Money Movements Research Articles

Virtual money: understanding the power and risks of money's high-speed journey into electronic space

The amount of circling the globe each day is huge: the Federal Reserve's Fedwire and the New York-based CHIPS alone send out well over $2 trillion in virtual money daily. Retail systems such as credit and debit cards deliver several hundred billion more, meaning the combined dollar flow in just one day equals over one third of the USA's gross domestic product for an entire year. Trillions of dollars of ethereal money soar around the globe, on a narrow real money base, and with the growth of the Internet, these vast numbers are expected to grow. This volume provides an introduction to electronic monies, describing how each system works. Starting with gold and paper money, the author examines the growth of the credit card from the mid-1960s, when it was a status symbol for the wealthy, to its present near-universal use throughout America, and discusses the evolution of e-monies, such as smart cards, e-cash, electronic wallets and cybermoney, and the prospect of electronic benefits transfers (EBT), which may replace food stamps by 1999. The text discusses the advantages and disadvantages of electronic money, looking at the benefits for consumers, investors and corporations as goods and services competing in world markets can be purchased instantly from anywhere across the globe. The hazards are also explored: the size of virtual money movements creates an enormous float which exceeds the amount of monetary reserves to back it up at any given moment and digital glitches can cause chaos, as in 1995 when a snafu which delayed the opening of Wall Street's Big Board by just one hour caused the Nasdaq Composite to fall 27 points. Other risks include fraud, piracy and invasion of privacy, as well as possible threats to national security. The author also explores the world of international money-laundering - a 300 billion-dollar-a-year business - showing how vast electronic wire transfers help conceal illegal activities.

Seasonal money movements and the January effect

Many possible explanations have been suggested for the January effect, with tax considerations receiving the most attention. This analysis suggests a new explanation. The data show that money supply announcements during January contribute at least as much as tax considerations to explaining stock returns during the first five trading days in January. The seasonal behavior of money during December and January appears to be responsible for the money-supply-announcement effect. In addition, the end-of-year seasonal pattern of the money supply is present in other countries and was present before the adoption of personal taxes, so money supply announcements may offer a more consistent explanation of the January effect than tax considerations.

The Effects of Inside and Outside Money on Industrial Production Across Spectral Frequency Bands

This paper examines money-income causality using band spectral filtering techniques. The paper's central finding is that relatively low frequency movements in outside money are responsible for the relationship between money and economic activity. This result is inconsistent with theoretical models in which unanticipated changes in money are responsible for movements in real activity. Reverse causality is also examined. The results are not supportive of a strong feedback relationship from income to inside money. However, there is evidence of strong feedback from income to outside money.

THE FED AND THE POLITICAL BUSINESS CYCLE

This study asks whether the Federal Reserve has actively made monetary policy so as to aid the president's reelection. Using Shiller's smoothness “prior” to estimate the shape of cycles, the study finds a political business cycle in unemployment and a preelection increase in growth of the money supply. But the timing of these two cycles is inconsistent. Furthermore, little evidence exists of a cycle in the instruments of monetary policy. Thus, the Fed is not actively creating a political business cycle. Apparently, movements in real money that are not caused—but are not offset—by the Fed are an important cause of the political business cycle.Elections influence Fed behavior. Monetary tightness occurs early in a presidential term, before reelection incentives become critical. This is due to the Fed's political weakness. Thus, the Fed's independence only partly insulates it from electoral pressures.

Cash dispensing module

NCR (Manufacturing) Ltd., in Dundee, develops and produces automatic teller machines (ATM) for worldwide markets. It is the world leader in ATM quality and reliability. This article deals with, in the main, the cash dispensing module located within an ATM. This is a classic mechatronics example with the mechanical conveyor system for note movement controlled by a microprocessor, PROM, RAM, digital and analogue circuits. These in turn are controlled by the main ATM processor, running under an RMX operating system. The money movement and control mechansims will be addressed, as will the software procedures to ensure accurate note dispensing. To appreciate the manufacturing process discussion of the testing philosophy, the automated assembly line and robotic cell used to assemble the money cassettes is also included.

THE FED AND THE POLITICAL BUSINESS CYCLE

This study asks whether the Federal Reserve has actively made monetary policy so as to aid the president's reelection. Using Shiller's smoothness “prior” to estimate the shape of cycles, the study finds a political business cycle in unemployment and a preelection increase in growth of the money supply. But the timing of these two cycles is inconsistent. Furthermore, little evidence exists of a cycle in the instruments of monetary policy. Thus, the Fed is not actively creating a political business cycle. Apparently, movements in real money that are not caused—but are not offset—by the Fed are an important cause of the political business cycle. Elections influence Fed behavior. Monetary tightness occurs early in a presidential term, before reelection incentives become critical. This is due to the Fed's political weakness. Thus, the Fed's independence only partly insulates it from electoral pressures.

Domestic and International Sources of Inflation in Developing Countries: Some Evidence from the Monetary Approach

Using the monetary approach, this paper examines empirically the causes of inflation in twenty-five developing countries. In addition to money supply, the underlying money demand function and foreign exchange rates are taken into account in the inflationary process. The lag structures are determined by Akaike's FPE criterion and the exogeneity assumptions are assessed by Granger-type causality tests. The results suggest that the monetary approach provides adequate explanation of inflation across all countries examined. Besides changes in expected inflation and foreign exchange rates, movements in base money in these countries have significantly contributed to their inflationary pressures. [134, 431]

Is Equilibrium Indexation Efficient?

This paper investigates the welfare properties of equilibrium indexation in a decentralized economy. If indexation is costless, so all firms index, then the equilibrium degree of indexation is efficient. But if indexation is costly and this leads some firms not to index, equilibrium indexation is inefficient because indexation has externalities for nonindexed firms. Firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages. The results do not depend on the relative importance of real and nominal shocks.

Stock returns and inflation: The role of the monetary sector

This paper hypothesizes that the relation between stock returns and inflation is caused by the equilibrium process in the monetary sector. More importantly, these relations vary over time in a systematic manner depending on the influence of money demand and supply factors. Post-war evidence from the United States, Canada, the United Kingdom and Germany indicates that the negative stock return-inflation relations are caused by money demand and counter-cyclical money supply effects. On the other hand, pro-cyclical movements in money, inflation, and stock prices during the 1930's lead to relations which are either positive or insignificant.

TRENDS IN RURAL WAGES, WEST JAVA, 1977–83

This paper examines monthly wage data collected by the Agro Economic Survey from seven villages in the Cimanuk River Basin of West Java, where data on agricultural and non-agricultural wages and prices of nine essential commodities were collected twice monthly between 1977 and 1983. Movements in money wages deflated by both the rice price and a weighted index of basic commodities are analysed in detail and differences between lowland and upland villages are discussed.

Quarterly Prediction of Reserve Money Multiplier and Money Stock in India

For a closer forecasting and control of money stock, movements in the reserve money and in the reserve money multiplier both need to be watched. Between the two, the variations in the former are decidedly the more dominant. But those in the latter are not negligible at all. Besides, minor variations in the multiplier cause large absolute changes in the money stock. The present study concentrates on examining the variations in the multiplier, assuming that the variations in the reserve money will be examined separately.

INTERNATIONAL PRICE BEHAVIOR AND THE DEMAND FOR MONEY

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figured prominently in explanations of the international inflation process in the late 1960s and early 70s. OUT major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced‐form rational‐expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976.The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance.The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used GLS with a second‐order correction for autocorrelation. We believe this produced more plausible estimates of the parameters of the long‐run demand function and of the adjustment process itself.

Money stock revisions and unanticipated money growth

An important ‘empirical regularity’ is the strong positive effect of money shocks on output and employment. One strand of business cycle theory relates this finding to temporary confusions between absolute and relative price changes. These models predict positive output effects of unperceived monetary movements, but the quantitative importance of unperceived shifts in nominal aggregates is subject to question. Another strand of theory, based on long-term nominal contracts and analogous price-setting institutions, generates output effects from unanticipated, but not necessarily contemporaneously unperceived, money shocks. However, the real effects of unpredicted, but contemporaneously understood, monetary changes are not obviously consistent with efficient institutional arrangements. The present paper provides some empirical evidence on the two types of theories by analyzing the output effects associated with revisions in the money stock data, where the revisions are interpreted as components of unperceived monetary movements. The revisions turn out to have no significant explanatory power for output. Previous findings that innovations from an estimated money growth equation have a significant output effect remain intact when the revisions are included as separate explanatory variables. Overall, the study provides a small amount of evidence against the special role of unperceived, as opposed to unanticipated, money movements as a determinant of business fluctuations.

Unanticipated Money, Output, and the Price Level in the United States

Earlier analysis of unanticipated money growth is extended to output (GNP) and the price level (GNP deflator) for recent U.S. experience. Price level determination is more complicated than output determination, because both anticipated and unanticipated money movements are involved. Empirical results accord well with the model--notably, they support the key hypothesis of a one-to-one, contemporaneous link between anticipated money and the price level. Precise estimates are obtained for the lagged responses of output and prices to unanticipated money movements. Cross-equation comparisons indicate that the price response to unanticipated money movements has a longer lag than the output response. A form of lagged adjustment in money demand can account for this difference. The forecasts for inflation average 5.5 percent per year for 1977-80.

A Multivariate Spectral Analysis of the Supply of Money and Credit

MOVEMENTS IN MONEY AND INCOME are closely correlated. There is general agreement that this correlation is the result of a fundamental economic relation between tlle monetary sector and the sector, but there is not agreement on the nature of this relation. It may be that income is the major determinant of the supply of money and that the observed correlation is a result of the sector's inRuence on money. Alternately, the arguments of the money-supply function may be independent of the sector, and the money supply may be an essentially exogenous variable which influences the sector. Economists have advanced a number of hypotheses about the nature of this relation between the monetary sector and the sector. Monetary economists studying the institutional arrangements and behavior of the Federal Reserve Board have concluded that as a result of board policy the money supply is most accurately characterized as an endogenously determined variable dependent on the sector. They note, that early board policy was dominated by the real bills doctrine, subject to a gold constraint, and by the desire to accommodate the sector by providing an elastic currency.1 Subsequent board policy has emphasized controlling the sector fluctuation, or leaning against the wind, via control of the credit markets with free reserves and interest rates as

The Hot Money Movement and the Private Exchange Pool Proposal of 1896

A Widespread belief exists that those disequilibrating international capital flows known as “hot money movements” and the associated measures instituted to regulate transactions in foreign exchange were peculiar to the post-1914 era and especially to the epoch of the “Great Depression” that commenced after 1929. It is felt that the “relative” stability of world economic and political conditions associated with the operation of the pre-1914 gold standard precluded “hot money” transfers and obviated the need to control the foreign exchange market.1 The experience of the United States during the depression of the 1890's vitiates the accuracy of this sweeping generalization. To be sure, these phenomena were largely unrecognized before the depression of the 1930's, but they nevertheless existed. The purpose of this article is to examine one such pre-1930 hot money movement, the one that occurred during the American presidential election campaign of 1896. The nomination of William Jennings Bryan as the Democratic candidate on a free silver platform at Chicago in July 1896 gave impetus to a major disequilibrating outflow of short-term funds. This condition, in turn, led to an interesting effort to control the foreign exchange market.

Leads and Lags in Sterling Payments

M ONTHLY statistics of the sterling area's trade and payments position with Western Europe and North America indicate that a substantial volume of short-term speculation in sterling has taken place since the end of I948 and that inward as well as outward movements of capital have occurred. The pressure against sterling resulting from this speculation has been recognized as a significant factor contributing to the I949 devaluation as well as to the loss of reserves incurred in I95I-52. The short-term flows of funds into and out of sterling, which have been induced principally by the expectation of changes in exchange rates, have been of a disequilibrating character. These transactions have taken the form of leads and lags in sterling payments by merchants in connection with their normal trading operations: hence, this speculation has been effected within the framework of rigorous controls over exchange and foreign trade transactions which have blocked short-term money movements of the pre-i939 character.

Capital Movements and International Payments in Postwar Europe

EFFORTS to construct a workable system ~of international payments for Europe since the end of World War n1 have concentrated almost exclusively on the problem of finding suitable machinery to handle current account transactions between monetary areas. Capital transactions have been ignored, deprecated, and made as difficult as possible. This is in accord with the attitude toward international capital movements that has been dominant for the past ten or fifteen years. The concern of national treasuries to prevent a recurrence of the hot money movements of the I930's led the drafters of the Bretton Woods agreements to place capital movements in a kind of limbo where exchange controls, supposedly committed to let current transactions go free after the transition period, could exercise their ingenuity and regulate to the controllers' hearts' content. The resources of the International Monetary Fund cannot be used to finance capital movements unless the Fund's holdings of a currency remain below seventy-five per cent of that member's quota for more than six months, and then only if the effect of the operation does not raise holdings of that member's currency above seventy-five per cent and does not lower the Fund's holdings of the desired currency below seventy-five per cent of the appropriate quota. The existence of commitments to service debts in a money other than that of the debtor is regarded as an almost intolerable nuisance by technicians who have the duty of preparing and overseeing bilateral payments accords. Broadly speaking, a capital export, if it comes before the authorities at all, is treated by them as a hard currency transaction, whether it involves a movement of funds to a harder currency area or to an area whose money is as soft as that of the capital exporting country. Europe has innumerable committees dedicated to the removal of restrictions on international trade, and a good many sober groups working to establish greater freedom of movement across frontiers for labor. There are no committees to improve international capital movements, although there are lots of committees producing all kinds of reasons why countries need to import capital. The Bank for International Settlements is almost a lone voice in urging economic policy makers to remember that free movement of capital, both short and long term, has in the past been an important aid in the economic development of the world as a whole. 1 The problem of establishing greater convertibility of European currencies is commonly analyzed on the basis of the unstated assumption that there are no capital movements between monetary areas or between European and non-European parts of a given monetary area-i.e., that convertibility is possible only under circumstances in which net deficits and net surpluses on current account could be completely cleared, exception being made for more or less net capital inflow from the United States to European monetary areas as a group. The neglect of capital movements in current discussion and policy making has already led to serious practical difficulties. The United Kingdom balance of payments estimates have been consistently thrown off, and rather badly off, by the appearance of unexpected capital movements, both within the sterling area and with other areas. The figures are not very good, although Britain is the only country in Europe for which respectable data exist. At the time of the negotiations for the first U.S. loan to Britain, care was taken to establish criteria for disposing of the three billion odd pounds sterling of debt held by the (mostly sterling area) recipients of Britain's heavy overseas Dayments during the war. There is

Film Demonstration of Money Movements

IN view of the recent discussions on“Science and Society”in our columns, many readers will be interested to learn that Prof. M. Polanyi, professor of physical chemistry in the University of Manchester, has produced a short film entitled “An Outline of the Working of Money”. The film, which runs for 25 minutes and, except in the opening section, is in diagrammatic form, is divided into five parts. It deals in turn with the circular flow of money, the actions of saving and spending, the functions of the banks, depreciation and the role of the capital goods industries, and finally the interaction of these forces affecting the working of the economic system. In the preparation of the film, simplification of ideas has of course been necessary, but it presents a most interesting venture—so far as we are aware, the first venture—in the application of methods of visual presentation to economic theory. The film was first shown to members of the Manchester Statistical Society in March, and the Society has now published the full script of the film. The film itself, which is at present only available in a silent version, was made by Science Films Limited.