Monetary Growth Rate Research Articles

REPLACING THE FOMC BY A PC

Recent behavior of velocity suggests that a stable monetary growth rate rule could have dangerous consequences. Hence this paper suggests a compromise–adjusting the money growth rate only in accordance with past changes in velocity. This preserves most of the benefits of a stable monetary growth rate rule.

Capital flows, investment, and exchange rates

This paper incorporates international capital flows into a two-country, monetary-general-equilibrium model of asset prices with investment and production. We calculate theoretical covariances between investment, the current account, the exchange rate, and the terms of trade. These covariances depend upon the coefficient of relative risk aversion, the magnitude and sign of a country's net international indebtedness, other properties of tastes and technologies, and the stochastic processes on disturbances to productivity and monetary growth rates. International capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets.

Monetary Uncertainty and Investment in an Optimizing, Rational Expectations Model with Income Taxes and Government Debt

THE EFFECT OF MONETARY GROWTH on an economy's investment has long been of interest to economists, and monetary growth models provide a convenient tool for the analysis of this question. The standard optimizing growth model postulates that money is injected into the private sector through transfer payments which typically either are of lump sum form or are proportional to wealth, income, or money holdings. (See, for example, Brock (1974), Calvo (1979), Fischer (1979), and Gertler and Grinols (1982).) In these models monetary changes are tied directly to changes in subsidy or tax rates, and greater expected money growth generally either has no effect on investment or increases it through a Tobin (1965) effect. In this paper we analyze the effects that a stochastic monetary policy has on investment in an economy with individual optimization, rational expectations, and a government which makes expenditures and finances them through borrowing, money creation, and proportional income taxes. With such a formulation, money can be injected into the private sector through government purchases and open market operations as well as through transfers, and the link between money growth and subsidy or tax rates is weakened or nonexistent. We assume that the nominal income tax rates are constant over time. Given tax rates and (stochastic) government consumption, the stochastic monetary growth rule followed by the government induces a stochastic government debt policy. The effects that changes in the stochastic monetary growth rate have on investment depend on the nature of the depreciation deduction and on the relationship between the coefficient of relative risk aversion and the tax rate on production income. When depreciation deductions are based on historical costs, an equilibrium is unique so long as the coefficient of relative risk aversion is greater than the tax rate applicable to production income. In this case an increase in the mean rate of money growth decreases equilibrium investment while a mean preserving spread in the money growth rate increases investment. Given Friend and Blume's (1975) finding that the coefficient of relative risk aversion is substantially greater than one, this seems to be the empirically relevant case. If the coefficient of relative risk aversion is less than the tax rate on production income, multiple equilibria are possible, and the effects on investment of changes in the stochastic money growth rate are generally indeterminate. When depreciation deductions are based on replacement costs, investment is independent of the stochastic money growth rate. The paper is organized as follows. Section 2 develops the optimization problem of the representative individual when depreciation deductions are based on historical costs. Section 3 describes the behavior of the government and develops the rational expectations equilibrium for this economy. Section 4 examines the effects on investment of changes in the stochastic money growth rate. Section 5 briefly reconsiders the model when depreciation deductions are based on replacement costs.

Taxation, inflation, and asset accumulation in a small open economy

This paper develops a long-run model of a small open economy to demonstrate how inflation may interact with the nominal, discriminatory income tax system to produce some unexpected results. Conventional theory predicts that a higher long-run rate of monetary growth and inflation will raise the steady-state capital intensity of production, and it also leads one to expect that an inflating country will experience a fall in its real net stock of foreign assets. According to the present model, however, these results may well be reversed under the actual income tax rules prevailing in many countries.

Inflation in Latin America, 1970–1980

In explaining the highly varied inflationary experience of sixteen Latin American countries, a simple quantity theory model is shown to be quite robust in the sense that variations in the rate of monetary growth and in the rate of real growth explain practically all of the variation in the rate of inflation. The correlation-causation issue is addressed within the framework of a monetary-base-multiplier model of the determination of monetary growth. It is shown that the larger share of monetary growth in Latin America has been due to changes in the monetary base. Changes in the money multiplier due to changes in reserve requirements were also significant in some cases. It is argued that this evidence, taken jointly with the strong correlation between monetary growth and inflation, implies that the direction of causality runs from money to prices.

Central Bank Behavior and Credibility: Some Recent Theoretical Developments

Recent theoretical literature on the behavior of monetary policymakers may be divided into two broad categones — positive and normative. The positive literature formulates hypotheses about the objectives and constraints fircing central bankers and derives implications for the behavior of both observable vanables (e.g., the rate of monetary growth amid the rate of inflation) and unobservable variables (e.g., policy credihilityi The normative literature focuses on the issue ofhow, given the behavior of central bankex-s, monetary institutions can he redesigned to improve social welfare. Both approaches use the same general analytic framework to model central bank behavior.

Dynamic behavior of capital accumulation in a cash-in-advance model

This paper analyzes the dynamic behavior of capital accumulation in Stockman's cash-in-advance model. If the cash-in-advance constraint applies only to consumption, then money is superneutral along the transition path as well as in the long run. Alternatively, if the cash-in-advance constraint applies to gross investment as well as consumption, then a permanent increase in the rate of monetary growth reduces the steady state capital stock. The effect on the speed of adjustment depends on the sign of a certain simple function of the parameters of preferences and technology.

Domestic and foreign disturbances in an optimizing model of exchange-rate determination

This paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are divided from optimization by the private sector. In this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy. In response to a disturbance in either the foreign interest rate or inflation rate, the economy undergoes an initial partial jump towards its new equilibrium, which it thereafter approaches gradually. The implications of these results for exchange-rate adjustments and the insulation properties of flexible exchange rates are discussed.

Countercyclical versus Passive Monetary Policy in a Medium-Run Macro Model

A macro model of an inflationary economy incorporating the government budget constraint is set up to analyze two alternative monetary policy regimes: a passive policy and an active countercyclical policy. It is found that the policy is potentially unstable, especially when monetarist parameter values prevail, whereas the local stability of fullemployment equilibrium can always be ensured by choosing an appropriate countercyclical feedback rule for the monetary growth rate. An active monetary policy can also smooth out the business cycle in the neighborhood of equilibrium, but in accordance with Leijonhufvud's corridor hypothesis, instability may occur when output is pushed sufficiently far below its full-employment level.

Macro effects of interest-sensitive aggregate supply

This paper investigates the implications of the negative effect of the real interest rate on aggregate supply. The micro foundations of this effect are first explained. The effect is then incorporated into a dynamic macro model with inflation and rational expectations. If the wealth effect on consumption is large, an increased interest sensitivity of aggregate supply enhances stability. If the wealth effect is small, increased interest sensitivity of supply is stabilizing up to a point, and destabilizing beyond that. Furthermore, an increased interest sensitivity of aggregate supply enhances the positive effect of the monetary growth rate upon steady-state output, and it enhances the negative effect of government spending upon steady-state output.

Nominal Prices and Interest Rates in General Equilibrium: Money Shocks

The outstanding problem of neoclassical monetary theory has been to determine the of changes in the money stock on nominal prices and interest rates. The classic result is that, in the absence of money illusion, contracts fixed in nominal terms, and other such impedimenta, money is neutral. Thus a doubling of the money stock results in a doubling of the nominal price level and in no change in nominal interest rates (except at most for a temporary liquidity effect while the price level is rising to its new level; during the adjustment period the nominal interest rate might temporarily drop). This neutrality result has conventionally been proved in a static framework. In intertemporal models it is necessary to distinguish between static neutrality and dynamic neutrality: if a model displays dynamic neutrality, fluctuations in the money stock immediately induce a proportional change in the nominal price level, and no change in nominal interest rates or any real variable. This property is different from and stronger than static neutrality, which, in dynamic models, states only that if the money stock at all dates is doubled so will be the price level at all dates. The effects of exogenous shocks in the monetary growth rate on nominal prices and interest rates are analyzed. A representative-individual rational-expectations framework is adopted, and a demand for money is generated by entering money in the utility function. The effects of monetary shocks on inflation and interest rates are shown to depend on the autocorrelation of the monetary growth rate: for example, under serial independence the inflation rate equals the monetary growth rate and the nominal interest rate is nonrandom, while under positive (negative) autocorrelation the nominal interest rate is affected positively (negatively) by positive growth rate shocks. * I am grateful to the staff of the Federal Reserve Bank of Philadelphia, to the finance groups at the University of Southem California and Virginia Polytechnic Institute, and to C. J. LaCivita, Dan Peled, John Seater, and Jon Sonstelie for valuable comments on earlier drafts.

Expected Monetary Changes and Relative Prices: A Look at Evidence from the Stock Market

At the heart of the natural rate theory is the assumption that fully perceived monetary growth is neutral with respect to relative price changes. Unfortunately, there have been few attempts to test this assumption directly. Because the belief that active contracyclical monetary policies are not superior to Friedman's constant growth rule rests upon the assumption that expected monetary changes have neutral relative price effects, more evidence is needed on whether such changes are, in fact, neutral. To this end, we test the hypothesis that only the unexpected components, and not the expected components, of monetary changes affect relative price changes by looking at the stock market. Testing is done on a modification of the well known mean-variance Capital Asset Pricing Model, the CAPM. Specifically, we modify the CAPM to allow for differential stock returns depending upon expected and unexpected monetary growth rates. Section II explains the basic model used to test for non-neutral relative price effects of monetary change. Section III deals with the empirical definitions of expected and unexpected money growth. Section IV discusses the basic data while Sections V and VI make neutrality tests of monetary growth using actual, expected, revisions in expected, and unexpected money growths. The last part summarizes the paper.

Inflation, growth and wage policy: A Brazilian perspective

A growth inflation model based on recent Brazilian experience is developed. The paper focuses on Brazilian compulsory wage policy in order to analyse current stabilization policy issues. In this context, it is argued that orthodox stabilization policies — as exemplified by an autonomous reduction in the rate of monetary growth — implies both a temporary and a permanent decrease in output growth, if the wage formula as in Brazil provides for lagged price indexation. The idea of promoting stabilization through full wage indexation is also examined.

A Positive Theory of Monetary Policy in a Natural Rate Model

Natural-rate models suggest that the systematic parts of monetary will not have important consequences for the business cycle. Nevertheless, we often observe high and variable rates of monetary growth, and a tendency for monetary authorities to pursue countercyclical policies. This behavior is shown to be consistent with a rational expectations equilibrium in a discretionary environment where the policymaker pursues a reasonable objective, but where precommitments on monetary growth are precluded. At each point in time, the policymaker optimizes subject to given inflationary expectations, which determine a Phillips Curve-type tradeoff between monetary growth/inflation and unemployment. Inflationary expectations are formed with the knowledge that policymakers will be in this situation. Accordingly, equilibrium excludes systematic deviations between actual and expected inflation, which means that the equilibrium unemployment rate ends up independent of policy in our model. However, the equilibrium rates of monetary growth/inflation depend on various parameters, including the slope of the Phillips Curve, the costs attached to unemployment versus inflation, and the level of the natural unemployment rate. The monetary authority determines an average inflation rate that is excessive, and also tends to behave countercyclically. Outcomes are shown to improve if a costlessly operating rule is implemented in order to precomrnit future choices in the appropriate manner. The value of these precommitments -- that is, of long-term agreements between the government and the private sector -- underlies the argument for rules over discretion. Discretion is the sub-set of rules that provides no guarantees about the government's future behavior.

The optimal rate of monetary growth in an open economy : the optimal crawl revisited

This paper analyses the optimal monetary growth rate in a small open economy under two extreme assumptions about capital mobility. It shows that if capital is perfectly mobile internationally, then in general the optimal monetary growth rate is time inconsistent. Two exceptions to this arise, and in both cases no unique optimal monetary growth rate exists. The optimal rate of monetary growth across steady states is also considered and again no unique optimum exists. In the other extreme, where capital is perfectly immobile, there is no problem of time inconsistency. In this ease an optimal rate of monetary growth exists and leads to a ‘ distorted ’ Friedman rule, similar to that obtained for a closed economy

A fixed monetary-growth rule:Theoretical foundations and recent experiences

In the last decade explicit publicly announced monetary targets have been adopted by Central Banks. Starting with the original views to come to controlling the money supply, the article presents a detailed exposition of the crucial controversial issues dividing monetarists and nonmonetarists regarding the theoretical foundations of monetary policy. Subsequently the money-supply rule is considered in relation to the inflation-unemployment tradeoff, in an inflationary environment. Adherence to a preannounced monetary growth rate is emphasized to reduce uncertainties and inflationary expectations, making monetary policy more predictable. Finally an evaluation is given of the recent experiences with monetary targeting made in some countries.

Money Growth and the Employment Aspirations of Black Americans

Irrespective of other economic initiatives in the area of fiscal and regulatory policies that may be required, there will not likely be an improvement in the employment situation for black Americans unless policy-makers gain a better handle on the conduct of monetary policy. The implication is that the welfare of black Americans tends to improve most when the economy is experiencing high and steady rates of economic growth. The single most important tool for achieving that growth is a highly stable rate of monetary growth that is roughly in line with the longterm growth of the economy.

Optimum Currency Pegs for Latin America

THE POSTWAR ECONOMIC RECORD of Latin America from 1950 to 1979 is a mixed one. Inflation rates range from a low of 3 percent in Honduras, Panama, and Venezuela to highs of 120 percent in Chile, 67 percent in Argentina, and 37 percent in Brazil. Further, these rates have been stable in the low inflation countries with a standard deviation (S.D.) of about 4 percent, while in Chile, Argentina, and Brazil the standard deviations in the inflation rates were 1 15 percent, 95 percent, and 20 percent respectively. Monetary growth rates exhibit the same pattern: low and stable in some countries, high and unstable in others. Real growth rates range from lows of 1 percent in Uruguay to highs of 9 percent in Brazil and Mexico. For the eighteen Latin American countries as a whole, the inflation rate since 1950 has averaged 21 percent with a standard deviation of 30 percent, monetary growth rates 29 percent (S.D. of 25 percent), and real growth rates 5 percent (S.D. of 2 percent). One striking fact emerges from a cursory examination of this historical record: countries that peg to the U.S . dollar experience low and stable inflation rates, while those that do not exhibit high and unstable inflation rates. The choice to peg to the dollar is, simultaneously, a decision not to inflate more than the United States. It is a clear signal regarding the future supply of local money. Similarly, a decision to inflate more than the United States is, simultaneously, a choice not to have a fixed

Monetary Growth and the Timing of Interest Rate Movements

W. W. Brown and G. J. Santoni re-examine the widely held view that permanent increases in the monetary growth rate cause market interest rates initially to decline, then ultimately to rise above their original levels. The path that interest rates follow when adjusting to a change in the monetary growth rate is important for two reasons.

Rational Expectations and the Impact of Money Upon Stock Prices

Received monetary theory supports the existence of a strong relationship between monetary activity and stock prices. Following the work of Friedman and Schwartz [8], relating money supply to aggregate economic activity, some researchers have examined the more specific connection between changes in the rate of growth of money supply and associated movements in stock prices (see [6], [10], [11], [14], [17], [18], [19], [20], [22], and [28]). These studies use a variety of monetary aggregate measures to functionally relate the level of stock market indices to contemporaneous and lagged monetary growth rates. In general, the findings indicate a direct relationship between money supply and stock returns.