogeneous banking system response to monetary policy actions. This article argues that the micro models of bank behavior implicit in these monetary theories remain untested and perhaps misspecified. An experimental model of a single bank's weekly balance sheet adjustments is specified and estimated with the purpose of improving the micro foundations of the theory of monetary dynamics.

The Monetary Dynamics of International Adjustment under Fixed and Flexible Exchange Rates

I. Introduction, 227. — II. The static system, 229. — III. The dynamic systems, 233. — IV. The crucial role of capital movements, 237. — V. Foreign exchange reserves, 242. — VI. Speculation, 246. — VII. Concluding remarks, 249. — Appendix, 251.

The banking year 1947 in Italy

The event of 1947 have afforded exceptional proof of the important part played by baking activities in monetary dynamics, and have assigned a central place to credit policies in Italian economy. The present article brings up to date the information on the legislative measures and more especially the statistical data affecting the more important recent developments, covering the provisions regulating the relations between the Bank of Italy and the Treasury, the movement of bank deposits and investments in the various phases, their reciprocal inter-action, the changes that have occurred in the positions of the several groups of credit institutions, the alterations in the distribution of bank investments between the Treasury and business activities. JEL: G21, G28, E58