Monetary Phenomena Research Articles

Institutionalized monopsonistic capital markets in a developing economy

This paper presents a plausible story on capital market imperfections and fits it in a Pasinetti-style growth model. The first object is to show that, in a developing economy, credit rationing may well be explained by the institutionalized monopsonistic capital market. The second object is to amplify the intimate relationship between real and monetary phenomena by presenting a simple conceptual framework to link the financial sector and the real sector via workers' demand for monetary assets and entrepreneurs' capital formation. The foremost emphasis is given to the fact that entrepreneurs and workers do not have the same ability and opportunity to invest their saved income.

Futures and Actual Markets: How they are Related

In order to explore how futures markets affect the market for the commodity or asset underlying the futures contract, this study takes as its central theme the analogy between futures and money. The relation between monetary and real phenomena is isomorphic to the relation between a futures contract and the underlying asset. Success in establishing the validity of this isomorphism will have several advantages. First, it will throw new light on some important aspects of futures trading by pointing out the analogies with the corresponding monetary phenomena, which are better understood. This enables students of futures to learn from the lessons of the monetary branch of economics. Second, students of money also can learn from that knowledge about futures, which has been more thoroughly analyzed than the corresponding monetary phenomena. By demonstrating that there is an isomorphism between money and futures, these two branches of economics can illuminate each other. This ap-

On the Anatomy of Inflation: The Variability of Relative Commodity Prices in Argentina

THERE IS SUBSTANTIAL EVIDENCE indicating that the inflationary process is not neutral with respect to the structure of relative prices. A1though real variables also affect the distribution of commodity prices, the variability of relative prices appears to be largely increased by monetary phenomena. The general picture emerging from the empirical literature links the cross-sectional variability of commodity prices to the variability of the aggregate rate of inflation over time, to the rate of unexpected inflation, and to the rate of monetary expansion. 1 Most studies, however, have dealt with low-inflation countries, for which it is more difficult to isolate real from monetary effects on relative price changes. The purpose of this paper is to analyze in detail the characteristics of relative-price behavior within the context of very rapid and variable inflation. Using disaggregated monthly data for Argentina, a number of specific aspects of that country's

Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits

THE hypothesis attributed to Fisher (1930) and more recently the innovative investigation by Fama (1975) have predisposed many economists to treat the expected rate of interest as a constant. At the very least, as a magnitude, the expected interest rate is appealingly viewed as being independent of monetary phenomena. The late 1970s and early 1980s have produced events which force reevaluation of the maintained hypothesis of constancy of the expected rate (hereafter referred to as the real rate). For example, from December 1980 to June 1981 the expected rate of inflation fell by 165 basis points from an annual rate of 10.51 % to an annual rate of 8.86%.' Over the same period 3 month Treasury bill rates continued to remain largely between 14% and 16% with average yields of 15.02% in December 1980 and 14.95% in June 1981. In order to reconcile such facts, one must either believe that security markets no longer fully reflect changes in anticipated inflation in nominal market rates, or that a large drop in anticipated inflation which is not accompanied by a drop of similar magnitude in nominal interest rates, is due to an offsetting rise in the rate.2 Statistical investigations regarding the possibility of movements in the rate have appeared with increasing frequency since publication of Fama's (1975) provocative article.3 Nelson and Schwert (1977) argued that Fama's test of the joint hypothesis of market efficiency and constancy of the rate was not sufficiently powerful and after applying more powerful tests concluded that the data permitted rejection of the hypothesis of constancy of the rate. Other investigations including those by Carlson (1977), Garbade and Wachtel (1978) and Levi and Makin (1979) have rejected the hypothesis of constancy of the rate while tending to support the hypothesis that market interest rates include an efficient inflationary premium. Tanzi (1980) has, along with others, emphasized the role of taxes in interest rate determination. More recently investigators have moved from merely testing the hypothesis of constancy of the rate to searching for an explanation for the rate movements suggested by a large body of statistical evidence. Mishkin (1981) and Fama and Gibbons (1982) have investigated the relationship between the rate and anticipated inflation suggested by Mundell (1963) and Tobin (1965).4 Levi and Makin (1979, 1981), Hartman (1981) and Hartman and Makin (1982) have considered effects of inflation uncertainty on the rate. Dwyer (1981) has found that the rate is independent of predictable changes in the supply. This paper derives a Fisher-type interest rate equation from a structural model similar to that employed by Sargent (1973) for other purposes. The primary differences involve inclusion of a government sector and a simple open economy specification along with introduction of a role for Received for publication February 22, 1982. Revision accepted for publication September 3, 1982. *University of Washington and National Bureau of Economic Research. This work was supported by the National Science Foundation under (irant No. SES-8112687. I would like to thank without implicating Charles Nelson, Richard Hartman and especially Andrew Criswell for excellent help in estimating the equations. An earlier version of this paper was presented at an FMME Conference at NBER where many useful suggestions were provided. ' This figure is based on Livingston survey data for 6 month horizon expectations regarding the consumer price index (CPI). The 12 month horizon figure for CPI also indicated a drop of 165 basis points while 6 and 12 month horizon numbers for WPI indicated drops of 192 and 174 basis points, respectively. Updated Livingston survey data are now compiled by the Federal Reserve Bank of Philadelphia. 2Summers (1982) has argued that nominal interest rates do not adjust by the full amount implied by the Fisher hypothesis modified to allow for marginal tax rates on interest earnings. His results based on both preand post-World War II data arise from equations which employ actual inflation rates in place of anticipated inflation and which generally do not include variables to control for movements in the expected rate. 3Even well before the investigations discussed here Irving Fisher himself reported, based on an investigation of market interest rates during the late 19th and early 20th centuries in London, New York, Berlin, Calcutta and Tokyo, that ' the rate of interest in terms of commodities is from seven to thirteen times as variable as the market rate of interest expressed in terms of money (Fisher (1930), p. 415). 4 Mishkin (198 1) found a significant negative impact upon the rate of a lagged actual (CPI) inflation rate taken as a proxy for anticipated inflation. An ARIMA (0, 1, 1) inflation model with a seasonal MAI term also provided an expected inflation proxy with a significant negative impact on the rate. Mishkin (1982) is discussed below.

Exchange rate determination and the balance of payments, a theoretical framework

In order to distinguish the more fundamental determinants of the exchange rate, a static model for the balance of payments is constructed. From this theoretical exercise it follows that the exchange rate is determined by three kinds of phenomena: first, real phenomena such as exploitation of natural resources and the relative level of economic activity; second, nominal phenomena such as relative prices; and finally, monetary phenomena such as interest rate differentials, exchange rate expectations and official intervention.

American economists and the high cost of living: The late progressive era

In the years immediately preceding World War I, American economists indicated their intense concern with the problems of high and rising prices. Despite disagreements over the role of monetary phenomena in causing inflation, most observers saw it as a serious problem and considered the middle class its chief victim. However, more recent work indicates that the rise in prices was quite moderate and that middle income groups probably suffered less than others. This suggests that anxieties about the future of middle class careers, values, and family life influenced economists' theorizing about inflation. Rising prices seemed to threaten the doctrine of success through individual effort, thrift and restraint in consumption, and a patriarchal family structure. The article traces the ways in which many leading economists displayed these concerns in their discussions of inflation and the cost of living.

Money, Information and Uncertainty

Significantly rewritten and updated, this well known textbook covers the whole of monetary economics, from the role of money to international monetary relationships. It is unique in linking theoretical findings to policy issues and events, and extends conventional analyses of financial intermediation and monetary theory.Money, Information, and Uncertainty bridges the gap between introductory textbooks and the latest journal articles, clarifying the macroeconomic significance of a series of innovative developments in the economics of information and the analysis of financial markets and institutions. Goodhart brings out the key implications of ideas such as information asymmetries and market-completion services for problems relating to money and banking, making it easier for banking specialists who don't follow the financial literature to understand where their field is moving.The book's 18 chapters are organized around the theme that monetary phenomena can be properly understood only against a background of uncertainty and information costs, and around the premise that portfolio theory is the most appropriate analytical tool.The first 9 chapters focus on microeconomic issues, such as the role of and the demand for money and the role and functions of banks and of the Central Bank. final 9 chapters take up macroeconomic issues, such as the transmission mechanisms of monetary policy and international monetary problems. Chapters new to this edition cover the nature of markets, credit rationing, the functions of central banks, financial regulation the determination of interest rates, and floating exchange rates.Charles Goodhart is Norman Sosnow Professor of Banking and Finance at the London School of Economics. He has served as a monetary economist and as Chief Adviser at the Bank of England. He is the author of The Evolution of Central Banks.

Banks and Regional Economic Development

Economists are still groping for an explanation of economic growth processes, particularly the processes that will help underdeveloped countries. Regional economic growth in the United States is a special case of a more general growth process, and what causes regional economic growth is also debated [3; 4]. Moreover, the role that money plays in the growth process for developing countries as well as in regions of countries is open to question.' There has been little effort to measure regional financial flows and to discover the role that financial markets and institutions play in regional economic growth. This is so partly because of the paucity of data on money capital flows on a regional basis but mostly because money capital markets are assumed to be perfect in most regional models and therefore not a significant deterrent to growth per se. For example, regional interest rate differentials are usually attributed to information cost rather than capital immobility [15]. Thus, while the supply of saving is given a critical role in regional growth models [13, 28] the concomitant roles of monetary phenomena in the guise of availability of funds and/or the structure of financial institutions rightly or wrongly are ignored or given minimal consideration [13, 38, 72]. This is unfortunate since much public policy, e.g., liberal branching laws, is based on the assumption or implied evidence that banks and bankers are a significant influence in the regional and/or state growth process (e.g., see footnote 6).2 With the concern over regional growth in the United States that developed in the 1960s, some interest developed in regional finance. The Checchi Study [1] was commissioned by the Appalachian Regional Commission because of the lack of information about subregional financial flows and structures. Studies on the role of banks in the growth of the South have been made although these have serious limitations when applied to relatively small regional areas.3 Income and employment multipliers have been computed by Miernyk, et al. for in West Virginia in their input-output study Simulating Regional Economic Development [9]. These and most other studies have failed to look at subaggregate bank data and at the individual bank and banker to see how regional growth is affected at the micro level. This paper attempts to broaden our knowledge of how countywide financial flows and banker behavior influence economic growth in specific parts of Appalachia and to test a variety of hypotheses about this relationship. The findings suggest that it is unlikely that banks or bankers play a significant or distinct role in regional growth. This conclusion is circumscribed by the difficulty found in the study of isolating the banking role in regional growth from a myriad of possible growth determinants.

The Macro-Economics of Tsarist Russia in the Industrialization Era: Monetary Developments, the Balance of Payments and the Gold Standard

Students of Russia's first phase of industrialization concentrate on the real aspects of growth—the growth of population, production, and the change in industrial structure. In this they follow the traditional approach to economic history, which usually emphasizes the real variables of the growth process at the expense of the money variables. I do not propose to question the assumption that the study of the production aspect of an economy is a sine qua non of the analysis of industrialization. Yet the exclusion of factors that affect aggregate demand may lead to a failure to observe some important dimensions of growth. In any case, the relevance of money in Russia's first “Industrial Revolution,” which was underway in the last quarter of the nineteenth century, was considerable. Therefore, in what follows, I concentrate on the monetary developments and policies of this period. After a short survey of the quantitative information on the trends of the real variables, monetary developments and their impact on economic activity are studied. I then treat Russia's foreign trade and balance of payments and their links to monetary phenomena, and finally, make an attempt at a critical evaluation of the trade, monetary and fiscal policies of the Russian government in this period.

PREDICTIVE ABILITY AND DYNAMIC MULTIPLIER PROPERTIES OF ALTERNATIVE TREATMENTS OF THE MONETARY MECHANISM

THE PURPOSE of this paper is to make a detailed comparison of three macroeconometric models of the U.S. economy with regard to their predictive ability and policy multiplier properties. Three models are the St. Louis Model [1], the Wharton Model [3]1 and the M.P.S. Model [2]. These models are constructed with different emphasis on the treatment of the monetary phenomena, depending upon the philosophy of the model builder. They may respectively be called a monetarist model, a Keynesian-type income-expenditure model, and a structural model which emphasizes the monetary structure for the stabilization policy analysis. The structure of each model is not discussed in this paper but only a brief sketch of their special features is given in the next section. The predictive performance and the policy multiplier analysis are discussed in the 3rd and 4th sections, followed by some concluding remarks.

A NOTE ON LINEAR PROGRAMMING AND CAPITAL BUDGETING

This follows Carleton's presentation [2], to which the reader is referred for a full summary of the controversy and for discussion of a number of side issues not treated here. The major issue raised by Baumol and Quandt is that:' the discount factors (1 + k) -t in solution must equal ratios of the internal discount factors. Since we acknowledge the existence of capital rationing, k must itself be internally determined and hence be independent of monetary phenomena. However, if we assume that k is a true marginal opportunity rate, then it turns out that we cannot

TIGHT MONEY AS A CAUSE OF INFLATION: REPLY

TIGHT MONEY, Monetary Restraint, and the Price Level (2) was an attempt to analyze the short-run impact of interest rate movements on the price level within a two-commodity general-equilibrium framework. Hotson's complaint (3) involves mainly the empirical implications of the analysis, which he finds unsupported by postwar data. However, he also finds the theoretical treatment of a shift in investment unsatisfactory. I shall discuss this latter point first. Hotson argues (3, pp. 152-3) that my analysis of an increase in investment is selfcontradictory. In the text of my article (2, p. 22), the impact on the general price level is upward; in the appendix (Part C), downward. The text makes quite clear that there are two basic forces acting on the price level following a simultaneous increase in output and investment to a rise in the marginal efficiency of capital. One is the traditional deflationary influence of growth, by which additional output and income shift the demand schedule for balances to the right. Another is the inflationary influence of the higher natural rate of interest, which results from the increase in the investment schedule. The higher interest rate is traced along the prevailing liquidity preference function, reducing the quantity of balances demanded. The inflationary influence is assumed to predominate, but a footnote (2, p. 22, n.13) observes that it need not. By contrast, the appendix is an analysis of the real forces occurring in the commodity sectors following successive shifts in saving and investment, and abstracting from monetary phenomena. The impact of the disturbances on the price level is examined, assuming that the monetary authority has already offset any influences due to a reduction in the quantity of balances demanded (2, p. 18). Thus any remaining inflation can be attributed to the higher interest rate as a cost and production variable, rather than as a determinant of liquidity preference. I think the text was quite clear on this analytical sequence, although, in retrospect, the appendix could have stated its nonmonetary assumption more explicitly. In any case, on this procedure the inflationary influence is missing in the appendix and only the deflationary force of additional output remains. In the consumption sector, for example, the demand schedule shifts to the right less than supply, causing the price to fall. If Hotson were consistent, he would have also objected to the analysis of a decrease in saving. In the appendix (Part B), average prices are said to remain constant following that disturbance (output in this case is unchanged); in the text (2, p. 18), a reduction in saving, in the absence of offsetting monetary policy, is held to be unambiguously inflationary to the higher natural rate. Hotson moves swiftly from the analysis, right or wrong, to the data. According to Horwich's model, this doubling of the rate of interest [from 1947 to 1968] should have led to a fall in the price of capital goods relative to consumer goods. No such pattern is evident . (3, p. 153). At least two objections can be raised to this use of the model. First, it is a short-run apparatus with rising cost curves, inapplicable to such a long time span. For long-run analysis, a complete two-sector

Eine Neuformulierung der Quantitätstheorie des Geldes

A Reformulation of the Quantity Theory of Money The point of departure is the incapacity of traditional price theory to explain the wıdespread nonutilization of agents of production as encountered in the mass unemployment of the thirties. Keynes attempted to overcome this difficulty with a theory of interest in which the movements of interest rates appeared as the mirror image of a mechanism of relative prices. Then, in the Keynesian theory of the forties, this price theory approach was dropped and a so-called transfer mechanism was interpreted with the help of credit costs and entrepreneurial reaction to changes in them. The ensuing econometric investigations, however, brought an abundance of contradictory results on the significance of the interest mechanism. Hence the question can now be raised of whether the prevailing theoretical model should not be given up altogether, and an attempt made to reformulate price theory in a form which gives renewed valıdity both to the original programme of Keynes and that of Irving Fisher. Essentially this reformulation necessitates two extensions: On the one hand, the reactions to market stimuli must be generalized so that capital assets and liabilities, and also their returns and costs can be included. On the other hand, neither information nor changes in the structure of resource utilization are produced without marginal costs (or average costs). The article ventilates these two lines of approach thoroughly and develops from them a comprehensive price theory which also includes monetary phenomena. The object is a reformulation of the Quantity Theory in which the mechanism of relative prices plays a central role for capital assets, liabilities and output.

Een onderzoek naar de invloed van monetaire factoren op het reële groeiproces in enkele traditionele theorieën van economische groei (III)

With some exceptions — e.g., Tobin and Johnson — theorists have been looking for an explanation of economic growth in the real sector. This is the first of three successive papers on the problem of to what extent monetary phenomena influence the real variables in a process of economic growth. If one aims at adding a monetary sector to a real model of economic growth, the first thing to do is getting an exposition of the monetary theory which is most suitable for this purpose. The monetary theory used in this paper is based on Patinkin and Gurley and Shaw. The conditions under which money does not affect the real economic process are amply discussed. Only in very special cases money turns out to be neutral. In the two subsequent papers this monetary theory is used for an investigation into the impact of money on growth according to a neo-classical and a neo-keynesian model of economic growth.

Rational Choice and Patterns of Growth

Concluding his excellent survey of recent monetary theory, Harry Johnson [4] suggested that future developments in this field should come from attempts break monetary theory loose from the mould of short-run equilibrium analyses, conducted in abstraction from the process of economic growth and accumulation, and to integrate it with the rapidly developing theoretical literature on economic growth. This paper summarizes an attempt to deal with these issues. Like most theoretical work in rapidly growing fields, it is incomplete and the assumptions on which it is based are relatively crude abstractions. These abstractions, however, allow us to explore certain aspects of the interaction of the real and the monetary phenomena in a model of economic growth in which money, being government noninterest bearing debt, is introduced as an alternative asset to real capital. Most of the recent work in this field 1 has centered on the analysis of the patterns of growth of a monetary economy by postulating alternative plausible saving functions and demand functions for money. What differentiates this product is the fact that, in line with Patinkin's [6] presentation of the neoclassical theory of money, and with the classical Fisherian theory of saving [2], it is based on an explicit analysis of individuals' saving behavior, viewed as a process of wealth accumulation aimed at maximizing some intertemporal utility function. The first part of the paper describes the representative economic unit

Technology and Aggregate Demand in J. S. Mill's Economic System

The literature on the relationship between Keynesian and classical economics lays almost exclusive emphasis on monetary phenomena; relatively little attention is paid to technological relationships, although an understanding of the precise nature of the production function assumed in each system is clearly of relevance. In particular, the assumption of variable proportions between inputs is crucial to Keynes' approach, and it is usually taken to be an assumption of classical writers too. At times, it is recognized that the classics denied the possibility of obtaining additional output by increasing the quantity of labour used with other (given) inputs, but rarely is this seen as important. The customary interpretation possibly derives, in part, from the fact that the classics made use of the wages fund theory whereby full employment of labour is assured; attention is diverted, by this theory, from technological capital to wage-goods capital, and it becomes easy to jump to the conclusion that output in the classical system can be regarded as a simple function of the quantity of labour employed.In this paper I shall argue that in fact considerable attention was given to the assumption of fixed coefficients of production in classical economic literature (Section I). It will be necessary to show how this assumption could reasonably be maintained by writers who, at the same time, advocated the wages fund theory (Section II). In concluding the paper, I shall suggest a possible implication of the classical authors' approach to technology for their macro-economic policy, in particular for their tendency to minimize the significance of aggregate demand as a determinant of aggregate output (Section III).

TYPES OF MONEY USE IN THE 1950'S*

THE ANALYTICAL AND policy implications of aggregate changes in money use in the economy are not simple to unravel. For the most part, this is an inherent problem, since changes in monetary phenomena and changes in production and consumption are not linked in stable, predictable relationships, as is well known. But, to some extent, the problem is one of lack of information. That is, the available measures of changes in velocity do not reveal nearly so much about underlying money uses as the analyst could usefully employ. It is the purpose of this paper to examine some of the evidence available on the uses of money in recent years and to present some tentative estimates which may be of use to monetary analysts. One objective is to quantify the sources of the differences in income velocity and transactions velocity, for in the postwar years the two measures have differed both in their secular trend and in their cyclical movements.

La part des phénomènes monétaires dans le modèle de Keynes et dans les modèles de comptabilité économique

Monetary phenomena in the keynesian and in national accounting models The shortcomings of keynesian economics in the field of monetary theory reduces the usefulness of national accounting systems, built upon keynesian principles, for economic policy. The first part of the article analyses the nature of money and the characteristics of the supply of and demand for money in a system containing only bank money. Only a careful definition of these concepts can render possible an analysis of the role of monetary phenomena in short term fluctuations. This analysis, which constitutes the second part of the article, itself prepares the way for an examination of the different ways in which an influence may be exerted by the authorities on the banking structure itself and on the behaviour of economic units as regards money.

Ethical Aspects of Monetary Reform

Questions of monetary reform almost always have ethical implica? tions. Most of those who propose changes in the monetary and banking structure are utterly sincere in their conviction that existing arrange? ments and institutions work various kinds of injustices, and that the adoption of their proposals, as means of eliminating the inequities, would make a decisive contribution to the general welfare. Even the special pleaders who are interested, not so much in the advancement of the general welfare, as in the advancement of the welfare of par? ticular groups, shape their arguments to try to prove that the just treatment of such groups clearly demands the adoption of the reforms which they propose. In almost all instances, therefore, emphasis upon the justice and injustice of given situations quickly brings programs of monetary reform within the realm of ethics. The monetary economist may hold, however, that matters of justice and injustice, and therefore of ethics, do not concern him. He may take the point of view that his sole responsibility is to describe what effects upon the allocation of resources and the distribution of income will result from various groupings of monetary institutions, and to de? velop principles or theories which seek to establish a causal relationship between such groupings and a given complement of non-monetary con? ditions and developments. Looking at our existing monetary and bank? ing structure, he may be quite content to say, This is how it works/ and then to go on to describe how it works and to formulate his theories as to why it works exactly in that way. And looking at proposals for he may be satisfied to say, These would be the effects of the changes, and then to go on to describe what the effects would probably be in keeping with the theories already formulated. He may scrupu? lously avoid expressing a judgment as to whether the existing struc? ture is good or bad, andhe may likewise avoid the temptation to say that a given proposal for change is good or bad. All this means that the economist may strive to be as thoroughly scientific in his analysis of monetary phenomena as he tries to be in his study of other economic problems outside the immediate sphere of money. But the deliberate espousal of the scientific point of view on

Some Misconceptions of Banking and Interest Theory

It is a familiar fact to students of economics that, as a result of the expansion of commercial bank loans and investments, the volume of bank deposits may be greatly augmented. The greater part of bank deposits originate through the exchange of the less liquid and less acceptable promises-to-pay of the banks' customers for the more liquid and acceptable promises-to-pay of the banks. Most of the deposits to which bank loans or investments give rise tend to remain in the banking system in the form of demand balances subject to somebody's check. When banks simultaneously expand their loans and investments, the flow of cash into and away from any given bank tends to be synchronized at a level which leaves most of its deposits intact. If a particular bank increases the amount of its loans or investments, it may very well happen that cash or cash balances of an approximately equivalent amount will be lost to other banks. When this occurs, however, the banks with which this is deposited will enjoy an accession of cash or cash balances which, in turn will form the reserve basis for a new series of possible loans and investments. This process may continue, in cumulative fashion, until the total amount of deposits to which they give rise, exceeds, by several times, the amount of either the total reserves or invested capital of the whole banking system. In general, the limit to such a process of multiple expansion is set by the customary or legal requirements as to the ratio of reserves to bank liabilities (principally deposits). Inasmuch as the obligations of those who borrow from the banks are, in effect, converted into a generally accepted medium of payments, several perplexing questions present themselves. Precisely what do banks lend? In what sense and to what extent do they manufacture the money which they lend? Are the interest charges exacted by credit or money-creating banks an altogether warranted exaction from the community-especially when it is the government in whose behalf the banks create deposit credit (money)? Are bank interest charges to be considered as a reward for essentially the same kind of sacrifice as that for which the individual is paid interest when he lends his personal savings? Or is the interest charge by banks to be considered as merely a fee for certain valuable services rendered to borrowers and, possibly, the community at large? A vast literature has been devoted to these questions, and the principles by which they are to be answered have been elaborated in one connection or another by various writers. Nevertheless, the fact that able students of monetary phenomena still differ in their interpretations of the nature of bank credit is indicative of the obscurity with which the subject is still shrounded.