Money Interest Rates Research Articles

Money's marketability premium and the microfoundations of Keynes's theory of money and interest

The authors argue that Keynes's treatment of the 'Essential Properties of Interest and Money' in Chapter 17 of 'The General Theory' can provide microfoundations for Keynesian explanations of business cycle fluctuations. They focus on how the nature of money's liquidity premium may generate stickiness in the nominal rate of interest. A constant or very slowly changing liquidity premium on real cash balances, which follows from the 'essential properties,' thus provides the foundation for how the money rate of interest 'rules the roost.' Keynes's endorsements of government control of investment, Gesell's money stamping proposal, and mercantilism are consistent with this interpretation. Keynesian results would not obtain if all money and money substitutes were to bear flexible pecuniary returns. Copyright 1994 by Oxford University Press.

TWO ALTERNATIVE APPROACHES TO FINANCIAL MODEL BUILDING

ABSTRACTThe paper compares the long and the short period models presented by Tobin and those that can be derived from the writings of Kaldor. It presents a Kaldorian model where the government deficit is financed through bonds and money, where inflation can occur, financial assets are allocated through portfolio decisions, and Kaldor's characterization of monetary and fiscal policies are taken into account. The model clarifies under which conditions the “Cambridge Equation” holds and reconciles two different Post‐Keynesian views on income distribution, since distributive variables are made to depend both on the rate of growth and on the money rate of interest.

The transactions trust demand for money

An exchange economy using gold as a means of payment is considered where it is possible to borrow gold in a money market. A positive money rate of interest is encountered as the shadow price of the capacity constraint in an economy without enough gold. The meaning of enough gold and the role of the default penalty are noted in the determination of the interest rate.

The Demand for Money: A Rational Expectations Approach

The authors derive a model of money demand for an optimizing consumer with rational expectations in a discrete time infinte hortizon framework under uncertainty. Mone y demand responds to unanticipated changes in income, one period expe ctations of future bond and money interest rates, unanticipated curre nt interest rates, and past anticipations of current rates. The deriv ed consumption function mirrors money demand behavior. Joint estimati on of the consumption and money demand equations by weighted nonlinea r least squares corroborates the predicted effects, particularly inco me neutrality. This money demand model substantially outperforms a co nventional specification in post-sample simulation over 1975-85. Copyright 1988 by MIT Press.

Ajustement de marché et « taux d'intérêt spécifiques » chez Keynes et Sraffa

The present paper first emphasizes that General Theory rests crucially on the assumption that the money rate of interest is independent of aggregate income. In this view are analyzed the origin and development of the concept of own- rate of interest, and of the market adjustment associated with that concept. It is shown that, against the appearances, the use of that concept by Sraffa and Keynes reveals two alternative theories of the relation between the money rate of interest and investment ; as a consequence, the scope of Keynes's approach becomes more precise and limited.

Fisher, Thornton, and the Analysis of the Inflation Premium: Note

[I]nsofar as there exists any adjustment of the money rate of interest to the changes in the purchasing power of money, it is for the most part (1) lagged and (2) indirect.... The indirectness of the effect of changed purchasing power comes largely through the intermediate steps which affect business proElts and volumes of trade, which in turn affect the demand for loans and the rate of interest-Irving Fisher (1930, p. 494)

La monnaie est-elle à l’origine du chômage ?

The General Theory offers three explanations as regard unemployment : 1. maximised and anticipated profit comes into sight before full employment ; 2. the shifts in employment are deemed linked to the changes in the agents' preference for liquidity, so that the «liquidity trap» when it emerges, is opposed to the fall in interest rate, blocking investment. This hypothesis would not explain joblessness over a long-medium term period ; 3. the marginal yieldings of assets should be in line with money interest rates. However, if the equilibrium rate for the yield of assets in lower than the liquidity premium, for full employment to be reached there must be a decrease in monetary interest rates which supposes exogenous money supply, inconsistent with effective demand and banking activity. Moreover, it is unrealistic. The only feasible explanation lies in abandoning the explanation in terms of aggregate demand deficit in favour of one in terms of a deficit in aggregate supply.

PROPERTY VALUATION: A RATIONAL MODEL

The mathematics of property valuations commonly used in practice exist in several formulations which have been adopted over the years. All are similar in that they represent simple discounted cash flow models equating the estimated future earnings capacity of a property to a net present (capital) value. The process, whilst appearing somewhat daunting, is in fact accomplished in a manner such that, under normal circumstances, the estimated future cash flow beyond the next rent review is not explicitly expressed. Instead of generating a future income flow (assuming some rate of rental growth) and discounting at a money rate of interest (suitably adjusted for risk), the estimated rental income at the next review is capitalised at a relatively low investment yield rate which merely implies a future rental growth rate.

Notes on consumption, investment and effective demand: I

In Part I we looked for the premises from which traditional theory derived the assertion that aggregate demand would adjust to productive capacity. These premises were found to lie ultimately in the conception of capital as a 'factor of production' em ployable in increasing proportion to other factors as the rate of interest falls—the basis, as we argued, of the idea of a demand schedule for 'saving' determining the rate of interest in conjunction with the supply schedule of full employment saving. The deficiencies of that conception of capital led us to the conclusion that, contrary to what is often argued, an analysis conducted in 'real' and 'static' terms provides no basis for the belief that investment decisions can, in the long period, adjust to decisions to save. In this second Part of the paper, the problem will be approached in terms of the 'monetary' analysis of Keynes' General Theory and the subsequent controversy. In section 1, we shall use Wicksell's theory of the price level as an example of how traditional theories would link their 'real' analysis of distribution with their analysis of the money rate of interest. We shall then argue, in section 2, that Keynes's different conclusions

THE FISHER EFFECT: GRAPHICAL TREATMENT AND SOME ECONOMETRIC IMPLICATIONS

IN RECENT YEARS, various economists have presented econometric evidence measuring the influence which commodity price inflation exerts upon market interest rates. Judging from the number of papers devoted to the subject, it has become, in Friedman's words, dynamic growth industry. Each author has inevitably acknowledged the pioneering work of Irving and, indeed, the term Fisher has entered the lexicon of economists to explain the influence of commodity price changes on money interest rates. As is now well known, Fisher's theory holds that in the long run the nominal interest on bonds, iT, can be taken as equal to the real rate of interest, rT, the yield associated with real capital, plus the rate of inflation anticipated by the participants in the market, pT, or i = rT +p. In addition, any permanent change in the anticipated rate of inflation will eventually produce a more or less equal rise in the nominal rate and have little effect on the technologically determined real rate. While at least four of Fisher's books were devoted in one way or another to this subject, his primary theoretical explanation for the supposed relationship is to be found in The Purchasing Power of Money [3]. There, in Chapter 4, titled Periods of Transition, describes a monetary theory of the business cycle concentrating largely on the effects of variation in the real interest rate upon the financial or loanable funds market. These variations in the real rate are produced by and interact with varying degrees of temporary money illusion on the part of savers/ lenders which, among other things, lead to cyclical movements in the desired reserve ratios of commercial banks. Such cyclical movements produce corresponding movements in the money supply which, in turn, constitute the principal motive force in the business cycle once an initial equilibrium is disturbed. It will be the purpose of this paper to present a graphical analysis of Fisher's cycle theory as seen from the loanable funds market. As such, it should complement Samuel Morley's [12] presentation of the cyclical effects of variations in the real wage engendered by imperfect anticipations of inflation as seen from the labor and cornfmodity markets. The integration of both presentations could be taken as an initial step in giving complete graphical treatment to Friedman's Presidential Address before the American Economic Association [5]. In addition, our presentation of Fisher's cycle theory will allow us to comment on some of the purported tests for the effect and the relationship of such tests to Fisher's theory. We will also suggest some modifications by which this theory might be made to fit more modern institutional arrangements and practices.

Money Supply and Economic Growth

This paper gives explicit consideration to the basic role of monetary institutions in the context of a monetary growth model. The fundamental schema of this article is the following. Inflation will always affect the money rate of interest. Under the assumption that the reserves to demand deposit ratio depends on the money rate of interest, it follows that the ratio of outside money to the money supply will be influenced by inflation and ultimately the long-run equilibrium values of the real variables in a fully employed economy.

Hyperinflation and Monetary Reform in the Soviet Union, 1921-26

The hyperinflation of the early 1920's in the Soviet Union and the subsequent monetary reform provide us with an opportunity to observe alterations in the portfolios of individuals in response to drastic changes in the costs and benefits of holding cash balances. This study is concerned with the specification of the demand function for money in the Soviet Union during these two periods. A demand function containing two arguments-the cost of holding cash balances and wealth-will be fitted for each period. The cost of holding cash balances is the money rate of interest, which measures the opportunity cost of holding cash. The money rate is composed of the real rate of interest and the expected rate of inflation. If the expected rate of inflation is zero, the money rate and the real rate are equal. During the period under consideration in the Soviet Union, the range of assets which the individual could hold was quite narrow. He was primarily limited to cash and physical assets, since there was no private securities market, and the history of the sale of government securities suggests that in most cases they should be regarded as a form of taxation rather than as a possible non-cash asset. Since physical assets could be purchased primarily for the individual's own consumption, the relevant real rate of interest is the implicit rate that measures the return in kind. Due to the lack of measurable interest rates, it will be assumed that the real rate of interest is constant and that the rate of inflation reflects the changes in the money rate of interest and, thus, the cost of holding cash.

A Note on Banking Policy and the Income-Velocity of Circulation of Money

IT is the purpose of this note to consider the effects of an increase in the amount of saving made by the public through the mediation of the banking system. It is generally agreed that this change, which is a decrease in the income-velocity of circulation of money, will upset equilibrium. The quantitative importance of such a change as a cause of disequilibrium has, however, often been exaggerated due to the neglect of the distinction between autonomous and induced changes. An autonomous change may be defined as a change in the saving habits of the public which is not brought about by a condition of disequilibrium. An induced change may be defined as one which is itself the effect of disequilibrium. To a certain extent it is merely the monetary aspect of the conditions of disequilibrium, but it may itself become an aggravating cause. The more important quantitative changes in income-velocity take place during the downward swings of the trade cycle and are to be considered as induced changes. These changes would, of course, be avoided by the elimination of the inflationary boom. This note deals only with the effects of an autonomous change. The effects of an increase in the amount of saving which directly causes a reduction in income-velocity depend upon the policy of the banking system. The results of such a change can be analysed on the basis of three different assumptions regarding the reaction of the banking system. The banking system may take no action; it may maintain the quantity of money multiplied by its income-velocity of circulation constant; it may maintain the quantity of money constant. i. If the banking system takes no action it will, in effect, be maintaining the money rate of interest above the equilibrium rate.' This will cause a reduction in the quantity of money. The decrease in incomevelocity will mean a reduction in the amount of money spent on consumers' goods and a fall in the prices of these goods. If stocks are not increased the public will consume just as much as before with a lower money expenditure because prices will have fallen proportionately. Voluntary saving will thus be in excess of investment and the new savings