scholarly journals On the Welfare Cost of Inflation and the Recent Behavior of Money Demand

2009 ◽  
Vol 99 (3) ◽  
pp. 1040-1052 ◽  
Author(s):  
Peter N Ireland
Keyword(s):  
Interest Rate ◽  
Money Demand ◽  
Demand Curve ◽  
Nominal Interest Rate ◽  
Welfare Cost Of Inflation ◽  
Friedman Rule ◽  
Long Run ◽  
Income Ratio ◽  
Interest Rate Rule ◽  
Relationship Of

Post-1980 US data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semielasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule. (JEL E31, E41, E52)

scholarly journals Money Demand Function for Nepal: An Empirical View from Expenditure Component

2019 ◽  
pp. 12-25
Author(s):  
Pujan Adhikari
Keyword(s):  
Interest Rate ◽  
Money Demand ◽  
Capital Formation ◽  
Consumption Expenditure ◽  
Demand For Money ◽  
Final Consumption ◽  
On Demand ◽  
Long Run ◽  
Fixed Capital Formation ◽  
Short Run

This paper examines the long run and short-run dynamics relationship between broad money, consumption expenditure, capital stock and interest rate in Nepal over the period of 1975-2017. This paper employs ARDL bound testing approach for co-integration between the broad money demand and its determinants. Result reveals the evidence of cointegration among the variables. The empirical results show that the demand for money is affected by the interest rate and final consumption expenditure both in the long run and short-run. However, the gross fixed capital formation has no impact on demand for money in the long-run and short-run as well. On contrast, interest rate is positively associated with Broad money demand, which is not consistent with theoretically. Positive association of money demand with interest rate shows that demand for money function is instability in Nepal. Thus, this study suggests that policy maker to correct price fluctuation through the control of various expenditure components, particularly, real final consumption expenditure might be an important strategy in the long run. However, the gross fixed capital formation has no impact on demand for money in the long-run.

scholarly journals MONETARY POLICY AND ENDOGENOUS MARKET STRUCTURE IN A SCHUMPETERIAN ECONOMY

2014 ◽  
Vol 20 (5) ◽  
pp. 1127-1145 ◽  
Author(s):  
Angus C. Chu ◽  
Lei Ji
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rate ◽  
Market Structure ◽  
Firm Size ◽  
Growth Effect ◽  
Nominal Interest Rate ◽  
Long Run ◽  
Endogenous Market Structure ◽  
Number Of Firms

This study develops a monetary Schumpeterian model with endogenous market structure (EMS) to explore the effects of monetary policy on the number of firms, firm size, economic growth, and social welfare. EMS leads to different results from previous studies in which market structure is exogenous. In the short run, a higher nominal interest rate reduces the growth rates of innovation, output, and consumption and decreases firm size through reduction in labor supply. In the long run, a higher nominal interest rate reduces the equilibrium number of firms but has no steady-state effect on economic growth and firm size because of EMS. Although monetary policy has no long-run growth effect, increasing the nominal interest rate permanently reduces the levels of output, consumption, and employment. Taking transition dynamics into account, we find that welfare is decreasing in the nominal interest rate and the Friedman rule is optimal in this economy.

scholarly journals On the nexus between Stock Market Fluctuations and the Demand for Money in Saudi Arabia

2020 ◽  
Vol 10 (1) ◽  
pp. 142
Author(s):  
Moayad Al Rasasi ◽  
Fares Rawah ◽  
Bander Alghamdi
Keyword(s):  
Saudi Arabia ◽  
Interest Rate ◽  
Money Demand ◽  
Stock Prices ◽  
Demand Function ◽  
Positive Impact ◽  
Demand For Money ◽  
Money Demand Function ◽  
Long Run ◽  
Estimated Error

This research paper estimates the augmented money demand function for Saudi Arabia while incorporating stock prices as one of the key determinants and utilizing quarterly data spanning over the period of 2010-2018. The estimated money demand function coincides with theoretical expectation regarding income and interest rate over long run. In Particular, the demand for money is statistically significant and positively related with income while it’s negatively related with interest rate. On stock prices, the findings suggest that they are statistically significant and have positive impact on money demand over the long run. Moreover, the estimated error correction model indicates that it takes money demand about two quarters to adjust to its equilibrium condition.

scholarly journals The Determinants of Money Demand in Jordan: ARDL Approach

2019 ◽  
Vol 11 (1) ◽  
pp. 61
Author(s):  
Ali Mustafa Al-Qudah
Keyword(s):  
Interest Rate ◽  
Gross Domestic Product ◽  
Money Demand ◽  
Budget Deficit ◽  
Inflation Rate ◽  
Domestic Product ◽  
Real Gross Domestic Product ◽  
Long Run ◽  
Recursive Residuals ◽  
Bound Test

The current study examined the relationship between real money demand (M2) and its determinants represented by real gross domestic product, real interest rate, inflation rate and budget deficit in Jordan for the period (2000Q1-20018Q1). The study used unit root test, Autoregressive Distributive Lag (ARDL), cointegration and long run, bound test to examine the study hypotheses. ARDL cointegration equation and ARDL Bound test show that there is a long run relationship between money demand M2 and its determinants, real interest rate, inflation rate, budget deficit and real gross domestic product. The short run ARDL results shows that the past period of money demand has a negative and significant impact on money demand, while inflation rate and Gross domestic product have a positive and significant impact on money demand in Jordan. The long run ARDL results show that the inflation rate, real gross domestic product and budget deficit have a positive long run relationship with money demand (M2)and Its impact on (M2 ) is positive and statistically significant at 1 percent level, while interest rate has a negative and significant impact on Money demand (M2 ). Inflation rate, real gross domestic product, budget deficit and interest rate are good determinants for money demand M2. The cumulative sum (CUSUM) of recursive residuals and cumulative sum of squares (CUSUMQ) of recursive residuals confirm that the estimated money demand M2 model is stable.

Fisher Effect in Pakistan

1999 ◽  
Vol 38 (2) ◽  
pp. 153-166 ◽  
Author(s):  
Hamid Hasan
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Inflation Rate ◽  
Banking Sector ◽  
Rational Expectation ◽  
Nominal Interest Rate ◽  
Complete Replacement ◽  
Long Run ◽  
Fisher Hypothesis ◽  
Savings Rate

This paper attempts to test the validity of the Fisher Hypothesis (FH) in Pakistan by investigating the long-run relationship between interest rate and inflation rate applying cointegration analysis. The FH has serious implications for debtors and creditors in an inflation prone economy since inflationary expectations influence nominal interest rate. Moreover, the effectiveness of monetary policy and efficiency in banking sector has direct bearing on the long-run relationship between nominal interest rate and expected inflation rate. Inflationary expectation has been modeled using adaptive and rational expectation approaches and sensitivity of the result to expectation formation has been compared. The paper finds the long-run relationship between nominal interest rate and inflation rate and accepts the partial Fisher Hypothesis. This result suggests that interest rate does not fully cover or accurately anticipate inflation, which implies that bank deposits deteriorate over time. The result further implies that monetary policy may not be effective in such a situation and households’ savings rate may suffer a decline. The acceptance of partial Fisher Hypothesis in case of rational expectation suggests that the rate of interest does not reflect all relevant information and real interest rate does not exhibit random walk behaviour, which is indicative of inefficiency in banking sector. The analysis clearly shows the failure of interest rate as a hedge against inflation and as a predictor of inflation. Therefore, the paper recommends innovation and financial engineering for better alternative especially in banking. The paper also recommends the growth and encouragement of equity market vis-à-vis prevalent debt-biased market. Finally, the paper advocates the complete replacement of traditional credit-based banking by more efficient trade-based banking in Pakistan.

HOW CAN THE GOVERNMENT SPENDING MULTIPLIER BE SMALL AT THE ZERO LOWER BOUND?

2018 ◽  
Vol 23 (8) ◽  
pp. 3457-3482 ◽  
Author(s):  
Valerio Ercolani ◽  
João Valle e Azevedo
Keyword(s):  
Interest Rate ◽  
Government Spending ◽  
New Keynesian ◽  
Nominal Interest Rate ◽  
Size Of Government ◽  
Large Size ◽  
Keynesian Model ◽  
Recent Estimate ◽  
The Government ◽  
Relationship Of

Some recent empirical evidence questions the typically large size of government spending multipliers when the nominal interest rate is stuck at zero, finding output multipliers of around 1 or even lower, with an upper bound of around 1.5 in some circumstances. In this paper, we use a recent estimate of the degree of substitutability between private and government consumption in an otherwise standard New Keynesian model to show that this channel significantly reduces the size of government spending multipliers obtained when the nominal interest rate is at zero. All else being equal, the relationship of substitutability makes a government spending shock crowd out private consumption while being less inflationary, thus, limiting the typically expansionary effect of the fall in the real interest rate. Subject to the nominal interest rate being constrained at zero, the model generates output multipliers ranging from 0.8 to 1.6.

scholarly journals HUMAN CAPITAL AND INNOVATION IN A MONETARY SCHUMPETERIAN GROWTH MODEL

2017 ◽  
Vol 23 (5) ◽  
pp. 1875-1894 ◽  
Author(s):  
Angus C. Chu ◽  
Lei Ning ◽  
Dongming Zhu
Keyword(s):  
Monetary Policy ◽  
Human Capital ◽  
Interest Rate ◽  
Growth Model ◽  
Growth Rates ◽  
Capital Accumulation ◽  
Nominal Interest Rate ◽  
Human Capital Accumulation ◽  
Schumpeterian Growth ◽  
Long Run

This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on research and development (R&D) investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which, in turn, reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.

TEMPTATION AND SELF-CONTROL IN A MONETARY ECONOMY

2016 ◽  
Vol 22 (4) ◽  
pp. 1076-1095 ◽  
Author(s):  
Ryoji Hiraguchi
Keyword(s):  
Interest Rate ◽  
Self Control ◽  
Nominal Interest Rate ◽  
Real Money ◽  
The Real ◽  
Friedman Rule ◽  
Monetary Economy

We construct a microfounded model of money with Gul–Pesendorfer preferences. In each period, agents are tempted to spend all their money by the end of the period, and they suffer from the forgone utility that could have been obtained by adopting the tempting choice. We find that the Friedman rule may not be optimal. A positive nominal interest rate improves welfare because it reduces the real money balances and renders the temptation less attractive. The welfare gained by deviating from the rule is equivalent to 0.67% of consumption.

scholarly journals Welfare cost of inflation in Brazil: an approach with time-varying cointegration and Kalman filter

2019 ◽  
Vol 23 (1) ◽  
pp. 137-160
Author(s):  
Eduardo Lima Campos ◽  
Rubens Penha Cysne
Keyword(s):  
Kalman Filter ◽  
Interest Rate ◽  
Kalman Filtering ◽  
Money Demand ◽  
Welfare Cost ◽  
Time Variability ◽  
Time Varying ◽  
Welfare Cost Of Inflation ◽  
The Interest Rate

This paper compares the time-varying cointegration and the Kalman filter techniques to estimate the Brazilian money demand between 1996 and 2015. The estimation using Kalman filtering performs better and is subsequently used to calculate the welfare cost of inflation. Taking into consideration the time variability of the interest-rate elasticity during the period, the average welfare cost amounts to 0.24% of the GDP, for an average annual inflation of 6.63%.

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