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We study the effects of monetary policy–induced changes in Tobin's q on corporate investment and capital structure. We develop a theory of the mechanism, provide empirical evidence, evaluate the ability of the quantitative theory to match the evidence, and quantify the relevance for monetary transmission to aggregate investment. [ABSTRACT FROM AUTHOR]

Interbank networks amplified the contraction in lending during the Great Depression. Panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate commercial bank lending by an estimated 15 percent. [ABSTRACT FROM AUTHOR]

The article focuses on University of Chicago economists Milton Friedman and Don Patinkin. Topics discussed include the book "Studies in the Quantity Theory of Money--a Restatement," published by Friedman, Patinkin's article "Friedman on the Quantity Theory and Keynesian Economics," published in the "Journal of Political Economy" and dissertations that constructed time series on some well-defined measure of a money supply and measures of nominal prices.

Suppose that the nominal money supply could be cut literally overnight. What would happen to prices, wages, and output? Such an experiment was carried out three times in France in 1724, resulting in a cumulative 45 percent cut. Prices adjusted instantaneously and fully on the foreign exchange market. Prices of commodities and of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. The industrial sector experienced a contraction of 30 percent. When the government changed course and increased the nominal money supply overnight by 20 percent, prices responded more, and industry rebounded. [ABSTRACT FROM AUTHOR]

We infer determinants of Latin American hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden Markov model that assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals. Levels and conditional volatilities of monetized deficits drove most hyperinflations and stabilizations, with a notable exception in Peru, where a cosmetic reform of the type emphasized by Marcet and Nicolini occurred. [ABSTRACT FROM AUTHOR]

The Lagos-Wright model--a monetary model in which pairwise meetings alternate in time with a centralized meeting--has been extensively analyzed, but always using particular trading protocols. Here, trading protocols are replaced by two alternative notions of implementability: one that allows only individual defections and one that also allows cooperative defections in meetings. It is shown that the first-best allocation is implementable under the stricter notion without taxation if people are sufficiently patient. And, if people are free to skip the centralized meeting, then lump-sum taxation used to pay interest on money does not enlarge the set of implementable allocations. [ABSTRACT FROM AUTHOR]

We show analytically that in a rational expectations present-value model, an asset price manifests near-random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well-known puzzle that fundamental variables such as relative money supplies, outputs, inflation, and interest rates provide little help in predicting changes in floating exchange rates. As well, we show that the data do exhibit a related link suggested by standard models--that the exchange rate helps predict these fundamentals. The implication is that exchange rates and fundamentals are linked in a way that is broadly consistent with asset-pricing models of the exchange rate. [ABSTRACT FROM AUTHOR]

David Hume's monetary theory has been controversial since its formulation. Lately, the focus has been on Hume's alleged misapplication of the quantity theory of money. While he appears to subscribe to a simple quantity theory with money neutrality, in a famously contested passage in the essay Of Money, he violates the neutrality condition by claiming that an increase in the money stock has favorable output effects. While most commentators argue about the persistence of the output effect, this paper suggests that we can derive an alternative understanding of Hume's monetary thinking by recognizing that he made an analytical distinction between endogenous and exogenous money. Realization that only the former has a favorable output effect forces us to overturn the long-standing consensus that Hume instructed the government to use monetary or trade policy to engineer a gradually increasing money stock. [ABSTRACT FROM AUTHOR]

The author comments on the article "The Role of Countercyclical Monetary Policy," by Peter N. Ireland in the August 1996 issue of the "Journal of Political Economy," in which Ireland argues that appropriate monetary policy sets the nominal rate to zero and supports this interest rate with procyclical movements in the money supply. This note argues that Ireland's policy conclusions are not robust to either of the two modest extensions, the introduction of capital to the production process or an expansion of the type of equilibria considered. Either of the two minor and plausible changes in the modeling environment of Ireland's article cancels the policy prescriptions of the paper. In conclusion, the author contends that Ireland's analysis ignores the relationship of optimal policy to the money demand function.

This paper addresses a basic, yet unresolved, question: Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the state have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means? In our model, firms can meet future liquidity needs in three ways: by issuing new claims, by obtaining a credit line from a financial intermediary, and by holding claims on other firms. When there is no aggregate uncertainty, we show that these instruments are sufficient for implementing the socially optimal (second-best) contract between investors and firms. However, the implementation may require an intermediary to coordinate the use of scarce liquidity, in which case contracts with the intermediary impose both a maximum leverage ratio and a liquidity constraint on firms. When there is only aggregate uncertainty, the private sector cannot satisfy its own liquidity needs. The government can improve welfare by issuing bonds that commit future consumer income. Government bonds command a liquidity premium over private claims. The government should manage debt so that liquidity is loosened (the value of bonds is high) when the aggregate liquidity shock is high and is tightened when the liquidity shock is low. The paper thus suggests a rationale both for government-supplied liquidity and for its active management. [ABSTRACT FROM AUTHOR]

A random-matching model of money is used to deduce the effects of a once-for-all change in the quantity of money. It is shown that the change has short-run effects that are predominantly real and long-run effects that are in the direction of being predominantly nominal provided that the change is random and people learn its realization only with a lag. The change in the quantity of money comes about through a random process of discovery that does not permit anyone to deduce the aggregate amount discovered when the change actually occurs. [ABSTRACT FROM AUTHOR]

Trade is both uncertain and sequential. Money surprises are not neutral because prices at the beginning of the trading process cannot depend on its end. In contrast with fixed-price models, in this paper sellers can change prices during trade. In contrast with Lucas's article, here there is no asymmetry in the information about the money supply. The price quoted by individual sellers may adjust slowly to changes in the targeted money supply, but the distribution of quoted prices adjusts perfectly to these changes and the real price distribution is independent of the anticipated rate of change in the money supply. [ABSTRACT FROM AUTHOR]

This paper studies the value of the stock market as a monitor of managerial performance. It shows that the stock price incorporates performance information that cannot be extracted from the firm's current or future profit data. The additional information is useful for structuring managerial incentives. The amount of information contained in the stock price depends on the liquidity of the market. Concentrated ownership, by reducing market liquidity, reduces the benefits of market monitoring. Integration is associated with weakened managerial incentives and less market monitoring. This may explain why shares of divisions of a firm are rarely traded. The model offers a reason why market liquidity and monitoring have both a private and a social value, a feature missing in standard finance models. This is used to study the equilibrium size of the stock market as a function of investor preferences and the available amounts of long- and short-term capital. [ABSTRACT FROM AUTHOR]

This paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest. It shows that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate. The cumulative process shows up as the failure of learning to converge to rational expectations. Specifically, the paper shows, first in a conventional IS-LM model with an expectations augmented Phillips curve and then in a micro-based finance constraint model, that if people follow any learning rule based on experience that satisfies a weak condition, then the sequence of temporary equilibria under a policy of interest pegging cannot converge. The nonconvergent path that will be observed accords with the familiar cumulative process, in that inflation accelerates if the market rate of interest has been pegged below the natural rate. [ABSTRACT FROM AUTHOR]

In a long-standing controversy over monetary experiences in colonial America, the main substantive issue concerns large and rapid increases in stocks of paper currency that were followed by negligible changes in price levels. The "backing theory" or anticlassical interpretation is that prices failed to respond to major increases in total money supplies. The "quantity theory" or classical hypothesis, by contrast, is that specie seas exported in amounts that left total money stocks approximately unchanged. This paper develops and applies a strategy for resolving this fundamental disagreement despite the absence of data on stocks and flows of specie. [ABSTRACT FROM AUTHOR]

Hume's analysis of how a change in the quantity of money can have a temporary effect on real income has been variously interpreted and misinterpreted for over two hundred years. A possible reason for some misinterpretation is Hume's archaic usage of the term "labor." With the correct interpretation, which is consistent with Hume's other theories and in particular his theory of the interest rate, the reason for the temporary effect on real income is that prices lag behind money wages, and a rise in real wages leads to an increased supply of effort. [ABSTRACT FROM AUTHOR]

This paper generalizes Samuelson's well-known analysis concerning the use of fiat or outside money to support Pareto-optimal allocations in an overlapping-generations framework. While maintaining an elementary demographic structure but expanding the list of available commodities in each period, we establish the following result: If there is a fixed supply of fiat money, and individuals are also permitted to issue bonds or inside money, then there always exists at least one stationary equilibrium yielding a Pareto-optimal allocation. [ABSTRACT FROM AUTHOR]

Recent developments in monetary economics stress the nature of monetary injections, emphasizing that they have implications for the relationship between money and prices. In contrast, traditional approaches posit stable money demand functions that are independent of how money is injected. The former approach implies that certain proportionality relations between money and prices need not obtain. This permits the two approaches to be empirically distinguished, but only if an appropriate "experiment" is conducted. The colonial period is one such experiment. Colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply. [ABSTRACT FROM AUTHOR]

Nominal wages have less variation about a trend than the money supply does, and the variation is more .persistent. This inertia in the nominal wage is often cited as the principal source of stagflation. This paper explains the phenomenon by appealing to temporary wage inflexibility in an environment where agents cannot directly disentangle permanent versus transitory movements in key state variables. A wage equation results that is a distributed lag of previous values of the state variables, including money. Nominal wage varia becomes less sensitive to the money supply as agents' ability to detect the permanent evolution of the money supply declines. This paper adopts an intermediate approach to characterizing money wage inertia, which appeals to temporary wage inflexibility in an environment of imperfect information. The purpose is to provide an example that accounts for the observed inertia in nominal wages without appealing to exogenous multiperiod contracts or restrictions on the flow of data about current-state variables, including the money supply. A related purpose is to separate the issue of nominal-wage persistence from that of the effectiveness of monetary policy. [ABSTRACT FROM AUTHOR]

This paper estimates a reduced-form exchange-rate equation whose estimates are used to address questions on exchange-rate overshooting, intermediate-run exchange-rate dynamics, and long-run proportionality relationships between relative money supplies and exchange rates. Based on Swiss-U.S. data from the period 1973-79, the major findings are that following a monetary shock there is short-run exchange-rate overshooting by a factor of about two, and that subsequent exchange-rate adjustments to a new long-run equilibrium take longer than 2 years and exhibit nonmonotonic patterns. The purpose of this paper is to examine empirically the predictions of these exchange-rate dynamic models against Swiss/U.S. data over the period 1973-77. Specifically, the paper addresses the questions of whether there is short-run exchange-rate overshooting, whether the intermediate-run exchange-rate and price-level adjustments are nonmonotonic, and whether the long-run proportionality relationships between money supplies, price levels, and exchange rates hold. The major empirical findings from this study are as follows: (1) The exchange rate overshoots in the quarter in which a monetary change takes place by a factor of about two. (2) The exchange-rate adjustment path to full equilibrium is not monotonic, as predicted by the original Dornbusch fixed-output model, but rather exhibits periods of appreciation and depreciation. The price level, however, adjusts monotonically. (3) Purchasing power parity holds in the long run. As noted above, there is wide theoretical agreement that this should be the case, but it has often been difficult to verify empirically. Furthermore, the "long run" is calculated to be approximately 2-3 years. [ABSTRACT FROM AUTHOR]

The traditional explanation for the pattern of commodity price adjustment to monetary change, which stresses factors affecting the short-run elasticities of supply and demand in different markets, does not take into account price flexibility. This paper offers an explanation for the pattern of commodity price adjustment to monetary change based on differing degrees of price flexibility across industries, where price flexibility is determined by contract length. An extension to product markets of the theory of implicit long-term wage contracts leads to a simple hypothesis which explains the pattern of industry and sectoral price response to monetary change by implicit contract length, the latter being determined by relative price variability. Tests of this hypothesis across broad sectors and industries using postwar U.S. data produce favorable results. Also confirmed by the empirical evidence is the pattern of industry and sectoral price response to monetary change suggested by the traditional approach. [ABSTRACT FROM AUTHOR]

The paper examines the trajectories of the economic variables when government expenditures are financed by changes in the money stock. It is shown that government budget balance is not a condition for equilibrium. If the nominal rate of interest changes by about as much as the expected rate of inflation, a rise in real government purchases per capita has the following effects: There will be a positive impact upon output per capita but steady-state output per capita and the capital intensity will decline, and there will be a rise in the inflation tax on real balances and stead-state rate of inflation. [ABSTRACT FROM AUTHOR]

Using Kendrick's recently published data on human and nonhuman wealth in the United States, log-linear money demand functions of the "partial adjustment" variety are estimated by introducing in each nonhuman, total, or human wealth as the scale or the "constraint" variable. It is found that the long-run elasticity of money demand with respect to nonhuman wealth is somewhat larger than that with respect to total wealth, and the elasticity with respect to human wealth is the lowest. Such a structure in the elasticities is observed consistently, although differences between the elasticities are not large and perhaps not statistically significant. Using Kendrick's recently published data on human and nonhuman wealth in the United States, log-linear money demand functions of the "partial adjustment" variety are estimated by introducing in each nonhuman, total, or human wealth as the scale or the "constraint" variable. It is found that the long-run elasticity of money demand with respect to nonhuman wealth is somewhat larger than that with respect to total wealth, and the elasticity with respect to human wealth is the lowest. Such a structure in the elasticities is observed consistently, although differences between the elasticities are not large and perhaps not statistically significant. [ABSTRACT FROM AUTHOR]

Agents' beliefs in the imminent reform of a particular money supply process can have a powerful effect on their predictions of such variables as the rate of inflation. To find a criterion for monetary reform, we argue that any money supply process which does not provide a finite solution for price in a Cagan-type hyperinflationary money market will be rejected by the public. Such a process does not have the basic property of money which we call "process consistency,'' and we suggest that agents' subjective probabilities that their money is "process consistent" are identical to the probability that they attach to a currency reform. We compute agents' subjective probabilities that a particular money supply process is process consistent for the explosive part of the German hyperinflation, and we find that the probability of process consistency reached its lowest level in the very week in which the reform started. [ABSTRACT FROM AUTHOR]

In a recent paper, Sargent (1976a) proposed that the natural rate hypothesis could be tested by equating it to the statistical hypothesis that policy variables do not "cause" real variables in the sense defined by Granger (1969). Thus, if past rates of growth in the money supply do not help to predict the unemployment rate when added to a regression which includes past unemployment rates, then money does not "cause" the unemployment rate and the data would be regarded by Sargent as being consistent with the natural rate hypothesis. The purpose of this note is to examine the statistical connection between Granger causality and the natural rate hypothesis and to argue that these are fundamentally unrelated concepts. Therefore, finding that money does "cause" the unemployment rate (as some of Sargent's results suggest) does not constitute evidence against the natural rate hypothesis. [ABSTRACT FROM AUTHOR]

Changes in the money supply are expected to affect the nominal rate of interest in opposite directions: the liquidity and credit effects tend to depress the rate, while higher inflationary expectations work in the opposite direction. Theoretical studies suggest that, although liquidity and credit effects initially dominate, they are eventually more than offset by the expectations effect. These results are confirmed in countries of mild inflation. The results obtained here for a highly inflationary country--Argentina--indicate that the expectations effect is dominant and that any change in the rate of monetary disequilibrium was fully transmitted to the nominal interest rate. [ABSTRACT FROM AUTHOR]

Looks into the inconsistencies of the nominal money stock with the appearance of real income and nominal interest rates. Money demand on the usual regressors like real income; Formulation of money-demand equations; Existence of casual patterns within a bivariate distributed-lag system.

Thus paper analyzes a two-sector model of exchange rate determination for a small open economy with flexible prices. Residents are assumed to hold both domestic and foreign currency and to have rational expectations. The model satisfies the homogeneity postulate but it is shown that an increase in the rate of expansion of money supply leads to an instantaneous deterioration of the real exchange rate. In the long run, however, the latter moves back to its previous level. [ABSTRACT FROM AUTHOR]

The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior. [ABSTRACT FROM AUTHOR]

Examines the interdependent nature of monetary policies. Discoveries made regarding the Cournot, or noncooperative, solution and the Stackelberg leadership solution and their relation to the contract curve; Effect of creation of international reserves.

The usual proof that Friedman's simple k-percent growth rule for the money supply is suboptimal comes from mechanically manipulating a reduced-form equation. Those manipulations, in general, show that pursuing a rule with feedback from current economic conditions to the money supply is better than following Friedman's advice. To be valid, the proof requires that, as written in one particular way, the reduced-form equation will remain unaltered when the monetary authority departs from the old "rule" used during the estimation period and follows a new one. Here I point out that there are always alternative ways of writing the reduced form, one being observationally equivalent with the other, so that each is equally valid in the estimation period. If one assumes that the first form is invariant when the policy rule is changed, the proof of the superiority of rules with feedback over Friedman's rule goes through. But if one assumes that it is the reduced form as written in the second way that remains unchanged, the proof that Friedman is wrong does not obtain--instead, the implication is that Friedman's rule does as well as any other deterministic feedback rule and better than a stochastic rule. [ABSTRACT FROM AUTHOR]

One of the unsolved problems in nineteenth-century monetary history has been why so few national bank notes were issued even though most of the time their issuance seemed to be very profitable. The Goodhart explanation for this phenomenon is unsatisfactory. The higher cost of note issue for city banks is very small indeed, and the increased risk is really relevant only after 1907. It does not offer a general explanation for why note issue was so low in, say, the 1890s. Just as Goodhart attempted to resurrect the explanation of Spurgeon Bell, this paper represents a modified restoration of Charles Dunbar and the Indianapolis Monetary Commission. The principal reason behind the low issue of national bank notes lay in differences in the relative profitability of note issue across areas as evidenced in the wide geographical variation in note issue. Southern and western banks issued hardly any notes at all in excess of the minimum 10 There is the question, of course, whether differences in local profitability of note issue are the important effect or whether differences in local interest rates only pick up systematic regional differences such as population density, differences in preferences for holding notes, or average city size, all of which might influence the relative difficulty of keeping notes outstanding and thus may be the true determinants of geographical variation in note issue. A pooled regression of country and reserve city banks of the same form was estimated including both regional dummies and one for reserve cities. Once more, the R coefficient was highly significant while the dummies were generally small and insignificant, contributing little explanatory power. Variations in profitability appear to be the dominant influence. requirements, in spite of the strong demand for notes in those regions, because of the high opportunity cost of note issue as measured by the local interest rate. If the country bank chose to issue notes it would lose the h... [ABSTRACT FROM AUTHOR]

The need for issuing bigger denomination notes arises every 5 or 10 years in an economy like Taiwan where nominal income has been growing tremendously rapidly and where the public's currency holdings loom large in its total stock of money.[1] The authorities, however, have been reluctant to meet the needs of trade on the ground that the issuance of big-denomination notes is likely to be interpreted by the public as a sign of the overissue of currencies, and the mere expectation of inflation may drive the price level up even though the total stock of money is held constant. On the other hand, there was recently a shortage of 1-yuan coins in Taiwan. The authorities, in this case, responded very promptly and effectively in meeting the difficulty of coin shortages by issuing 1-yuan notes first and then by managing to provide an adequate amount of new coins.[2] Introduction of bigger denomination notes to relieve the public from the inconvenience of a higher price and unchanged maximum denomination implies a shift to a better denomination mix of money (currency). By the same token, mitigating the difficulty of coin shortages and providing an adequate amount of small-denomination currencies also imply an improvement in the currency size mixture. The purpose of this note is to analyze the macroeconomic effects of shifts in currency size mixture. Specifically it will be shown that an improvement in the size mixture of money would be contractionary on the price level. [ABSTRACT FROM AUTHOR]

Focuses on the domestic monetary policy. Rate of growth in the money stock; Level of interest rates; Fluctuations in the demand for goods and services.

This paper applies previous theoretical and empirical results on inflation and demand for money to a study of inflationary finance and the welfare cost of inflation. The amount of revenue generated by a steady inflation is derived as a function of the inflation rate and some underlying parameters. Empirically, the revenue maximizing rate is on the order of 140 percent per month, with the corresponding revenue approximating 15 percent of national income. It is argued that hyper-inflations become unstable when the revenue-maximizing rate is exceeded. Because inflation leads to higher transaction costs (resulting from greater payment frequencies and reduced use of "money" as a payments medium), there is a net social cost attached to inflationary finance. The model implies that marginal collection tests of inflationary finance exceed 50 percent for all positive rates of inflation--hence, alternative means of raising revenue should be socially preferable. The analysis also provides estimates of the social gain from moving to the optimum quantity of money as 1-3 percent of income. [ABSTRACT FROM AUTHOR]

The article is based on textual evidence from the quantity-theory and Keynesian literature. It shows, first, that the conceptual framework of a portfolio demand for money that Friedman denotes as the "quantity theory" is actually that of Keynesian economics. Conversely, Friedman detracts from the true quantity theory by stating that its formal short-run analysis assumes real output constant, while only prices change. Friedman also incorrectly characterizes Keynesian economics in terms of absolute price rigidity. He does this by overlooking the systematic analysis by Keynes and the Keynesians of the role of downward wage flexibility during unemployment, and of the "inflationary gap" during full employment. Otherwise Friedman's interpretation of Keynes is the standard textbook one of an economy in a "liquidity-trap" unemployment equilibrium. The author restates his alternative interpretation of Keynesian economics in terms of unemployment disequilibrium. [ABSTRACT FROM AUTHOR]

Despite Friedman's numerous trenchant confrontations with "Keynesians," he has never compared his analytical, framework with the "Theory of a Monetary Economy" developed by Keynes. The purpose of this paper is, therefore, to enumerate a few of the more fundamental conceptual differences between the monetary analysis of Keynes and that of Friedman. Keynes's analysis involves (1) the concept of uncertainty in the Knight-Keynes sense, (2) the inapplicability of a Walrasian system to a real world production economy where false trades occur, and (3) the essential properties of money which follow from the existence of uncertainty. This paper shows that recognition of these conceptual differences leads to significantly different specification of the demand for money and its supply aspects in the Keynesian system compared with Friedman's theoretical framework. [ABSTRACT FROM AUTHOR]

There are two ways in which the quantity of money may be included in a general equilibrium system: as a datum, whose value is fixed exogenously, or as an unknown, whose value is determined by the equilibrium system itself. Let them be called active money and passive money, respectively. Current monetary theory uses the first approach. The Ricardo-Walras-Keynes tradition in general equilibrium models is clearly of the active-money variety. This is also true of the more contemporary versions, such as Patinkin's well-known system (1965).[1] Apart from the main stream of thought, however, a number of analyses exist which imply passive money. The gold--standard model, as it is usually expounded, belongs to this class. The price of gold in terms of money is given, while the stock of money is endogenously determined by the set of equilibrium conditions. The form in which the quantity of money adapts to its equilibrium level differs according to the institutional mechanism: Convergence is assured through monetization and demonetization of gold in the pure gold-currency system, and through convertibiliy of notes into gold and vice versa in the gold-standard system with paper money. In either case, the money supply is allowed to conform to its equilibrium volume. This kind of monetary system, in which the money price of a certain product or commodity is a datum and the quantity of money a dependent magnitude, may be denoted in general as a commodity standard. Today the chief motivation for passive-money hypotheses stems from inflation theory. The labor standard underlies nearly all cost-inflation models. Structural inflation analyses, on the other hand, presuppose the existence of some commodity standard; they view the main strand of causation as framing from the price level to the quantity of money, rather than in the opposite way.[2] Occasionally credit-standard arguments are combined with cost- or structural-inflation theses.[3] Thus the assumption of passive mon... [ABSTRACT FROM AUTHOR]

Examines the economic consequences of the Second Bank in the United States. Expansion of bank liabilities; Decline in money supply; Decrease in bank reserve ratios.

This paper investigates the empirical operation of some recognized theoretical effects of the money stock on market rates of interest. The analysis covers the period since World War II, the period for which extensive quarterly and monthly data are available. The estimates obtained here show that a change in the money stock produces an immediate negative liquidity effect on market interest rates, but also produces (only a little later) positive effects which tend to offset the initial negative influence. Liquidity effects are fully offset by the end of the third month following the month in which M[sub 1] is changed and by the end of the fifth month after M[sub 2] is changed. These positive effects cannot be directly separated into income and price expectations effects, but evidence on total price expectations effects implies that the latter have very little importance over a period as short as three to five months. The longer period required for offsetting the initial negative effects of M[sub 2] suggests that income reacts more slowly to a given percentage change in M[sub 2] than in M[sub 1]. [ABSTRACT FROM AUTHOR]

The primary purpose of this paper is to present an analysis of the behavior of the Canadian money supply during the 1925-34 period. Hopefully, this analysis will stimulate other forays into Canadian monetary history. The several approaches we employed in this paper should provide a useful link between the pre- and post-Bank of Canada era. Approach I will be appropriate for analyzing the money supply after 1935, while the other two approaches will prove valuable for the pre-1925 period. Our analysis also has implications for existing studies. For example, in chapter v of Liquidity Preferences of Commercial Banks, Morrison[19] analyzes the behavior of the Canadian banking sector from 1927-58 and, among other things, attempts to establish whether or not Canadian banks held the vast quantities of excess reserves during the 1930's that the U.S. banks held. While we do net quarrel with his conclusion (that they did not hold vast excess reserves then), nor with the reason offered (that there were no bank failures in Canada during the thirties), the operations of the Finance Act were such that had there been a. "run" on the Canadian banks they need not have had to give up any unborrowed reserves. They would simply meet any "run" with their unused, potential note issue. When this ran out, they could simply pledge their securities with the minister of finance and obtain dominion notes, which would be deposited in the Central Gold Reserve. They would then issue their own notes to the public, leaving untouched their unborrowed reserves. But this is a hypothetical situation, and these observations may not be very revealing. A second study is that by Macesich (1964) in which he appraises the performance of the quantity theory and of income-expenditure theory for 1926-58. For the period 1926-29, the money supply increased despite the tremendous fall in unborrowed reserves. We interpret this to mean that the banks easy access to (and willingness to borrow from) t... [ABSTRACT FROM AUTHOR]

Analyzes the quantity theory of money. Distinction between the nominal and real quantity of money; Use of quantity equations in the quantity theory; Determinants of money stocks.

This article comments on the optimal trend rate of growth of the money supply, or of the price level, in the "long run," when price and wage trends have become anticipated. As everyone now recognizes, some earlier analyses which make all money "outside money" and all "outside wealth" money mislead by deducing a necessary connection between the rate of anticipated inflation and growth of the money supply, on the one hand, and capital intensity, the investment-output ratio and the real interest rate, on the other. The general principle, that money should bear a real return sufficient to obviate technically unnecessary asset exchanges for transactions purposes, subject to qualifications about the social costs of paying interest on money if deflation is ruled out, clearly applies to private-bank demand liabilities. The essence of the welfare gain that would result is that less labor and capital would be tied up in making transactions. This gain does not make you "wealthier" except in the sense in which faster commuting times would make you "wealthier."

This article comments on the optimal growth rate of money. The author sees little point in attempts to derive optimality rules from models that bear as little relation to reality as does Aristotelian physics. Considered as a purely intellectual exercise, the elaboration of alternative growth models, with or without monetary frills, is surely worthwhile and may even offer some useful insights into the working of observable economic systems. But if one considers the literature on money and growth as a branch of positive economics, he can hardly fail to be appalled, if he takes theory seriously, by the extent to which contributors to it disregard elementary canons of scientific inquiry. The standard procedure is to convert "real" growth models, the properties of which are already established, into "monetary" growth models by simply adding a commodity called "money," the analytical characteristics of which are specified implicitly or not at all. As is well known, serious difficulties confront any attempt to explain why money will be held at all in these circumstances, unless it is the only store of value in the economy.

Any evaluation of the way the rate of growth of the money supply can be used to implement the goals of economic policy (as well as potential trade-offs among these goals) requires an analysis of the mechanism via which alternative rates of growth of the money supply affect the economy. The goals of policy which, in principle, may be affected by alternative growth rates of the money supply are (1) the rate of growth of the economy, (2) the price level, (3) the level of employment and output, and (4) international goals. In this paper, the restrictive assumptions are made that the economy is closed and that savings are automatically invested (that is, there is no independent investment function). The analysis deals almost exclusively with the first two goals of economic policy. [ABSTRACT FROM AUTHOR]

The question of the optimal size and rate of growth of the money supply has at least as many meanings as there are definitions of "money." Three possible interpretations of the question are: (1) What are the optimal size and the optimal rate of growth of the central government's deadweight debt to its citizens? (2) What are the optimal size and the optimal rate of growth of the supplies of currency and other means of payment? (3) What is the optimal degree of financial intermediation in an economy, and what is its optimal rate of expansion? In some models one or two of these interpretations vanish, or merge. An important example is the simplest monetary extension of the standard aggregative neoclassical growth model. In this extension money as government debt and money as means of payment are identical. It is assumed, in other words, that all government debt takes the form of means of payment --either directly as currency or indirectly as demand deposits backed 100 per cent by currency or other government obligations--and that all means of payment are directly or indirectly obligations of the central government. Under these restrictive assumptions, interpretations (1) and (2) merge. At the same time these models ignore private financial markets and intermediaries, so that question (3) does not arise. [ABSTRACT FROM AUTHOR]

This article comments on the two papers by economists Marinas Brownlee and Eric Maisel in which they analyze the effects of monetary policy of the U.S. in 1966. While Brownlee is primarily concerned with the demand for long-lived assets and Maisel with the flow of funds, both papers tend to emphasize the interest-rate effects of monetary policy. Both authors conclude that the major impact of monetary policy is on housing. The substantive differences between Brownlee's demand analysis and Maisel's supply-of-funds analysis are discussed in Section I. Interest rates play a major role in both papers as an indicator of monetary policy, as a measure of the cost of money, and as a transmitter of monetary impulses. Maisel begins his thorough review of 1966 with the observation that there are several conflicting theories as to the manner in which money affects the real economy. He adopts an eclectic view and analyzes "the relationship of monetary changes to expenditures in housing and other fixed investment," where the monetary influence on expenditures is more readily understood. Accordingly he traces, carefully and in detail, the link between interest rates, disintermediation, portfolio adjustments, changes in the flow of funds, and changes in private expenditures.

Policy makers are apparently devoting an expanding volume of resources to econometric studies. Policy makers adjust current open market transactions, requirement ratios, and other levers of control according to their beliefs concerning the structure of the economic process and according to their interpretation of the current state of evolution of the economy. Both belief and interpretation must be substantiated in order to provide reasonable grounds for rational policy making. Such substantiation requires two distinct types of intellectual activities. First, the beliefs must be reformulated in the form of explicitly constructed empirical theories. Second, the constructs advanced must be systematically evaluated in competition with rival hypotheses emanating from contending beliefs. Producers of econometric models promise on occasion successful resolution of policy problems. The adequate performance of the explicatory function, that is, the successful search for a theory formalizing the initially fuzzy belief, necessarily precedes an evaluation.

Investigates the causes of increase in the price of goods in the United States from 1939 to 1957. Discussion of economic science and policies; Incidence of inflation in money supply; Implications of excessive credit expansion for prices.

Changes in interest rates may be attributed to changes in the supply schedule of funds, changes in the demand schedule, or changes in both schedules. Since interest rates link the financial and real sectors of the economy and thus transmit the major thrust of central bask actions to the ultimate targets of monetary policy, it is important to identify properly the causes underlying changes in rates. An increase in rates resulting from an upward shift in the detoured for funds has substantially different implications for the course of economic activity than an equal rise attributable to a downward shift in the supply of funds. This paper conducts tests to determine whether postwar changes in interest rates have resulted primarily from changes in the demand for funds or in the supply of funds. [ABSTRACT FROM AUTHOR]