Neoclassical Demand Research Articles

Consumer preferences, the demand for Divisia money, and the welfare costs of inflation

This paper uses neoclassical demand theory to calculate the welfare costs of inflation. It considers the demand interactions between money, consumption goods, and leisure, relaxes the assumption of fixed consumer preferences, and addresses the inter-related problems of estimation of money demand functions, instability of money demand relations, and monetary aggregation. It makes full use of the relevant economic theory and econometrics and generates inference in terms of long-run welfare costs of inflation that is internally consistent with the data and models used.

The Demand for Assets: Evidence from the Markov Switching Normalized Quadratic Model

AbstractIn this paper, we provide and illustrate a solution to the inter‐related problems of estimation of asset demand functions, instability of money demand relations, and monetary aggregation. We use an econometric framework that very flexibly allows for changes in the coefficients of the asset demand functions and then quantifying the implications that this asset demand instability has for monetary policy and monetary aggregation. Our approach allows the estimation of asset demand functions in a systems context, using a flexible functional form for the aggregator function, based on the dual approach to demand system generation. However, instead of assuming that consumer preferences are fixed as in the neoclassical demand theory, we assume Markov regime switching, thus allowing for complicated nonlinear dynamics and sudden changes in the parameters of the asset demand functions and the underlying aggregator function. We use the monthly time series data on monetary asset quantities and their user costs, recently produced for the United States and maintained within the Center of Financial Stability, and the Normalized Quadratic (NQ) flexible functional form with Markov regime switching, to generate inference in terms of a full set of elasticities, simultaneously achieving consistency with the data‐generating process and economic and econometric regularity. We find evidence that our five‐regime NQ model provides a better fit of the actual data than a single regime model, that the asset demand specifications exhibit instability between regimes, but are rather stable within regimes, and that the assets are in general Morishima substitutes with the Morishima elasticities of substitution always being below unity.

The welfare cost of inflation

This paper uses neoclassical demand theory and applied consumption analysis to calculate the welfare cost of inflation, in the context of the Bailey (1956) approach. We integrate the demand for money with the demands for consumption and leisure, estimate flexible demand functions in a systems context, and show that raising the inflation rate from 2% to 4% in the United States, would impose (on average) a welfare cost equivalent to a loss of 0.30 percent of output when money is measured by our preferred (broad) Divisia M4 monetary aggregate. We also show that the welfare cost of inflation is countercyclical and trends upward over time.

Sino-U.S. Relations and the Demand for Military Expenditure in the Indo-Pacific Region

ABSTRACT This paper examines the demand for military expenditure in eighteen selected Indo-Pacific countries for the years 1993–2018. As the dominant powers, the U.S. and China characterize the geopolitical structure of the Indo-Pacific region. Sino-U.S. relations are newly quantified by measuring the number of cooperative and conflict events between China and the United States based on the Global Database of Events, Language, and Tone (GDELT). After incorporating Sino-U.S. relation variables into neoclassical demand models, the panel data estimating results reveal that the increasing number of confrontations from the United States toward China has lead to increases in non-U.S. allies’ military expenditure while the rise in China confronting the United States has not. U.S. allies in the Indo-Pacific region have tended to increase military expenditure when the United States increases its pressure on China. The empirical results provide evidence that Sino-U.S. relations affect the level of military expenditure in the Indo-Pacific Region.

Market demand: a holistic theory and its verification

The paper presents a revision of the contemporary reductionistic demand theory, replacing the studying object, i.e. an individual, with a fuzzy collection of market buyers, regarded as a “statistical ensemble of consumers”. The new holistic market demand theory formally retains the neoclassical demand theory with reconsidering the utility function as a collective one. A nonparametric verification method is presented, which uses the economic (Konus) and formula Fisher indexes. The method has a variational character based on the theory of ill-posed problems. Verification is carried out simultaneously with the construction of Konus indexes. The method is demonstrated on an example of the new Giffen demand model.

Wage inequality and macroeconomic stability: a synergetic approach

Motivation: The article is dedicated to the relationship between a level of wage inequality and such an aspect of macroeconomic instability as unemployment. Inequality is connected with structure variety of a relevant economic system. As variety is an important object of complexity study, it makes sense to consider the relationship between wage inequality and macroeconomic stability in the light of the synergetic and evolutionary theories, which are directly dealing with phenomena of systems complexity, order and stability. Aim: To present a dispersion (probabilistic) approach in using neoclassical demand and supply curves analysis and, thus, to propose a new definition of the equilibrium problem, which is closer to evolutionary paradigm; with help of the D–S curves, to prove the connection between degree of wage inequality and the general level of unemployment; to demonstrate two types of extreme macroeconomic instability in their relation with the character of wage inequality, and to regard them from the standpoint of the synergetic conception. Results: Both situations — very low and very high wage inequality — are related with extreme macroeconomic instability. The first situation can be related not only with general poverty and homogenous, low skilled workforce, but, primarily, with absence of evolutionary change. A very high wage inequality can be related with inflexible labour markets, low level of social mobility and weak social cohesion. These two situations are comparable with two types of disorder in synergetic conception. With help of the AD–AS curves, the action of macroeconomic synergistic effect is demonstrated; this effect is accompanied by economic growth, decreasing unemployment and the wage levelling. The approach applied in the article confirms some basic propositions of modern macroeconomics and can be used for diminishing the theoretical gap between such opposing interpretations of unemployment as neoclassical and Keynesian.

Keynes Did Not Use Pigou as a Strawman in the General Theory: Pigou Was Trapped by His Marshallian, Partial Equilibrium Approach in His 1933 the Theory of Unemployment

The economics profession’s failure to recognize that Keynes’s IS-LP(LM) model of chapters 15 and 21 of the General Theory, incorporating Uncertainty and Expectations, is the main message of the General Theory, has led to the failure to recognize that Keynes’s critique of Pigou’s partial equilibrium, the Marshallian model of the macroeconomy, as presented in Chapter Two and the Appendix to chapter 19, is not only entirely correct but understated. Keynes recognized Pigou’s treatment as the best that had been produced up to that time by any of the neoclassical economists. However, Pigou could not model any of the interdependencies of the macroeconomy because he had basically been operating with functions with only one, independent variable-the real wage. Pigou had no Liquidity Preference Function (LM function). He had no clearly defined consumption function with an MPC that would allow him to apply the investment multiplier. Pigou’s theory of the rate of interest was that the rate of interest was determined by the neoclassical Demand for investment and supply of savings, exactly what Keynes had shown was impossible on pp.179-182 of the GT and which Keynes described as a “nonsense” theory. At best, Pigou was operating with a poorly specified IS equation alone. Keynes’s Appendix to chapter 19 is actually very straightforward because it demonstrates repeatedly that Pigou’s macro version of his micro model is simply incorrectly specified and allows no accurate calculation of either aggregate output or aggregate income to be made. Keynes does acknowledge Pigou’s microeconomic structure, which he calls ‘concoctions’, as being valuable. Keynes, in fact, improved Pigou’s mathematical modelling in a manner that allowed him to specify and incorporate expectations and uncertainty into his D-Z model that lead to the specification of a set of multiple equilibria, which Keynes called the Aggregate Supply Curve. This model supports the IS-LP(LM) model.

Analisa Permintaan Pangan: Bukti Empiris Teori Rumah Tangga Pertanian

Most of demand parameters of rural households in Indonesia estimated by applying conventional neo-classical demand model. This model is not appropriate to predict the complex nature of rural household consumption decisions. The complex nature of rural household's production and consumption decisions was approached in this study by applying the farm household model. In this study two hundred and forty-one households in six villages of the Cimanuk River Basin of West Java were analysed. Results from the conventional model and new model were compared and discussed.

Anticipated Regret or Endowment Effect? A Reconsideration of Exchange Asymmetry in Laboratory Experiments

Abstract In simple exchange experiments, participants have been reported to trade their endowments with similar objects less frequently than predicted by the neoclassical demand theory. Recent research has indicated that the experimental support for exchange asymmetry is fragile in alternative environments. In this article, we report an environment which is different from all other environments previously known in which exchange asymmetry is not observed. In this environment, participants knew at the time of making exchange decisions that they will have an opportunity to reverse their decisions. We find significant differences in exchange asymmetry in this environment, and an environment in which exchange decisions were final. Such differences suggest that anticipated regret theory provides an adequate explanation for exchange asymmetry which is often reported in the laboratory experiments. Our results underscore the importance of careful design for testing theories in the laboratory experiments.

Markets in the Light of Political-Economic Actors and Democracy Reconsidering Conceptual Framework for Sustainability Politics

The conceptual framework of neoclassical economics has been quite stable over the years while present challenges point in the direction of a need for new thinking and a new conceptual framework. Neoclassical economics is more or less blind to equality issues and not enough to deal constructively with present unsustainable trends. I will suggest important elements of such a new conceptual framework as part of a pluralistic understanding of economics. When compared with neoclassical economics, the political dimension is emphasized thus making democracy a fundamental principle for relationships in markets and in society at large. A political economics is suggested where individuals are understood as political economic persons and organizations as political economic organizations. This leads to a different understanding of markets from that of neoclassical supply and demand. The ethics and responsibilities of market actors in a democratic society is considered relevant and something to be investigated for purposes of sustainability politics. Approaches to decision-making are also discussed. Emphasis on democracy suggests a different approach from that of neoclassical Cost-Benefit analysis (CBA).

Expenditure elasticities of the demand for leisure services

Although some research has already focused on the analysis of expenditure elasticities of leisure demand, some shortcomings with regard to the content and the underlying theoretical model as well as the applied methods exist. This article aims at avoiding these problems to provide consistent derivatives of leisure service expenditure elasticities. Therefore, a regular demand system is derived from microeconomic duality theory. To implement leisure specific demand factors (i.e. demand- and supply-based sports and recreational opportunities as well as sports and recreational preferences) while still being consistent with neoclassical demand theory, the basic model is extended by applying the demographic translation framework. Data of the continuous household budget survey (n = 7724) from Germany is used for the estimation of the derived demand system. It is shown how sensitive the results are depending on the applied (censored) regression model: 16 out of 18 analysed services are indicated as luxury goods based on the findings of the Tobit model type I but as necessities based on the findings of the Tobit model type II. Possible implications are presented and discussed.

Household Housing Demand: Empirical Analysis and Theoretical Reconciliation

Since owner-occupied housing is partly a financial asset, expectations of capital gain or loss play a role in housing demand. In recent years, some “hot” housing markets have exhibited an increase in demand when housing prices rise and a decrease when they fall, suggesting the presence of capital gains forces that outweigh the traditional neoclassical demand response associated with the standard consumer good. To explore whether this behavior is systematic, we estimate individual household housing demand equations for two large and geographically diverse metropolitan areas, San Francisco and Atlanta. The data base consists of forty nine Public Use Microdata Area samples. The econometric results indicate that own-housing demand is downward sloping in one market but upward sloping in the other. These disparate results are reconciled by showing that they are consistent with two different and explicit special case predictions of the same theoretical model of housing demand and reflect the differing relative strengths of a standard consumption good demand response and of an asset based capital gains effect.

The Demand for Money in Sierra Leone Revisited

AbstractThis paper uses Johansen's cointegration methodology to estimate Sierra Leone's money long run demand function for the 1964-2005 period. It finds a stable long-run relationship between the quantity of real money balances and its determinants. Secondly, all the estimated coefficients have their expected signs. Additionally, as expected in economies with under-developed financial systems, Sierra Leone's long-run money demand function is unit income-elastic and interest-rate inelastic. Thus, the study provides support for the neoclassical money demand specification. Additionally, it reaffirms the central findings of Kallon (1992).

That Elusive Elasticity and the Ubiquitous Bias: Is Panel Data a Panacea?

There is often assumed to be a unit elasticity of substitution between capital and labour. But estimates based on neoclassical capital demand equations frequently find a smaller value. Recent time-series work for the United States and Canada has suggested that, once the biases inherent in estimating cointegrating vectors are properly accounted for, the elasticity could indeed be close to 1. This paper investigates this possibility for the United Kingdom. First the analysis considers aggregate data where the estimated elasticity is close to 0.4. Then a unique industry-level data set for the United Kingdom is exploited in order to further pinpoint the estimated elasticity. Estimates using dynamic panel data methods are close to those from aggregate data, providing a robust statistical rejection of a unit elasticity in UK data.

The energy behind Vernon Smith's experimental economics

This paper begins with the interplay of the induced value theory and the Hayek hypothesis, and subsequently suggests that we need to understand Vernon Smith's experimental method as not simply empirical, but encompassing a commitment to a special version of neoclassical demand theory. To this end, we compare his commitment to Harold Hotelling's important work on demand, an exemplar of what we dub the Mirowski-Hands thesis. By providing an overview of Smith's research up until the mid-1970s, we place this progenitor of experimental economics in a new light, revealing his special epistemic commitments.

The impossibility of a perfectly competitive labour market

Using the institutional theory of transaction costs, I demonstrate that the assumptions of the competitive labour market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labour market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labour demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction costs and with zero transaction costs all labour is hired as independent contractors, implying that multi-person firms, the employment relationship and labour market disappear. With positive transaction costs, on the other hand, employment contracts are incomplete and the labour supply curve to the firm is upward sloping, again causing the labour demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price.

Investment, the Cost of Capital and Monetary Policy in the Nineties in France: A Panel Data Investigation

Using a large panel of about 6,946 French manufacturing firms, this paper investigates the effect of monetary policy from 1990 to 1999 on investment through the cost of capital and the cash-flow channels. We compare several specifications of the neo-classical demand for capital, taking into account transitory dynamics. The user cost of capital has a significant negative elasticity with respect to capital using the traditional within estimates, or as long as cash-flow are not added in the regression when using Generalized Method of Moments estimates. Asymmetries of effect of monetary policy are evaluated on different groups of firms which differ with respect to informational asymmetries.

Import Elasticities Revisited

Should the long run income elasticity of aggregate import demand be equal to one, as implied by the neoclassical demand theory? Why are many empirical estimates of income elasticities not equal to one, and why are some of them very high? The author addresses these and some other related questions by revisiting the relevant theories and empirical modeling frameworks.

Labour Demand and Wage-induced Innovations: Evidence from the OECD countries

This paper shows that increasing real wages steepens or reverses the slope of the labour demand schedule because increasing wages give firms incentives to innovate and to invest in newer and more efficient vintages of capital. Using macroeconomic data for the OECD countries it is shown that the efficiency inducement of higher real wages steepens the traditional neoclassical labour demand function substantially. Taking into account the adverse demand effects of wage reductions it is doubtful that real wage reductions are a cure for the unemployment problem in the OECD countries.

Investment, the Cost of Capital, and Monetary Policy in the Nineties in France: A Panel Data Investigation

Using a large panel of 6,946 French manufacturing firms, this paper investigates the effect of monetary policy on investment from 1990 to 1999 through the cost-of-capital and the cash-flow channels. We compare several specifications of neo-classical demand for capital, taking into account transitory dynamics. The user cost of capital has a significant negative elasticity with respect to capital using traditional Within estimates, or as long as cash-flow is not added to the regression when using Generalised Method of Moments estimates. Asymmetries of effect of monetary policy are evaluated for different groups of firms which differ in terms of informational asymmetries. When dummy variables related to firms which are more sensitive to cash-flow are added in the model, the user cost elasticity is significant again JEL Classification: C23, D21, D92