Monetary economics:
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2009
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| Edition: | 2. ed. |
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| Physical Description: | XXVII, 842 S. graph. Darst. 25 cm |
| ISBN: | 9780415772099 9780415772105 9780203892404 0415772095 0415772109 0203892402 |
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| 100 | 1 | |a Handa, Jagdish |d 1939- |e Verfasser |0 (DE-588)137984243 |4 aut | |
| 245 | 1 | 0 | |a Monetary economics |c Jagdish Handa |
| 250 | |a 2. ed. | ||
| 264 | 1 | |a London ; New York |b Routledge |c 2009 | |
| 300 | |a XXVII, 842 S. |b graph. Darst. |c 25 cm | ||
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| 650 | 4 | |a Bank | |
| 650 | 4 | |a Money | |
| 650 | 4 | |a Money supply | |
| 650 | 4 | |a Macroeconomics | |
| 650 | 4 | |a Monetary policy | |
| 650 | 4 | |a Banks and banking | |
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| adam_text | Contents
Preface
xxv
Acknowledgments
xxviii
PARTI
Introduction and heritage
1.
Introduction
1.1
What is money and what does it do?
5
1.1.1
Functions of money
5
1.1.2
Definitions of money
5
1.2
Money supply and money stock
6
1.3
Nominal versus the real value of money
7
1.4
Money and bond markets in monetary macroeconomics
7
1.5
A brief history of the definition of money
7
1.6
Practical definitions of money and related concepts
12
1.6.1
Monetary base and the monetary base multiplier
14
1.7
Interest rates versus money supply as the operating target
of monetary policy
15
1.8
Financial intermediaries and the creation of financial assets
15
1.9
Different modes of analysis of the economy
18
1.10
The classical paradigm: the classical group of
macroeconomic
models
20
1.11
The Keynesian paradigm and the Keynesian set of
macroeconomic
models
24
1.12
Which macro paradigm or model must one believe in?
26
1.13
Walras slaw
28
1.14
Monetary policy
28
1.15
Neutrality of money and of bonds
29
1.16
Definitions of monetary and fiscal policies
30
Conclusions
31
Summary of critical conclusions
32
Review and discussion questions
32
References
33
viii Contents
2.
The heritage of monetary economics
34
2.1
Quantity equation
35
2.1.1
Some variants of the quantity equation
38
2.2
Quantity theory
39
2.2.1
Transactions approach to the quantity theory
40
2.2.2
Cash balances (Cambridge) approach to the quantity
theory
45
2.3
Wicbell spure credit economy
49
2.4
Keynes s contributions
52
2.4.1
Keynes s transactions demand for money
54
2.4.2
Keynes s precautionary demand for money
55
2.4.3
Keynes s speculative money demand for an individual
56
2.4.4
Keynes s overall speculative demand function
58
2.4.5
Keynes s overall demand for money
60
2.4.6
Liquidity trap
61
2.4.7
Keynes s and the early Keynesians preference for fiscal
versus monetary policy
62
2.5
Friedman s contributions
63
2.5.1
Friedman s restatement of the quantity theory of money
63
2.5.2
Friedman on inflation, neutrality of money and monetary
policy
65
2.5.3
Friedman versus Keynes on money demand
66
2.6
Impact of money supply changes on output and employment
67
2.6.1
Direct transmission channel
69
2.6.2
Indirect transmission channel
69
2.6.3
Imperfections in financial markets and the lending/credit
channel
70
2.6.4
Review of the transmission channels of monetary effects in the
open economy
70
2.6.5
Relative importance of the various channels in financially
less-developed economies
71
Conclusions
71
Summary of critical conclusions
73
Review and discussion questions
73
References
74
PARTII
Money in the economy
77
3.
Money in the economy: General equilibrium analysis
79
3.
1 Money and other goods in the economy
80
3.2
Stylized facts of a monetary economy
83
3.3
Optimization without money in the utility function
84
Contents ix
3.4 Medium
of payments role of money: money in the utility function
(MIUF)
88
3.4.1
Money in the utility function (MIUF)
89
3.4.2
Money in the indirect utility function (MIIUF)
90
3.4.3
Empirical evidence on money in the utility function
93
3.5
Different concepts of prices
93
3.6
User cost of money
94
3.7
The individual s demand for and supply of money and other goods
95
3.7.1
Derivation of the demand and supply functions
95
3.7.2
Price level
95
3.7.3
Homogeneity of degree zero of the demand and supply
functions
96
3.7.4
Relative prices and the numeraire
97
3.8
The firm s demand and supply functions for money and other goods
97
3.8.1
Money in the production function (MIPF)
98
3.8.2
Money in the indirect production function
98
3.8.3
Maximization of profits by the firm
100
3.8.4
The firm s demand and supply functions for money and
other goods
101
3.9
Aggregate demand and supply functions for money and other goods in
the economy
101
3.10
Supply of nominal and real balances
102
3.11
General equilibrium in the economy
103
3.12
Neutrality and super-neutrality of money
105
3.12.1
Neutrality of money
105
3.12.2
Super-neutrality of money
105
3.12.3
Reasons for deviations from neutrality and
super-neutrality
107
3.13
Dichotomy between the real and the monetary sectors
109
3.14
Welfare cost of inflation
112
Conclusions
115
Summary of critical conclusions
116
Review and discussion questions
117
References
118
PARTIU
The demand for money
119
4.
The transactions demand for money
121
4.1
The basic inventory analysis of the transactions demand
for money
122
4.2
Some special cases: the profitability of holding money and bonds for
transactions
125
χ
Contents
4.3
Demand for currency
versus
demand deposits
127
4.4
Impact of economies of scale and income distribution
128
4.5
Efficient funds management by firms
129
4.6
The demand for money and the payment of interest on demand
deposits
130
4.7
Demand deposits versus savings deposits
131
4.8
Technical innovations and the demand for monetary assets
132
4.9
Estimating money demand
133
Conclusions
135
Summary of critical conclusions
136
Review and discussion questions
136
References
137
5.
Portfolio selection and the speculative demand for money
138
5.1
Probabilities, means and variances
140
5.2
Wealth maximization versus expected utility maximization
142
5.3
Risk preference, indifference and aversion
144
5.3.1
Indifference loci for a risk
averter
145
5.4
The expected utility hypothesis of portfolio selection
145
5.5
The efficient opportunity locus
147
5.5.1
Expected value and standard deviation of the portfolio
147
5.5.2
Opportunity locus for a riskless asset and a risky asset
148
5.5.3
Opportunity locus for risky assets
148
5.5.4
Efficient opportunity locus
151
5.5.5
Optimal choice
151
5.6
Tobin s
analysis of the demand for a riskless asset versus
a risky one
154
5.7
Specific forms of the expected utility function
158
5.7.1
EUH and measures of risk aversion
158
5.7.2
Constant absolute risk aversion
(CARA)
159
5.7.3
Constant relative risk aversion (CRRA)
162
5.7.4
Quadratic utility function
164
5.8
Volatility of the money demand function
165
5.9
Is there a positive portfolio demand for money balances in
the modern economy?
165
Conclusions
167
Appenda
I
167
Axioms and theorem of the expected utility hypothesis
167
Appendix
2 169
Opportunity locus for two risky assets
169
Summary of critical conclusions
172
Review and discussion questions
172
References
174
Contents xi
6.
Precautionary and
buffer
stock
demand for money
175
6.1
An extension of the transactions demand model to precautionary
demand
177
6.2
Precautionary demand for money with overdrafts
181
6.3
Precautionary demand for money without overdrafts
183
6.4
Buffer stock models
184
6.5
Buffer stock rule models
186
6.5.1
The rule model of Akerlof and Milboume
186
6.5.2
The rale model of Miller and
Orr
188
6.6
Buffer stock smoothing or objective models
191
6.6.1
The smoothing model of Cuthbertson and Taylor
191
6.6.2
The Kanniainen and Tarkka
( 1986)
smoothing model
193
6.7
Empirical studies on the precautionary and buffer stock models
196
Conclusions
201
Summary of critical conclusions
202
Review and discussion questions
203
References
203
7.
Monetary aggregation
205
7. 1
The appropriate definition of money: theoretical considerations
206
7.2
Money as the explanatory variable for nominal national income
207
7.3
Weak separability
208
7.4
Simple sum monetary aggregates
210
7.5
The variable elasticity of substitution and near-monies
212
7.6
User cost of assets
216
7.7
Index number theory and Divisia aggregates
217
7.8
The certainty equivalence monetary aggregate
219
7.9
Judging among the monetary aggregates
220
7.9.1
Stability of the money demand function
221
7.9.2
Controllability of the monetary aggregate and policy
instruments and targets
221
7.9.3
Causality from the monetary aggregate to income
221
7.9.4
Information content of economic indicators
223
7.9.5
The St Louis monetarist equation
224
7.9.6
Comparing the evidence of Divisia versus simple-sum
aggregation
225
7.10
Current research and policy perspectives on monetary
aggregation
228
Conclusions
228
Appendix: Divisia aggregation
230
Measuring prices by the user costs of liquidity services
232
Adjustments for taxes on rates of return
233
Summary of critical conclusions
234
xii Contents
Review and
discussion questions
234
References
235
8.
The demand function for money
237
8.1
Basic functional forms of the closed-economy money demand
function
238
8.1.1
Scale variable in the money demand function
240
8.2
Rational expectations
241
8.2.1
Theory of rational expectations
241
8.2.2
Information requirements of rational expectations:
an aside
243
8.2.3
Using the
REH
and the Lucas supply rule for predicting
expected income
245
8.2.4
Using the
REH
and a Keynesian supply function for predicting
expected income
247
8.2.5
Rational expectations
-
problems and approximations
248
8.3
Adaptive expectations for the derivation of permanent income and
estimation of money demand
249
8.4
Regressive and extrapolative expectations
251
8.5
Lags in adjustment and the costs of changing money balances
252
8.6
Money demand with the first-order
РАМ
254
8.7
Money demand with the first-order
РАМ
and adaptive expectations of
permanent income
255
8.8
Autoregressive
distributed lag model: an introduction
256
8.9
Demand for money in the open economy
257
8.9.1
Theories of currency substitution
258
8.9.2
Estimation procedures and problems
261
8.9.3
The special relation between
M
and M* in the
medium-of-payments function
264
8.9.4
Other studies on CS
266
Conclusions
267
Summary of critical conclusions
268
Review and discussion questions
268
References
269
9.
The demand function for money: Estimation problems, techniques and
findings
270
9. /
Historical review of the estimation of money demand
2 71
9.2
Common problems in estimation: an introduction
275
9.2.1
Single equation versus simultaneous equations estimation
276
9.2.2
Estimation restrictions on the portfolio demand functions for
money and bonds
276
9.2.3
The potential volatility of the money demand function
277
Contents xiii
9.2.4 Multicollinearity 278
9.2.5
Serial
correlation and
cointegration
278
9.3
The relationship between economic theory and
cointegration
analysis:
a primer
279
9.3.1
Economic theory: equilibrium and the adjustment to
equilibrium
279
9.4
Stationarity of variables: an introduction
280
9.4.1
Order of integration
282
9.4.2
Testing for non-stationarity
283
9.5
Cointegration
and error correction: an introduction
284
9.5.1
Cointegration
techniques
286
9.6
Cointegration, ECM
andmacroeconomic theory
288
9.7
Application of the
cointegration—
ECM technique to money demand
estimation
288
9.8
Some
cointegration
studies of the money-demand function
289
9.9
Causality
292
9.10
An illustration: money demand elasicities in a period of
innovation
292
9.11
Innovations and the search for a stable money-demand function
293
Conclusions
294
Summary of critical conclusions
296
Appendix
297
The ARDL model and its
cointegration
and ECM forms
297
Review and discussion questions
298
References
300
PART IV
Monetary policy and central banking
303
10.
Money supply, interest rates and the operating targets of monetary
policy: Money supply and interest rates
305
10.1
Goals, targets and instruments of monetary policy
306
10.2
Relationship between goals, targets and instruments, and difficulties
in the pursuit of monetary policy
308
10.3
Targets of monetary policy
309
10.4
Monetary aggregates versus interest rates as operating targets
309
10.4.1
Diagrammatic analysis of the choice of the operating target of
monetary policy
310
10.4.2
Analysis of operating targets under a supply shock
313
/0.5
The price level and inflation rate as targets
316
10.6
Determination of the money supply
319
10.6.1
Demand for currency by the public
319
10.6.2
Commercial banks: the demand for reserves
322
xiv Contents
10.7
Mechanical theories of the money supply: money supply
identities
325
10.8
Behavioral theories of the money supply
327
10.9
Cointegration
and error-correction models of the money
supply
331
10.10
Monetary base and interest rates as alternative policy
instruments
331
Conclusions
333
Summary of critical conclusions
334
Review and discussion questions
334
References
336
11.
The central bank: Goals, targets and instruments
338
11.1
Historic goals of central banks
339
11.2
Evolution of thegoals of
centralbanks
342
11.3
Instruments of monetary policy
345
11.3.1
Open market operations
345
11.3.2
Reserve requirements
346
11.3.3
Discount/bank rate
348
11.3.4
Moral suasion
351
11.3.5
Selective controls
351
11.3.6
Borrowed reserves
352
11.3.7
Regulation and reform of commercial banks
352
11.4
Efficiency and competition in the financial sector: competitive supply
of money
353
11.4.1
Arguments for the competitive supplies of private monies
353
11.4.2
Arguments for the regulation of the money supply
354
11.4.3
Regulation of banks in the interests of monetary policy
354
11.5
Administered interest rates and economic performance
356
11.6
Monetary conditions index
357
11.7
Inflation targeting and the Taylor rule
358
11.8
Currency boards
359
Conclusions
360
Summary of critical conclusions
361
Review and discussion questions
361
References
362
12.
The central bank: Independence, time consistency and credibility
364
12.1
Choosing among multiple goals
365
12.2
Conflicts among policy makers: theoretical analysis
368
12.3
Independence of the central bank
370
12.4
Time consistency of policies
373
12.4.1
Time-consistent policy path
374
12.4.2
Reoptimization policy path
376
Contents xv
12.4.3
Limitations on
the superiority of time-consistent policies over
reoptimization policies
377
12.4.4
Inflationary bias of myopic optimization versus
intertemporal
optimization
381
12.4.5
Time consistency debate: modern classical versus Keynesian
approaches
381
12.4.6
Objective functions for the central bank and the economy s
constraints
382
12.5
Commitment and credibility of monetary policy
387
12.5.1
Expectations, credibility and the loss from discretion versus
commitment
387
12.5.2
Credibility and the costs of disinflation under the EAPC
391
12.5.3
Gains from credibility with a target output rate greater
than/
393
12.5.4
Analyses of credibility and commitment under supply shocks
and rational expectations
395
12.6
Does the central bank possess information superiority?
398
12.7
Empirical relevance of the preceding analyses
398
Conclusions
399
Appenda
401
Myopic optimal monetary policy without commitment in a
new Keynesian framework
401
Intertemporal
optimization with commitment in a new
Keynesian framework
403
Summary of critical conclusions
403
Review and discussion questions
404
References
405
PARTV
Monetary policy and the macroeconomy
407
13.
The determination of aggregate demand
409
13.1
Boundaries
oý
the short-run
macroeconomic
models
410
13.1.1
Definitions of the short-run and long-ran in
macroeconomics
410
13.2
The foreign exchange sector of the open economy and the
determination of the exchange rate under floating exchange rates
411
13.3
The commodity sector
413
13.3.
ł
Behavioral functions of the commodity market
415
13.4
The monetary sector: determining the appropriate operating target of
monetary policy
418
13.5
Derivation of the LM equation
419
13.5.1
The link between the IS and LM equations: the Fisher equation
on interest rates
421
xvi Contents
13.6 Aggregate
demand for commodities in the IS-LM model
421
13.6.1
Keynesian-neoclassical synthesis on aggregate demand in the
IS-LM model
424
13.7
Ricardian equivalence and the impact of fiscal policy on aggregate
demand in the IS-LM model
424
13.8
IS-LM model under a Taylor-type rule for the money supply
429
13.9
Short-run macro model under an interest rate operating
target
429
13.9.1
Determination of aggregate demand under simple interest rate
targeting
434
13.9.2
Aggregate demand under the Taylor rule
435
13.9.3
Aggregate demand under the simple interest rate target and
Ricardian equivalence
436
13.9.4
The potential for disequilibrium in the financial markets under
an interest rate target
436
13.10
Does interest rate targeting make the money supply
redundant?
439
13.11
Weaknesses of the IS-LM and IS-IRT analyses of aggregate
demand
440
13.12
Optimal choice of the operating target of monetary policy
441
Conclusions
444
Appendix
444
The propositions of Ricardian equivalence and the evolution of
the public debt
444
Summary of critical conclusions
446
Review and discussion questions
446
References
449
14.
The classical paradigm in macroeconomics
451
14.
1 Definitions of the short run and the long run
453
14.2
Long-run supply side of the neoclassical model
454
14.3
General equilibrium: aggregate demand and supply analysis
458
14.4
Iterative structure of the neoclassical model
461
14.4.1
The rate of unemployment and the natural rate of
unemployment
463
14.4.2
IS-LM version of the neoclassical model in a diagrammatic
form
465
14.5
Fundamental assumptions of the Walrasian equilibrium analysis
467
14.6
Disequilibrium in the neoclassical model and the non-neutrality
of money
468
14.6Л
Pigou and real balance effects
468
14.6.2
Causes of deviations from long-run equilibrium
470
14.7
The relationship between the money supply and the price level: the
heritage of ideas
471
Contents xvii
14.8
The classical and neoclassical tradition, economic liberalism and
laissez faire
472
14.8.1
Some major misconceptions about traditional classical and
neoclassical approaches
474
14.9
Uncertainty and expectations in the classical paradigm
475
14.10
Expectations and the labor market: the expectations-augmented
Phillips curve
476
14.10.1
Output and employment in the context of nominal wage
contracts
476
14.10.2
The Friedman supply rale
481
14.10.3
Expectations-augmented employment and output
functions
482
14.10.4
The short-run equilibrium unemployment rate and
Friedman s expectations-augmented Phillips curve
483
14.11
Price expectations and commodity markets: the Lucas supply
function
485
14.12
The Lucas model with supply and demand functions
488
14.13
Defining and demarcating the models of the classical paradigm
492
14.14
Real business cycle theory and monetary policy
495
14.15
Milton Friedman and monetarism
497
14.16
Empirical evidence
501
Conclusions
503
Summary of critical conclusions
504
Review and discussion questions
505
References
507
15.
The Keynesian paradigm
510
15.1
Keynesian model I: models without efficient labor markets
514
15.1.1
Keynesian deficient-demand model: quantity-constrained
analysis
517
15.2
Keynesian model II: Phillips curve analysis
522
15.3
Components ofneoKeynesian economics
525
15.3.1
Efficiency wage theory
525
15.3.2
Costs of adjusting employment: implicit contracts and labor
hoarding
527
15.3.3
Price stickiness
528
15.4
New Keynesian (NK) macroeconomics
532
15.4.1
NK commodity market analysis
533
15.4.2
NK price adjustment analysis
534
15.4.3
Other reasons for sticky prices, output and employment
537
15.4.4
Interest rate determination
539
15.4.5
Variations of the overall NK model
543
15.4.6
Money supply in the NK model
544
15.4.7
NK business cycle theory
548
xviii Contents
15.5
Reduced-form equations for output and employment in the Keynesian
and neoclassical approaches
549
15.6
Empirical validity of the new Keynesian ideas
551
Conclusions
552
Summary of critical conclusions
556
Review and discussion questions
557
References
561
16.
Money, bonds and credit in macro modeling
563
16.1
Distinctiveness of credit from bonds
570
16.1.1
Information imperfections in financial markets
570
16.2
Supply of commodities and the demand for credit
575
16.3
Aggregate demand analysis incorporating credit as a
distinctive
asset
577
16.3.1
Commodity market analysis
577
16.3.2
Money market analysis
577
16.3.3
Credit market analysis
579
16.3.4
Determination of aggregate demand
581
16.4
Determination of output
582
16.5
Impact of monetary and fiscal policies
583
16.6
Instability in the money and credit markets and monetary
policy
585
16.7
Credit channel when the bond interest rate is the exogenous monetary
policy instrument
587
16.8
The informal financial sector and financial under development
588
16.9
Bank runs and credit crises
588
16.10
Empirical findings
589
Conclusions
591
Appendix A
592
Demand for working capital for a given production level in
a simple stylized model
592
Appendix
В
593
Indirect production function including working capital
593
Summary of critical conclusions
595
Review and discussion questions
595
References
596
17.
Macro models and perspectives on the neutrality of money
599
17.1
The Lucas-Sargent-Wallace (LSW) analysis of the classical
paradigm
600
17.2
A compact (Model H)form of the LSW model
605
17.3
The Lucas critique of estimated equations as a policy tool
606
Contents xix
17.4
Testing
the effectiveness of monetary policy: estimates based on the
Lucas and Friedman supply models
607
ПАЛ
A procedure for segmenting the money supply changes into
their anticipated and unanticipated components
608
17.4.2
Separating neutrality from rational expectations: Mishkin s
test of the Lucas model
610
17.5
Distinguishing between the impact of positive and negative money
supply shocks
611
17.6
LSW model with a Taylor rule for the interest rate
612
17.7
Testing the effectiveness of monetary policy: estimates from
Keynesian models
615
17.7.1
Using the LSW model with a Keynesian supply
equation
615
17.7.2
Gali s version of the Keynesian model with an exogenous
money supply
616
17.8
A compact form of the closed-economy new Keynesian model
618
17.8.1
Empirical findings on the new Keynesian model
619
17.8.2
Ball s Keynesian small open-economy model with a
Taylor rule
621
17.9
Results of other testing procedures
622
17.10
Summing up the empirical evidence on monetary neutrality and
rational expectations
622
17.11
Getting away from dogma
623
17.11.1
The output equation revisited
624
17.11.2
The Phillips curve revisited
625
17.12
Hysteresis in long-run output and employment functions
626
Conclusions
626
Summary of critical conclusions
630
Review and discussion questions
630
References
634
18.
Walras s law and the interaction among markets
636
18.1
Walras s law
637
18.1.1
Walras s law in a macroeconomic model with four
goods
640
18.1.2
The implication of Walras s law for a specific market
641
18.2
Walras s law and selection among the markets for a model
641
18.3
Walras s ¡aw and the assumption of continuous full employment
643
18.4
Say s law
643
18.5
Walras s law, Say s law and the dichotomy between the real and
monetary sectors
646
18.6
The wealth effect
646
18.7
The real balance effect
647
xx Contents
18.8
Is
Walras s
law really a law? When might it not hold?
648
18.8.1
Intuition: violation of Walras s law in recessions
648
18.8.2
Walras s law under excess demand for commodities
651
18.8.3
Correction of Walras s law
651
18.9
Notional demand and supply functions in the classical paradigm
652
18.10
Re-evaluating Walras s law
652
18.10.1
Fundamental causes of the failure of Walras
s
law
652
18.10.2
Irrationality of the behavioral assumptions behind Walras s
law
653
18.11
Reformulating Walras s law: the Clower and
Drèze
effective demand
and supply functions
653
18.11.1
Clower effective functions
653
18.11.2
Modification of Walras
s
law for Clower effective
functions
654
18.11.3
Drèze
effective functions and Walras s law
654
18.12
Implications of the invalidity of Walras s law for monetary policy
655
Conclusions
655
Summary of critical conclusions
656
Review and discussion questions
656
References
658
PARTVI
The rates of interest in the economy
659
19.
The macroeconomic theory of the rate of interest
661
19.1
Nominal and real rates of interest
662
19.2
Application of Walras s ¡aw in the IS-LM models: the excess demand
for bonds
663
19.2.1
Walras s law
663
19.3
Derivation of the general excess demand function for bonds
665
19.4
Intuition: the demand and supply of bonds and interest rate
détermination
667
19.5
Intuition: dynamic determination of the interest rate
669
¡9.6
The bond market in the IS LM diagram
670
19.6
Л
Diagrammatic analysis of dynamic changes in the rate
of interest
673
19.7
Classical heritage: the loanable funds theory of the rate
of interest
673
19.7.1
Loanable funds theory in the modern classical approach
675
19.7.2
David Hume on the rate of interest
676
19.
S
Kernes tan heritage: the liquidity preference theory of the
interest rate
678
¡9.9
Comparing the liquidity preference and the loanable funds
theories of interest
679
Contents xxi
19.10
Neutrality
versus
non-neutrality of the money supply for the real rate
of
interest
680
19.11
Determinants of the long-run ( natural ) real rate of interest and the
non-neutrality of fiscal policy
681
19.12
Empirical evidence: testing the Fisher equation
683
19.13
Testing the liquidity preference and loanable funds theories
683
Conclusions
686
Summary of critical conclusions
687
Review and discussion questions
687
References
689
20.
The structure of interest rates
690
20.1
Some of the concepts of the rate of interest
691
20.2
Term structure of interest rates
692
20.2.1
Yield curve
692
20.2.2
Expectations hypothesis
694
20.2.3
Liquidity preference version of the expectations
hypothesis
697
20.2.4
Segmented markets hypothesis
698
20.2.5
Preferred habitat hypothesis
698
20.2.6
Implications of the term structure hypotheses for monetary
policy
699
20.3
Financial asset prices
699
20.4
Empirical estimation and tests
701
20.4.1
Reduced-form approaches to the estimation of the term
structure of yields
701
20.5
Tests of the expectations hypothesis with a constant premium and
rational expectations
702
20.5.1
Slope sensitivity test
703
20.5.2
Efficient and rational information usage test
704
20.6
Random walk hypothesis of the long rates of interest
705
20.7
Information content of the term structure for the expected rates of
inflation
708
Conclusions
710
Summary of critical conclusions
711
Review and discussion questions
711
References
712
PART
VII
Overlapping generations models of money
715
21.
The benchmark overlapping generations model of fiat money
717
21.1
Stylized empirical facts about money in the modern economy
718
21.2
Common themes about money in
OLG
models
719
xxii Contents
21.3
The basic
OLG
model
722
21.3.1
Microeconomic behavior: the individual
s
saving and
money demand
723
21.3.2
Macroeconomic analysis: the price level and the value
of money
725
21.3.3
The stationary state
727
21.3.4
Indeterminacy of the price level and of the value of
fiat money
728
21.3.5
Competitive issue of money
729
21.4
The basic
OLG
model with a growing population
729
21.5
Welfare in the basic
OLG
model
731
21.6
The basic
OLG
model with money supply growth and a growing
population
733
21.7
Inefficiency of monetary expansion in the money transfer case
734
21.8
Inefficiency of price stability with monetary expansion and population
growth
738
21.9
Money demand in the
OLG
model with a positive rate of time
preference
738
21.10
Several fiat monies
740
21.11
Sunspots, bubbles and market fundamentals in
OLG
analysis
741
Conclusions
742
Summary of critical conclusions
743
Review and discussion questions
743
References
744
22.
The
OLG
model: Seigniorage, bonds and the neutrality of fiat money
746
22.1
Seigniorage from fiat money and its uses
747
22.1.1
Value of money under seigniorage with destruction of
government-purchased commodities
748
22.1.2
Inefficiency of monetary expansion with seigniorage as a
taxation device
749
22.1.3
Change in seigniorage with the rate of monetary expansion
751
22.1.4
Change in the lifetime consumption pattern with the rate of
monetary expansion
751
22.1.5
Seigniorage from monetary expansion versus lump-sum
taxation
752
22.1.6
Seigniorage as a revenue collection device
752
22.2
Fiat money and bonds in the
OLG
framework
753
22.3
Wallace—
Modigliani—
Miller (W—M—M) theorem on open market
operations
755
22.3.1
W-M-M theorem on open market operations with
commodity storage
755
22.3.2
W-M-M theorem on open market operations in the
money-bonds
OLG
model
758
Contents xxiii
22.4
Getting beyond the simplistic
OLG
analysis of money
760
22
A.
1
Model I: an
OLG
model with money, capital and
production
760
22.4.2
Model II: the preceding
OLG
model with a linear
production function
764
22.5
Model III: the Lucas
OLG
model with non-neutrality of money
764
22.6
Do the
OLG
models explain the major facets of a monetary
economy?
767
Conclusions
770
Summary of critical conclusions
771
Review and discussion questions
771
References
772
23.
The
OLG
model of money: Making it more realistic
773
23.1
A
Т
-period
cash-in-advance money-bonds model
775
23.1.1
Cash-in-advance models with money and one-period
bonds
777
23.1.2
Analysis of the extended multi-period
OLG
cash-in-advance
money-bonds model
777
23.1.3
W-M-M theorem in the extended
OLG
cash-in-advance
money-bonds model
781
23.2
An extended
OLG
model with payments time for purchases and the
indirect MIUF
784
23.2.1 OLG
model extended to incorporate money indirectly in the
utility function (MIIUF)
785
23.3
An extended
OLG
model for firms with money indirectly in the
production function (MIIPF)
790
23.3.1
Rationale for putting real balances in the production
function
790
23.3.2
Profit maximization and the demand for money by the firm
792
23.3.3
Intuitive empirical evidence
793
23.4
Basic
OLG
model with MIIUF andMIIPF
795
Conclusions
796
Summary of critical conclusions
797
Review and discussion questions
798
References
799
PART
VIII
Money and financial institutions in growth theory
801
24.
Monetary growth theory
803
24.1
Commodity money, real balances and growth theory
806
24.2
Fiat balances in disposable income and growth
808
xxiv Contents
24.3 Real
fiat
balances
in
the
static
production
function
811
24.4
Reformulation of the neoclassical model with money in the static
production and utility functions
812
24.5
Why and how does money contribute to per capita output and its
growth rate?
815
24.6
How does the use of money change the labor supplied for
production?
816
24.7
Distinction between inside and outside money
817
24.8
Financial intermediation
(FI) in
the growth and development
processes
817
24.9
The financial system
818
24.10
Empirical evidence on the importance of money and the financial
sector to growth
822
24.11
A simplified growth model of endogenous technical change involving
the financial sector
827
24.12
Investment, financial intermediation and economic development
828
Conclusions
829
Summary of critical conclusions
831
Review and discussion questions
831
References
832
Index
835
|
| adam_txt |
Contents
Preface
xxv
Acknowledgments
xxviii
PARTI
Introduction and heritage
1.
Introduction
1.1
What is money and what does it do?
5
1.1.1
Functions of money
5
1.1.2
Definitions of money
5
1.2
Money supply and money stock
6
1.3
Nominal versus the real value of money
7
1.4
Money and bond markets in monetary macroeconomics
7
1.5
A brief history of the definition of money
7
1.6
Practical definitions of money and related concepts
12
1.6.1
Monetary base and the monetary base multiplier
14
1.7
Interest rates versus money supply as the operating target
of monetary policy
15
1.8
Financial intermediaries and the creation of financial assets
15
1.9
Different modes of analysis of the economy
18
1.10
The classical paradigm: the classical group of
macroeconomic
models
20
1.11
The Keynesian paradigm and the Keynesian set of
macroeconomic
models
24
1.12
Which macro paradigm or model must one believe in?
26
1.13
Walras'slaw
28
1.14
Monetary policy
28
1.15
Neutrality of money and of bonds
29
1.16
Definitions of monetary and fiscal policies
30
Conclusions
31
Summary of critical conclusions
32
Review and discussion questions
32
References
33
viii Contents
2.
The heritage of monetary economics
34
2.1
Quantity equation
35
2.1.1
Some variants of the quantity equation
38
2.2
Quantity theory
39
2.2.1
Transactions approach to the quantity theory
40
2.2.2
Cash balances (Cambridge) approach to the quantity
theory
45
2.3
Wicbell'spure credit economy
49
2.4
Keynes 's contributions
52
2.4.1
Keynes's transactions demand for money
54
2.4.2
Keynes's precautionary demand for money
55
2.4.3
Keynes's speculative money demand for an individual
56
2.4.4
Keynes's overall speculative demand function
58
2.4.5
Keynes's overall demand for money
60
2.4.6
Liquidity trap
61
2.4.7
Keynes's and the early Keynesians' preference for fiscal
versus monetary policy
62
2.5
Friedman's contributions
63
2.5.1
Friedman's "restatement" of the quantity theory of money
63
2.5.2
Friedman on inflation, neutrality of money and monetary
policy
65
2.5.3
Friedman versus Keynes on money demand
66
2.6
Impact of money supply changes on output and employment
67
2.6.1
Direct transmission channel
69
2.6.2
Indirect transmission channel
69
2.6.3
Imperfections in financial markets and the lending/credit
channel
70
2.6.4
Review of the transmission channels of monetary effects in the
open economy
70
2.6.5
Relative importance of the various channels in financially
less-developed economies
71
Conclusions
71
Summary of critical conclusions
73
Review and discussion questions
73
References
74
PARTII
Money in the economy
77
3.
Money in the economy: General equilibrium analysis
79
3.
1 Money and other goods in the economy
80
3.2
Stylized facts of a monetary economy
83
3.3
Optimization without money in the utility function
84
Contents ix
3.4 Medium
of payments role of money: money in the utility function
(MIUF)
88
3.4.1
Money in the utility function (MIUF)
89
3.4.2
Money in the indirect utility function (MIIUF)
90
3.4.3
Empirical evidence on money in the utility function
93
3.5
Different concepts of prices
93
3.6
User cost of money
94
3.7
The individual's demand for and supply of money and other goods
95
3.7.1
Derivation of the demand and supply functions
95
3.7.2
Price level
95
3.7.3
Homogeneity of degree zero of the demand and supply
functions
96
3.7.4
Relative prices and the numeraire
97
3.8
The firm's demand and supply functions for money and other goods
97
3.8.1
Money in the production function (MIPF)
98
3.8.2
Money in the indirect production function
98
3.8.3
Maximization of profits by the firm
100
3.8.4
The firm's demand and supply functions for money and
other goods
101
3.9
Aggregate demand and supply functions for money and other goods in
the economy
101
3.10
Supply of nominal and real balances
102
3.11
General equilibrium in the economy
103
3.12
Neutrality and super-neutrality of money
105
3.12.1
Neutrality of money
105
3.12.2
Super-neutrality of money
105
3.12.3
Reasons for deviations from neutrality and
super-neutrality
107
3.13
Dichotomy between the real and the monetary sectors
109
3.14
Welfare cost of inflation
112
Conclusions
115
Summary of critical conclusions
116
Review and discussion questions
117
References
118
PARTIU
The demand for money
119
4.
The transactions demand for money
121
4.1
The basic inventory analysis of the transactions demand
for money
122
4.2
Some special cases: the profitability of holding money and bonds for
transactions
125
χ
Contents
4.3
Demand for currency
versus
demand deposits
127
4.4
Impact of economies of scale and income distribution
128
4.5
Efficient funds management by firms
129
4.6
The demand for money and the payment of interest on demand
deposits
130
4.7
Demand deposits versus savings deposits
131
4.8
Technical innovations and the demand for monetary assets
132
4.9
Estimating money demand
133
Conclusions
135
Summary of critical conclusions
136
Review and discussion questions
136
References
137
5.
Portfolio selection and the speculative demand for money
138
5.1
Probabilities, means and variances
140
5.2
Wealth maximization versus expected utility maximization
142
5.3
Risk preference, indifference and aversion
144
5.3.1
Indifference loci for a risk
averter
145
5.4
The expected utility hypothesis of portfolio selection
145
5.5
The efficient opportunity locus
147
5.5.1
Expected value and standard deviation of the portfolio
147
5.5.2
Opportunity locus for a riskless asset and a risky asset
148
5.5.3
Opportunity locus for risky assets
148
5.5.4
Efficient opportunity locus
151
5.5.5
Optimal choice
151
5.6
Tobin 's
analysis of the demand for a riskless asset versus
a risky one
154
5.7
Specific forms of the expected utility function
158
5.7.1
EUH and measures of risk aversion
158
5.7.2
Constant absolute risk aversion
(CARA)
159
5.7.3
Constant relative risk aversion (CRRA)
162
5.7.4
Quadratic utility function
164
5.8
Volatility of the money demand function
165
5.9
Is there a positive portfolio demand for money balances in
the modern economy?
165
Conclusions
167
Appenda
I
167
Axioms and theorem of the expected utility hypothesis
167
Appendix
2 169
Opportunity locus for two risky assets
169
Summary of critical conclusions
172
Review and discussion questions
172
References
174
Contents xi
6.
Precautionary and
buffer
stock
demand for money
175
6.1
An extension of the transactions demand model to precautionary
demand
177
6.2
Precautionary demand for money with overdrafts
181
6.3
Precautionary demand for money without overdrafts
183
6.4
Buffer stock models
184
6.5
Buffer stock rule models
186
6.5.1
The rule model of Akerlof and Milboume
186
6.5.2
The rale model of Miller and
Orr
188
6.6
Buffer stock smoothing or objective models
191
6.6.1
The smoothing model of Cuthbertson and Taylor
191
6.6.2
The Kanniainen and Tarkka
( 1986)
smoothing model
193
6.7
Empirical studies on the precautionary and buffer stock models
196
Conclusions
201
Summary of critical conclusions
202
Review and discussion questions
203
References
203
7.
Monetary aggregation
205
7. 1
The appropriate definition of money: theoretical considerations
206
7.2
Money as the explanatory variable for nominal national income
207
7.3
Weak separability
208
7.4
Simple sum monetary aggregates
210
7.5
The variable elasticity of substitution and near-monies
212
7.6
User cost of assets
216
7.7
Index number theory and Divisia aggregates
217
7.8
The certainty equivalence monetary aggregate
219
7.9
Judging among the monetary aggregates
220
7.9.1
Stability of the money demand function
221
7.9.2
Controllability of the monetary aggregate and policy
instruments and targets
221
7.9.3
Causality from the monetary aggregate to income
221
7.9.4
Information content of economic indicators
223
7.9.5
The St Louis monetarist equation
224
7.9.6
Comparing the evidence of Divisia versus simple-sum
aggregation
225
7.10
Current research and policy perspectives on monetary
aggregation
228
Conclusions
228
Appendix: Divisia aggregation
230
Measuring prices by the user costs of liquidity services
232
Adjustments for taxes on rates of return
233
Summary of critical conclusions
234
xii Contents
Review and
discussion questions
234
References
235
8.
The demand function for money
237
8.1
Basic functional forms of the closed-economy money demand
function
238
8.1.1
Scale variable in the money demand function
240
8.2
Rational expectations
241
8.2.1
Theory of rational expectations
241
8.2.2
Information requirements of rational expectations:
an aside
243
8.2.3
Using the
REH
and the Lucas supply rule for predicting
expected income
245
8.2.4
Using the
REH
and a Keynesian supply function for predicting
expected income
247
8.2.5
Rational expectations
-
problems and approximations
248
8.3
Adaptive expectations for the derivation of permanent income and
estimation of money demand
249
8.4
Regressive and extrapolative expectations
251
8.5
Lags in adjustment and the costs of changing money balances
252
8.6
Money demand with the first-order
РАМ
254
8.7
Money demand with the first-order
РАМ
and adaptive expectations of
permanent income
255
8.8
Autoregressive
distributed lag model: an introduction
256
8.9
Demand for money in the open economy
257
8.9.1
Theories of currency substitution
258
8.9.2
Estimation procedures and problems
261
8.9.3
The special relation between
M
and M* in the
medium-of-payments function
264
8.9.4
Other studies on CS
266
Conclusions
267
Summary of critical conclusions
268
Review and discussion questions
268
References
269
9.
The demand function for money: Estimation problems, techniques and
findings
270
9. /
Historical review of the estimation of money demand
2 71
9.2
Common problems in estimation: an introduction
275
9.2.1
Single equation versus simultaneous equations estimation
276
9.2.2
Estimation restrictions on the portfolio demand functions for
money and bonds
276
9.2.3
The potential volatility of the money demand function
277
Contents xiii
9.2.4 Multicollinearity 278
9.2.5
Serial
correlation and
cointegration
278
9.3
The relationship between economic theory and
cointegration
analysis:
a primer
279
9.3.1
Economic theory: equilibrium and the adjustment to
equilibrium
279
9.4
Stationarity of variables: an introduction
280
9.4.1
Order of integration
282
9.4.2
Testing for non-stationarity
283
9.5
Cointegration
and error correction: an introduction
284
9.5.1
Cointegration
techniques
286
9.6
Cointegration, ECM
andmacroeconomic theory
288
9.7
Application of the
cointegration—
ECM technique to money demand
estimation
288
9.8
Some
cointegration
studies of the money-demand function
289
9.9
Causality
292
9.10
An illustration: money demand elasicities in a period of
innovation
292
9.11
Innovations and the search for a stable money-demand function
293
Conclusions
294
Summary of critical conclusions
296
Appendix
297
The ARDL model and its
cointegration
and ECM forms
297
Review and discussion questions
298
References
300
PART IV
Monetary policy and central banking
303
10.
Money supply, interest rates and the operating targets of monetary
policy: Money supply and interest rates
305
10.1
Goals, targets and instruments of monetary policy
306
10.2
Relationship between goals, targets and instruments, and difficulties
in the pursuit of monetary policy
308
10.3
Targets of monetary policy
309
10.4
Monetary aggregates versus interest rates as operating targets
309
10.4.1
Diagrammatic analysis of the choice of the operating target of
monetary policy
310
10.4.2
Analysis of operating targets under a supply shock
313
/0.5
The price level and inflation rate as targets
316
10.6
Determination of the money supply
319
10.6.1
Demand for currency by the public
319
10.6.2
Commercial banks: the demand for reserves
322
xiv Contents
10.7
Mechanical theories of the money supply: money supply
identities
325
10.8
Behavioral theories of the money supply
327
10.9
Cointegration
and error-correction models of the money
supply
331
10.10
Monetary base and interest rates as alternative policy
instruments
331
Conclusions
333
Summary of critical conclusions
334
Review and discussion questions
334
References
336
11.
The central bank: Goals, targets and instruments
338
11.1
Historic goals of central banks
339
11.2
Evolution of'thegoals of
'centralbanks
342
11.3
Instruments of monetary policy
345
11.3.1
Open market operations
345
11.3.2
Reserve requirements
346
11.3.3
Discount/bank rate
348
11.3.4
Moral suasion
351
11.3.5
Selective controls
351
11.3.6
Borrowed reserves
352
11.3.7
Regulation and reform of commercial banks
352
11.4
Efficiency and competition in the financial sector: competitive supply
of money
353
11.4.1
Arguments for the competitive supplies of private monies
353
11.4.2
Arguments for the regulation of the money supply
354
11.4.3
Regulation of banks in the interests of monetary policy
354
11.5
Administered interest rates and economic performance
356
11.6
Monetary conditions index
357
11.7
Inflation targeting and the Taylor rule
358
11.8
Currency boards
359
Conclusions
360
Summary of critical conclusions
361
Review and discussion questions
361
References
362
12.
The central bank: Independence, time consistency and credibility
364
12.1
Choosing among multiple goals
365
12.2
Conflicts among policy makers: theoretical analysis
368
12.3
Independence of the central bank
370
12.4
Time consistency of policies
373
12.4.1
Time-consistent policy path
374
12.4.2
Reoptimization policy path
376
Contents xv
12.4.3
Limitations on
the superiority of time-consistent policies over
reoptimization policies
377
12.4.4
Inflationary bias of myopic optimization versus
intertemporal
optimization
381
12.4.5
Time consistency debate: modern classical versus Keynesian
approaches
381
12.4.6
Objective functions for the central bank and the economy's
constraints
382
12.5
Commitment and credibility of monetary policy
387
12.5.1
Expectations, credibility and the loss from discretion versus
commitment
387
12.5.2
Credibility and the costs of disinflation under the EAPC
391
12.5.3
Gains from credibility with a target output rate greater
than/
393
12.5.4
Analyses of credibility and commitment under supply shocks
and rational expectations
395
12.6
Does the central bank possess information superiority?
398
12.7
Empirical relevance of the preceding analyses
398
Conclusions
399
Appenda
401
Myopic optimal monetary policy without commitment in a
new Keynesian framework
401
Intertemporal
optimization with commitment in a new
Keynesian framework
403
Summary of critical conclusions
403
Review and discussion questions
404
References
405
PARTV
Monetary policy and the macroeconomy
407
13.
The determination of aggregate demand
409
13.1
Boundaries
oý
'the short-run
macroeconomic
models
410
13.1.1
Definitions of the short-run and long-ran in
macroeconomics
410
13.2
The foreign exchange sector of the open economy and the
determination of the exchange rate under floating exchange rates
411
13.3
The commodity sector
413
13.3.
ł
Behavioral functions of the commodity market
415
13.4
The monetary sector: determining the appropriate operating target of
monetary policy
418
13.5
Derivation of the LM equation
419
13.5.1
The link between the IS and LM equations: the Fisher equation
on interest rates
421
xvi Contents
13.6 Aggregate
demand for commodities in the IS-LM model
421
13.6.1
Keynesian-neoclassical synthesis on aggregate demand in the
IS-LM model
424
13.7
Ricardian equivalence and the impact of fiscal policy on aggregate
demand in the IS-LM model
424
13.8
IS-LM model under a Taylor-type rule for the money supply
429
13.9
Short-run macro model under an interest rate operating
target
429
13.9.1
Determination of aggregate demand under simple interest rate
targeting
434
13.9.2
Aggregate demand under the Taylor rule
435
13.9.3
Aggregate demand under the simple interest rate target and
Ricardian equivalence
436
13.9.4
The potential for disequilibrium in the financial markets under
an interest rate target
436
13.10
Does interest rate targeting make the money supply
redundant?
439
13.11
Weaknesses of the IS-LM and IS-IRT analyses of aggregate
demand
440
13.12
Optimal choice of the operating target of monetary policy
441
Conclusions
444
Appendix
444
The propositions of Ricardian equivalence and the evolution of
the public debt
444
Summary of critical conclusions
446
Review and discussion questions
446
References
449
14.
The classical paradigm in macroeconomics
451
14.
1 Definitions of the short run and the long run
453
14.2
Long-run supply side of the neoclassical model
454
14.3
General equilibrium: aggregate demand and supply analysis
458
14.4
Iterative structure of the neoclassical model
461
14.4.1
The rate of unemployment and the natural rate of
unemployment
463
14.4.2
IS-LM version of the neoclassical model in a diagrammatic
form
465
14.5
Fundamental assumptions of the Walrasian equilibrium analysis
467
14.6
Disequilibrium in the neoclassical model and the non-neutrality
of money
468
14.6Л
Pigou and real balance effects
468
14.6.2
Causes of deviations from long-run equilibrium
470
14.7
The relationship between the money supply and the price level: the
heritage of ideas
471
Contents xvii
14.8
The classical and neoclassical tradition, economic liberalism and
laissez faire
472
14.8.1
Some major misconceptions about traditional classical and
neoclassical approaches
474
14.9
Uncertainty and expectations in the classical paradigm
475
14.10
Expectations and the labor market: the expectations-augmented
Phillips curve
476
14.10.1
Output and employment in the context of nominal wage
contracts
476
14.10.2
The Friedman supply rale
481
14.10.3
Expectations-augmented employment and output
functions
482
14.10.4
The short-run equilibrium unemployment rate and
Friedman's expectations-augmented Phillips curve
483
14.11
Price expectations and commodity markets: the Lucas supply
function
485
14.12
The Lucas model with supply and demand functions
488
14.13
Defining and demarcating the models of the classical paradigm
492
14.14
Real business cycle theory and monetary policy
495
14.15
Milton Friedman and monetarism
497
14.16
Empirical evidence
501
Conclusions
503
Summary of critical conclusions
504
Review and discussion questions
505
References
507
15.
The Keynesian paradigm
510
15.1
Keynesian model I: models without efficient labor markets
514
15.1.1
Keynesian deficient-demand model: quantity-constrained
analysis
517
15.2
Keynesian model II: Phillips curve analysis
522
15.3
Components ofneoKeynesian economics
525
15.3.1
Efficiency wage theory
525
15.3.2
Costs of adjusting employment: implicit contracts and labor
hoarding
527
15.3.3
Price stickiness
528
15.4
New Keynesian (NK) macroeconomics
532
15.4.1
NK commodity market analysis
533
15.4.2
NK price adjustment analysis
534
15.4.3
Other reasons for sticky prices, output and employment
537
15.4.4
Interest rate determination
539
15.4.5
Variations of the overall NK model
543
15.4.6
Money supply in the NK model
544
15.4.7
NK business cycle theory
548
xviii Contents
15.5
Reduced-form equations for output and employment in the Keynesian
and neoclassical approaches
549
15.6
Empirical validity of the new Keynesian ideas
551
Conclusions
552
Summary of critical conclusions
556
Review and discussion questions
557
References
561
16.
Money, bonds and credit in macro modeling
563
16.1
Distinctiveness of credit from bonds
570
16.1.1
Information imperfections in financial markets
570
16.2
Supply of commodities and the demand for credit
575
16.3
Aggregate demand analysis incorporating credit as a
distinctive
asset
577
16.3.1
Commodity market analysis
577
16.3.2
Money market analysis
577
16.3.3
Credit market analysis
579
16.3.4
Determination of aggregate demand
581
16.4
Determination of output
582
16.5
Impact of monetary and fiscal policies
583
16.6
Instability in the money and credit markets and monetary
policy
585
16.7
Credit channel when the bond interest rate is the exogenous monetary
policy instrument
587
16.8
The informal financial sector and financial under development
588
16.9
Bank runs and credit crises
588
16.10
Empirical findings
589
Conclusions
591
Appendix A
592
Demand for working capital for a given production level in
a simple stylized model
592
Appendix
В
593
Indirect production function including working capital
593
Summary of critical conclusions
595
Review and discussion questions
595
References
596
17.
Macro models and perspectives on the neutrality of money
599
17.1
The Lucas-Sargent-Wallace (LSW) analysis of the classical
paradigm
600
17.2
A compact (Model H)form of the LSW model
605
17.3
The Lucas critique of estimated equations as a policy tool
606
Contents xix
17.4
Testing
the effectiveness of monetary policy: estimates based on the
Lucas and Friedman supply models
607
ПАЛ
A procedure for segmenting the money supply changes into
their anticipated and unanticipated components
608
17.4.2
Separating neutrality from rational expectations: Mishkin's
test of the Lucas model
610
17.5
Distinguishing between the impact of positive and negative money
supply shocks
611
17.6
LSW model with a Taylor rule for the interest rate
612
17.7
Testing the effectiveness of monetary policy: estimates from
Keynesian models
615
17.7.1
Using the LSW model with a Keynesian supply
equation
615
17.7.2
Gali's version of the Keynesian model with an exogenous
money supply
616
17.8
A compact form of the closed-economy new Keynesian model
618
17.8.1
Empirical findings on the new Keynesian model
619
17.8.2
Ball's Keynesian small open-economy model with a
Taylor rule
621
17.9
Results of other testing procedures
622
17.10
Summing up the empirical evidence on monetary neutrality and
rational expectations
622
17.11
Getting away from dogma
623
17.11.1
The output equation revisited
624
17.11.2
The Phillips curve revisited
625
17.12
Hysteresis in long-run output and employment functions
626
Conclusions
626
Summary of critical conclusions
630
Review and discussion questions
630
References
634
18.
Walras's law and the interaction among markets
636
18.1
Walras's law
637
18.1.1
Walras's law in a macroeconomic model with four
goods
640
18.1.2
The implication of Walras's law for a specific market
641
18.2
Walras 's law and selection among the markets for a model
641
18.3
Walras's ¡aw and the assumption of continuous full employment
643
18.4
Say's law
643
18.5
Walras's law, Say's law and the dichotomy between the real and
monetary sectors
646
18.6
The wealth effect
646
18.7
The real balance effect
647
xx Contents
18.8
Is
Walras 's
law really a law? When might it not hold?
648
18.8.1
Intuition: violation of Walras's law in recessions
648
18.8.2
Walras's law under excess demand for commodities
651
18.8.3
Correction of Walras's law
651
18.9
Notional demand and supply functions in the classical paradigm
652
18.10
Re-evaluating Walras's law
652
18.10.1
Fundamental causes of the failure of Walras'
s
law
652
18.10.2
Irrationality of the behavioral assumptions behind Walras's
law
653
18.11
Reformulating Walras's law: the Clower and
Drèze
effective demand
and supply functions
653
18.11.1
Clower effective functions
653
18.11.2
Modification of Walras
'
s
law for Clower effective
functions
654
18.11.3
Drèze
effective functions and Walras's law
654
18.12
Implications of the invalidity of Walras's law for monetary policy
655
Conclusions
655
Summary of critical conclusions
656
Review and discussion questions
656
References
658
PARTVI
The rates of interest in the economy
659
19.
The macroeconomic theory of the rate of interest
661
19.1
Nominal and real rates of interest
662
19.2
Application of Walras's ¡aw in the IS-LM models: the excess demand
for bonds
663
19.2.1
Walras's law
663
19.3
Derivation of the general excess demand function for bonds
665
19.4
Intuition: the demand and supply of bonds and interest rate
détermination
667
19.5
Intuition: dynamic determination of the interest rate
669
¡9.6
The bond market in the IS LM diagram
670
19.6
Л
Diagrammatic analysis of dynamic changes in the rate
of interest
673
19.7
Classical heritage: the loanable funds theory of the rate
of interest
673
19.7.1
Loanable funds theory in the modern classical approach
675
19.7.2
David Hume on the rate of interest
676
19.
S
Kernes tan heritage: the liquidity preference theory of the
interest rate
678
¡9.9
Comparing the liquidity preference and the loanable funds
theories of interest
679
Contents xxi
19.10
Neutrality
versus
non-neutrality of the money supply for the real rate
of
interest
680
19.11
Determinants of the long-run ("natural") real rate of interest and the
non-neutrality of fiscal policy
681
19.12
Empirical evidence: testing the Fisher equation
683
19.13
Testing the liquidity preference and loanable funds theories
683
Conclusions
686
Summary of critical conclusions
687
Review and discussion questions
687
References
689
20.
The structure of interest rates
690
20.1
Some of the concepts of the rate of interest
691
20.2
Term structure of interest rates
692
20.2.1
Yield curve
692
20.2.2
Expectations hypothesis
694
20.2.3
Liquidity preference version of the expectations
hypothesis
697
20.2.4
Segmented markets hypothesis
698
20.2.5
Preferred habitat hypothesis
698
20.2.6
Implications of the term structure hypotheses for monetary
policy
699
20.3
Financial asset prices
699
20.4
Empirical estimation and tests
701
20.4.1
Reduced-form approaches to the estimation of the term
structure of yields
701
20.5
Tests of the expectations hypothesis with a constant premium and
rational expectations
702
20.5.1
Slope sensitivity test
703
20.5.2
Efficient and rational information usage test
704
20.6
Random walk hypothesis of the long rates of interest
705
20.7
Information content of the term structure for the expected rates of
inflation
708
Conclusions
710
Summary of critical conclusions
711
Review and discussion questions
711
References
712
PART
VII
Overlapping generations models of money
715
21.
The benchmark overlapping generations model of fiat money
717
21.1
Stylized empirical facts about money in the modern economy
718
21.2
Common themes about money in
OLG
models
719
xxii Contents
21.3
The basic
OLG
model
722
21.3.1
Microeconomic behavior: the individual
'
s
saving and
money demand
723
21.3.2
Macroeconomic analysis: the price level and the value
of money
725
21.3.3
The stationary state
727
21.3.4
Indeterminacy of the price level and of the value of
fiat money
728
21.3.5
Competitive issue of money
729
21.4
The basic
OLG
model with a growing population
729
21.5
Welfare in the basic
OLG
model
731
21.6
The basic
OLG
model with money supply growth and a growing
population
733
21.7
Inefficiency of monetary expansion in the money transfer case
734
21.8
Inefficiency of price stability with monetary expansion and population
growth
738
21.9
Money demand in the
OLG
model with a positive rate of time
preference
738
21.10
Several fiat monies
740
21.11
Sunspots, bubbles and market fundamentals in
OLG
analysis
741
Conclusions
742
Summary of critical conclusions
743
Review and discussion questions
743
References
744
22.
The
OLG
model: Seigniorage, bonds and the neutrality of fiat money
746
22.1
Seigniorage from fiat money and its uses
747
22.1.1
Value of money under seigniorage with destruction of
government-purchased commodities
748
22.1.2
Inefficiency of monetary expansion with seigniorage as a
taxation device
749
22.1.3
Change in seigniorage with the rate of monetary expansion
751
22.1.4
Change in the lifetime consumption pattern with the rate of
monetary expansion
751
22.1.5
Seigniorage from monetary expansion versus lump-sum
taxation
752
22.1.6
Seigniorage as a revenue collection device
752
22.2
Fiat money and bonds in the
OLG
framework
753
22.3
Wallace—
Modigliani—
Miller (W—M—M) theorem on open market
operations
755
22.3.1
W-M-M theorem on open market operations with
commodity storage
755
22.3.2
W-M-M theorem on open market operations in the
money-bonds
OLG
model
758
Contents xxiii
22.4
Getting beyond the simplistic
OLG
analysis of money
760
22
A.
1
Model I: an
OLG
model with money, capital and
production
760
22.4.2
Model II: the preceding
OLG
model with a linear
production function
764
22.5
Model III: the Lucas
OLG
model with non-neutrality of money
764
22.6
Do the
OLG
models explain the major facets of a monetary
economy?
767
Conclusions
770
Summary of critical conclusions
771
Review and discussion questions
771
References
772
23.
The
OLG
model of money: Making it more realistic
773
23.1
A
Т
-period
cash-in-advance money-bonds model
775
23.1.1
Cash-in-advance models with money and one-period
bonds
777
23.1.2
Analysis of the extended multi-period
OLG
cash-in-advance
money-bonds model
777
23.1.3
W-M-M theorem in the extended
OLG
cash-in-advance
money-bonds model
781
23.2
An extended
OLG
model with payments time for purchases and the
indirect MIUF
784
23.2.1 OLG
model extended to incorporate money indirectly in the
utility function (MIIUF)
785
23.3
An extended
OLG
model for firms with money indirectly in the
production function (MIIPF)
790
23.3.1
Rationale for putting real balances in the production
function
790
23.3.2
Profit maximization and the demand for money by the firm
792
23.3.3
Intuitive empirical evidence
793
23.4
Basic
OLG
model with MIIUF andMIIPF
795
Conclusions
796
Summary of critical conclusions
797
Review and discussion questions
798
References
799
PART
VIII
Money and financial institutions in growth theory
801
24.
Monetary growth theory
803
24.1
Commodity money, real balances and growth theory
806
24.2
Fiat balances in disposable income and growth
808
xxiv Contents
24.3 Real
fiat
balances
in
the
static
production
function
811
24.4
Reformulation of the neoclassical model with money in the static
production and utility functions
812
24.5
Why and how does money contribute to per capita output and its
growth rate?
815
24.6
How does the use of money change the labor supplied for
production?
816
24.7
Distinction between inside and outside money
817
24.8
Financial intermediation
(FI) in
the growth and development
processes
817
24.9
The financial system
818
24.10
Empirical evidence on the importance of money and the financial
sector to growth
822
24.11
A simplified growth model of endogenous technical change involving
the financial sector
827
24.12
Investment, financial intermediation and economic development
828
Conclusions
829
Summary of critical conclusions
831
Review and discussion questions
831
References
832
Index
835 |
| any_adam_object | 1 |
| any_adam_object_boolean | 1 |
| author | Handa, Jagdish 1939- |
| author_GND | (DE-588)137984243 |
| author_facet | Handa, Jagdish 1939- |
| author_role | aut |
| author_sort | Handa, Jagdish 1939- |
| author_variant | j h jh |
| building | Verbundindex |
| bvnumber | BV035070166 |
| callnumber-first | H - Social Science |
| callnumber-label | HG221 |
| callnumber-raw | HG221 |
| callnumber-search | HG221 |
| callnumber-sort | HG 3221 |
| callnumber-subject | HG - Finance |
| classification_rvk | QC 300 QC 320 |
| ctrlnum | (OCoLC)192109799 (DE-599)BVBBV035070166 |
| dewey-full | 332.4 |
| dewey-hundreds | 300 - Social sciences |
| dewey-ones | 332 - Financial economics |
| dewey-raw | 332.4 |
| dewey-search | 332.4 |
| dewey-sort | 3332.4 |
| dewey-tens | 330 - Economics |
| discipline | Wirtschaftswissenschaften |
| discipline_str_mv | Wirtschaftswissenschaften |
| edition | 2. ed. |
| format | Book |
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| genre | (DE-588)4123623-3 Lehrbuch gnd-content |
| genre_facet | Lehrbuch |
| id | DE-604.BV035070166 |
| illustrated | Illustrated |
| index_date | 2024-07-02T22:03:57Z |
| indexdate | 2024-07-09T21:21:31Z |
| institution | BVB |
| isbn | 9780415772099 9780415772105 9780203892404 0415772095 0415772109 0203892402 |
| language | English |
| lccn | 2008006924 |
| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-016738559 |
| oclc_num | 192109799 |
| open_access_boolean | |
| owner | DE-703 DE-355 DE-BY-UBR DE-521 DE-945 DE-2070s DE-188 DE-20 |
| owner_facet | DE-703 DE-355 DE-BY-UBR DE-521 DE-945 DE-2070s DE-188 DE-20 |
| physical | XXVII, 842 S. graph. Darst. 25 cm |
| publishDate | 2009 |
| publishDateSearch | 2009 |
| publishDateSort | 2009 |
| publisher | Routledge |
| record_format | marc |
| spelling | Handa, Jagdish 1939- Verfasser (DE-588)137984243 aut Monetary economics Jagdish Handa 2. ed. London ; New York Routledge 2009 XXVII, 842 S. graph. Darst. 25 cm txt rdacontent n rdamedia nc rdacarrier Bank Money Money supply Macroeconomics Monetary policy Banks and banking Geldpolitik (DE-588)4019902-2 gnd rswk-swf Geldtheorie (DE-588)4121333-6 gnd rswk-swf (DE-588)4123623-3 Lehrbuch gnd-content Geldtheorie (DE-588)4121333-6 s DE-604 Geldpolitik (DE-588)4019902-2 s DE-188 Digitalisierung UB Regensburg application/pdf http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=016738559&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA Inhaltsverzeichnis |
| spellingShingle | Handa, Jagdish 1939- Monetary economics Bank Money Money supply Macroeconomics Monetary policy Banks and banking Geldpolitik (DE-588)4019902-2 gnd Geldtheorie (DE-588)4121333-6 gnd |
| subject_GND | (DE-588)4019902-2 (DE-588)4121333-6 (DE-588)4123623-3 |
| title | Monetary economics |
| title_auth | Monetary economics |
| title_exact_search | Monetary economics |
| title_exact_search_txtP | Monetary economics |
| title_full | Monetary economics Jagdish Handa |
| title_fullStr | Monetary economics Jagdish Handa |
| title_full_unstemmed | Monetary economics Jagdish Handa |
| title_short | Monetary economics |
| title_sort | monetary economics |
| topic | Bank Money Money supply Macroeconomics Monetary policy Banks and banking Geldpolitik (DE-588)4019902-2 gnd Geldtheorie (DE-588)4121333-6 gnd |
| topic_facet | Bank Money Money supply Macroeconomics Monetary policy Banks and banking Geldpolitik Geldtheorie Lehrbuch |
| url | http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=016738559&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA |
| work_keys_str_mv | AT handajagdish monetaryeconomics |