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A Revised Tobin Effect from Inflation: Relative Input Price and Capital Ratio Realignments, US and UK, 1959-1999
Abstract
The paper studies the realignments induced by inflation within an endogenous growth monetary economy. Accelerating inflation raises the ratio of the real wage to the real interest rate, and so raises the use of physical capital relative to human capital across all sectors. We find cointegration evidence for the US and UK economies consistent with a general equilibrium, Tobin-type, effect of inflation on input prices, and capital intensity, even while the growth rate of output is reduced by inflation.
... Second, it is actually the rate of money supply growth in these models that is exogenous, changes in which "cause" changes in the stationary inflation rate, and simultaneously cause changes in the output growth rate. However since, for example, long run evidence finds that money Granger-causes inflation (Crowder 1998), and since some evidence also finds that inflation Granger-causes the output growth rate (Gillman and Nakov 2003), this literature on inflation and growth tends to discuss how inflation affects the output growth rate. This convention is also used here, even though strictly speaking it is changes in the exogenous supply growth rate that "cause" both the inflation and growth rate changes simultaneously, as detailed in Section 2.2 below. ...
... types of capital that compare to Gomme (1993), and to the capital accumulation process of Chari, Jones, and Manuelli (1996). Finally, an extension to Gomme (1993) is put forth that includes credit, as in Gillman andKejak (2002), Gillman andNakov (2003), and Gillman, Harris, and Matyas (2003). ...
... This includes a long run decrease in the real interest rate as a result of an inflation rate increase, in US data, as well as a long run decrease in consumption relative to output, and an increase in investment relative to output, because of inflation. There is also related evidence in Gillman and Nakov (2003) of inflation Granger-causing increases in the capital to effective labor ratios in the US and UK postwar data. ...
The paper formulates a nesting model for studying the theoretical literature on inflation and endogenous growth. It analyses different classes of endogenous growth models, with different usage of physical and human capital, with different exchange technologies. First, the paper shows that a broad array of models can all generate significant negative effects of inflation on growth. Second, it shows that these models can be differentiated primarily by the fact whether there is a Tobin-type effect of inflation and also whether the inflation-growth effect becomes weaker as the inflation rate rises, a non-linearity, or stays essentially constant over the range of inflation rates. The paper compares these features of the models to empirical evidence as a way to summarize the efficacy of the models. Copyright Blackwell Publishers Ltd, 2005.
... it is de…ned as in Tobin as "capital intensity", but in particular in terms of the e¤ect of in ‡ation in causing higher capital to e¤ective labour ratios across sectors (as in Gillman and Nakov (2003)). Our de…nition is almost identical to what underlies the Tobin e¤ect in his original model, except that our capital intensity is the stationary capital to e¤ective labour ratio, which includes the Lucas (1988) indexing of labour by endogenous human capital instead of the Solow indexing of labour by exogenous technological change. ...
... And the central feature for the Tobin e¤ect of a comovement between in ‡ation and the capital to e¤ective labour ratio is supported empirically in Gillman and Nakov (2003), for both US and UK data. Here cointegration is found between the two series and Granger causality is found from in ‡ation to the input ratio. ...
Output growth, investment and the real interest rate are all found empirically to be negatively affected by inflation. But a seeming puzzle arises of opposite Tobin-like inflation effects because theory indicates a negative Tobin effect when investment falls and a positive Tobin effect when the real interest rate rises. We define inflation's Tobin effect more specifically in terms of the effect on the capital to effective labor ratio and resolve the puzzle by showing the simultaneous occurrence of all three negative inflation effects, on growth, investment and real interest rates, in a model calibrated to postwar US data. Here, investment along with consumption are exchanged for within a monetary endogenous growth economy with human capital and a decentralized credit-producing sector.
... . Gillman and Kejak (2004a) compare Tobin-like effects across endogenous growth models. 4 Ahmed and Rogers (2000) report long run US evidence showing that inflation has had a negative effect on the real interest rate historically, which would be expected if inflation causes the capital to effective labor ratio to rise as in the Tobin (1965) effect. Gillman and Nakov (2003) report long run US and UK evidence of an increase in the capital to effective labor ratio as a result of inflation. be empirically examined: that the magnitude of the Tobin (1965) effect is roughly proportional to the magnitude of the growth effect, and that these magnitudes vary monotonically from higher to lower as the inflation rate ...
... Additionally for the economy of Lemma 2, in which there is no physical capital,Figure 2c shows that the inflation growth profile is perfectly linear for the cashonly economy (dashed line) versus the nonlinear Section 2 model with credit (solid line).Table 2 also shows how leisure rises with inflation (Figure 3a), the real interest rate falls (Figure 3b), the real effective wage rises (Figure 3c), and the capital to effective labor ratio in the goods sector and the investment to output ratio rise (Figures 3d and 3e). The sectorial reallocations are supported empirically in Gillman and Nakov (2003), while supporting evidence for the positive investment rate effect and negative real interest rate effect are found in Ahmed and Rogers (2000).Figure 3f simulates the money demand per unit of consumption goods; this is the inverse, endogenous, consumption velocity and it contrasts for example to the assumption in Alvarez, Lucas, and Weber (2001) that velocity is exogenous. In addition,Table 2 shows the link among the magnitude of the growth and Tobin (1965) effects and the magnitude of the interest elasticity of money demand.Table 3 provides a calibration with the goods sector's capital intensity increased above that of the human capital production sector, with β = 0.50, instead of β = 0.64 as in the baseline. ...
The paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long run inflation experience. A negative inflation-growth relation is explained, including a striking non-linearity found repeatedly in empirical studies. A set of Tobin (1965) effects are also explained and, further, linked in magnitude to the growth effects through the interest elasticity of money demand. Undis-closed previously, this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism.
... . Gillman and Kejak (2004a) compare Tobin-like effects across endogenous growth models. 4 Ahmed and Rogers (2000) report long run US evidence showing that inflation has had a negative effect on the real interest rate historically, which would be expected if inflation causes the capital to effective labor ratio to rise as in the Tobin (1965) effect. Gillman and Nakov (2003) report long run US and UK evidence of an increase in the capital to effective labor ratio as a result of inflation. be empirically examined: that the magnitude of the Tobin (1965) effect is roughly proportional to the magnitude of the growth effect, and that these magnitudes vary monotonically from higher to lower as the inflation rate ...
... Additionally for the economy of Lemma 2, in which there is no physical capital,Figure 2c shows that the inflation growth profile is perfectly linear for the cashonly economy (dashed line) versus the nonlinear Section 2 model with credit (solid line).Table 2 also shows how leisure rises with inflation (Figure 3a), the real interest rate falls (Figure 3b), the real effective wage rises (Figure 3c), and the capital to effective labor ratio in the goods sector and the investment to output ratio rise (Figures 3d and 3e). The sectorial reallocations are supported empirically in Gillman and Nakov (2003), while supporting evidence for the positive investment rate effect and negative real interest rate effect are found in Ahmed and Rogers (2000).Figure 3f simulates the money demand per unit of consumption goods; this is the inverse, endogenous, consumption velocity and it contrasts for example to the assumption in Alvarez, Lucas, and Weber (2001) that velocity is exogenous. In addition,Table 2 shows the link among the magnitude of the growth and Tobin (1965) effects and the magnitude of the interest elasticity of money demand.Table 3 provides a calibration with the goods sector's capital intensity increased above that of the human capital production sector, with β = 0.50, instead of β = 0.64 as in the baseline. ...
This paper adds a credit services sector into a monetary endogenous growth economy in order to investigate the inflation-growth effect. We compare this economy to more standard models with respect to the effect of the money / credit exchange technology. We find a markedly negative effect of inflation on economic growth using very standard calibration parameters. Resulting estimates are within or close to the range reported in the literature, depending on the credit technology. Analytically the model employs a general equilibrium version of the Tobin-type substitution in the face of higher inflation that manifests as an increase in the effective capital to effective labor ratios across each of the sectors. An realistic large fall in growth results because of the combination of Lucas (1988) endogenous growth, in which more leisure time implies directly lower growth, and a capital intensive credit technology that induces resource reallocation across sectors so as to avoid the inflation tax.
... to carefully de…ne what is meant by the Tobin e¤ect in this broader framework: it is de…ned as in Tobin as "capital intensity", but in particular in terms of the e¤ect of in ‡ation in causing higher capital to e¤ective labour ratios across sectors (as in Gillman and Nakov (2003)). Our de…nition is almost identical to what underlies the Tobin e¤ect in his original model, except that our capital intensity is the stationary capital to e¤ective labour ratio, which includes the Lucas (1988) indexing of labour by endogenous human capital instead of the Solow indexing of labour by exogenous technological change. ...
... And the central feature for the Tobin e¤ect of a comovement between in ‡ation and the capital to e¤ective labour ratio is supported empirically in Gillman and Nakov (2003), for both US and UK data. Here cointegration is found between the two series and Granger causality is found from in ‡ation to the input ratio. ...
Output growth, investment and the real interest rate in long-run evidence tend to be negatively affected by inflation. Theoretically, inflation acts as a human capital tax that decreases output growth and the real interest rate, but increases the investment rate, opposing evidence. This paper resolves this puzzle by requiring exchange for investment as well as consumption. Inflation then decreases the investment rate, and still decreases both output growth and real interest up to some moderately high rate of inflation, above which increasingly low investment finally causes capital to fall relative to labour, and the real interest rate to rise.
... Therefore the model's in ‡ation-induced decrease in leisure yields a decrease in the rate of productively employed time that is consistent with this cointegration evidence, and its causality. 8) Empirical evidence shows a positive Tobin (1965) e¤ect of in ‡ation decreasing the return to capital (Rapach 2003), and increasing the capital to e¤ective labor ratio across sectors (Gillman and Nakov 2003). The model produces this when in ‡ation-induced substitution towards leisure causes an increase in the real wage and decrease in the return to human capital, thereby inducing substitution from expensive labor to less expensive capital, even while the investment rate decreases. ...
... Gillman and Nakov (2003) present US cointegration evidence of in ‡ation with the capital to e¤ective labor ratio, with Granger causality from in ‡ation to this input ratio. ...
The paper presents a general equilibrium that can explain ten related sets of empirical results, providing a unified approach to understand usually disparate effects typically treated separately. These are grouped into two sets, one on financial development, investment and inflation, and one on inflations effect on other economy-wide variables such as growth, real interest rates, employment, and money demand. The unified approach also contributes a systematic explanation of certain nonlinearities that are found across these results, as based on the production function for financial intermediary services and the resultant money demand function.
... . Gillman and Kejak (2003a) compare Tobin-like effects across endogenous growth models. 4 Ahmed and Rogers (2000) report long run US evidence showing that inflation has had a negative effect on the real interest rate historically, which would be expected if inflation causes the capital to effective labor ratio to rise as in the Tobin (1965) effect. Gillman and Nakov (2003) report long run US and UK evidence of an increase in the capital to effective labor ratio as a result of inflation. inflation rate increases. The key mechanism that gives our model the added flexibility to explain the evidence is the ability of the representative consumer to choose between competing payment mechanisms, money and credit, ...
... Additionally for the economy of Lemma 2, in which there is no physical capital,Figure 2c shows that the inflation growth profile is perfectly linear for the cashonly economy (dashed line) versus the nonlinear Section 2 model with credit (solid line).Table 2 also shows how leisure rises with inflation (Figure 3a), the real interest rate falls (Figure 3b), the real effective wage rises (Figure 3c), and the capital to effective labor ratio in the goods sector and the investment to output ratio rise (Figures 3d and 3e). The sectorial reallocations are supported empirically in Gillman and Nakov (2003), while supporting evidence for the positive investment rate effect and negative real interest rate effect are found in Ahmed and Rogers (2000).Figure 3f simulates the money demand per unit of consumption goods; this is the inverse, endogenous, consumption velocity and it contrasts for example to the assumption in Alvarez, Lucas, and Weber (2001) that velocity is exogenous. In addition,Table 2 shows the link among the magnitude of the growth and Tobin (1965) effects and the magnitude of the interest elasticity of money demand.Table 3 provides a calibration with the goods sector's capital intensity increased above that of the human capital production sector, with β = 0.50, instead of β = 0.64 as in the baseline. ...
The paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long-run inflation experience. A negative inflation-growth relation is explained, including a striking nonlinearity found repeatedly in empirical studies. A set of Tobin (1965) effects are also explained and, further, linked in magnitude to the growth effects through the interest elasticity of money demand. Undisclosed previously, this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism. Copyright 2005 Royal Economic Society.
... Making the substitution of consumption goods for deposited funds, apply the balance constraint that d t = c t , since the bank problem is not decentralized here. Then as in Gillman andNakov (2003 and, Gillman and Kejak (2004, Gillman, Harris, and Matyas (2004), Benk et al. (2005aBenk et al. ( , 2005bBenk et al. ( , 2008Benk et al. ( , and 2010, Gillman and Otto (2007) and Gillman and Yerokhin (2005), the consumer acts also as banker and produces the credit service so that the normalized credit production function can be written as / = ( ) . Alternatively, the bank problem can be decentralized by which the consumer chooses d t , along with q t , with d t = c t as an added constraint of the consumer problem; for such a decentralization of the bank provision of exchange credit in a similar deterministic setting see Gillman and Kejak (2011). ...
The paper presents the welfare cost of inflation in a banking time economy that models exchange credit through a bank production approach. The estimate of welfare cost uses fundamental parameters of utility and production technologies. It is compared to a cash-only economy, and a [Lucas, Robert Jr. E. 2000. “Inflation and Welfare.” Econometrica 68 (2): 247–274.] shopping economy without leisure, as special cases. The paper estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. A zero rate is statutorily specified as the US inflation rate target in the 1978 Employment Act amendments. The paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33 billion a year. Estimates of the percent of government expenditure that can be financed through a 2% vs. zero inflation rate are also provided.
... Data ini adalah hasil publikasi Bank Indonesia dan BPS. Dengan menggunakan strategi metode empiris yang dilakukan oleh Gillman dan Nakov (2003), analisis ini berusaha untuk memahami arah kausalitas inflasi dan pertumbuhan ekonomi di Indonesia. Langkah pengujian yang dilakukan adalah dengan melihat apakah ada kointegrasi antara inflasi dan pertumbuhan ekonomi. ...
The long-run relationship between inflation and economic growth has been recognized by macroeconomist in the last three decades. This leads to the implementation of inflation targeting as a monetary policy framework for developing countries including Indonesia. For developing countries inflation effect on economic growth is more supply side phenomena than demand side or economic fluctuation (Basu, 2000), theoretically, the insignificance response of output to the increase effective demand (such as higher employment rate). On the other hand, the stable and low inflation rate, in the long run, will promote higher output growth. These two theoretical analyses could be tested with granger causality test for more price behavior of the relationship between inflation and growth in Indonesia. For the long run relationship between inflation and growth, I use the Johansen cointegration test. Base on these methods, I found a significance two-way causality between inflation and growth in Indonesia. Base on the Johansen Cointegration Test, there is a non-linear long-run relationship between inflation and economic growth in Indonesia. Furthermore, to check on the non-linearity relationship between inflation and growth, I run the simple OLS regression on inflation and growth. The result has shown a non-linear causality relationship from inflation to economic growth using Indonesian annual data.
... Some literature suggests that US-generated inflation was the main reason for the two "oil shocks" in 1974 and 1979. Penrose mentions that early attempts to raise the oil price were defended by OPEC with the explicit argument to offsetting the cumulative effect of US inflation, as well as to shelter against future erosion of revenues due to inflation (see Gillman and Nakov, 2001). ...
This paper deals with development of oil prices and the factors which have impact on these prices. The main objective of this paper is to identify the impact of movement of exchange rate of US Dollar on crude oil prices. To reach the mentioned objective we have had used theoretical and empirical analyses and methods such as regression model, Granger causality and structural models to identify to what the extent the oil prices depend on the value of US Dollar, as one of the factors influencing the oil prices in the international markets, particularly in the last two decades. We find that US Dollar has a significant impact on oil prices.
... This occurs even while the growth rate goes down. Such realignment has found empirical support in Gillman and Nakov (2003), for the postwar US and UK; see also Ahmed and Rogers (2000) for additional long term US evidence in support of a Tobin effect. The growth evidence of this paper, given its theoretical model, makes it a complement to the Tobin evidence. ...
The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961-1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior.
... The paper analyzes a stochastic version of the Gillman and Kejak (2002) monetary economy with a payments technology for credit. Deterministically this credit technology has been useful in explaining long run international panel evidence on in ‡ation and growth (Gillman, Harris, and Matyas, 2003), and in explaining a long run increase in the capital to e¤ective labor ratio as a result of in ‡ation (Gillman and Nakov, 2003). Applied to the business cycle, the credit sector allows for a new focus on shocks besides the goods productivity and money supply shocks. ...
The paper sets out a monetary business cycle model extended to include the production of credit that serves as an alternative to money in transactions and is subject to productivity shocks. The model provides some improvement on certain puzzles, in particular by capturing the procyclic movements of monetary aggregates, inflation and interest rates. And its application to analyse banking episodes indicates that the credit shock helps explain cycle behavior during the US financial deregulation period of the 1980s and 1990s
... This occurs even while the growth rate goes down. Such realignment has found empirical support inGillman and Nakov (2003), for the postwar US and UK; see also Ahmed and Rogers (2000) for additional long term US evidence in support of a Tobin effect. The growth evidence of this paper, given its theoretical model, makes it a complement to the Tobin evidence. ...
The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961–1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior. The nature of the inflation-growth profile and differences in this between the regions are interpreted with the credit production technology of the model in a way not possible with a standard cash-only economy. Copyright Springer-Verlag 2004
... The paper analyzes a stochastic version of the Gillman and Kejak (2005) monetary economy with a payments technology for exchange credit. Deterministically this credit technology has been useful in explaining the effect of inflation on growth (Gillman and Kejak, 2005), the role of financial development in the inflation-growth evidence (), and in explaining Tobin (1965) evidence (Gillman and Nakov, 2003), as well as for allowing for a liquidity effect to be postulated Li (2000). Applied to the business cycle, a shock to credit productivity allows for a new focus on shocks besides the goods productivity and money supply shocks. ...
The paper constructs credit shocks using data and the solution to a monetary business cycle model. The model extends the standard stochastic cash-in-advance economy by including the production of credit that serves as an alternative to money in exchange. Shocks to goods productivity, money, and credit productivity are constructed robustly using the solution to the model and quarterly US data on key variables. The contribution of the credit shock to US GDP movements is found, and this is interpreted in terms of changes in banking legislation during the US financial deregulation era. The results put forth the credit shock as a candidate shock that matters in determining GDP, including in the sense of Uhlig (2003). (Copyright: Elsevier)
... Dawson's (2003) investigation of financial development in transition is accompanied by alternative growth explanations in the literature that include inflation but not financial development. For example, Gillman and Nakov (2003) find in time series VARs that inflation Granger causes growth in a negative way, for two lead transition countries Hungary and Poland. Financial development enters that study only through its interpretation of the identified structural breaks, in a way similar to the role of financial development in Friedman and Schwartz (1982). ...
The paper presents panel data evidence for 13 transition countries on inflation, financial development and growth. It contributes to the growth literature by showing that the transition countries conform to developed country evidence in particular with the strong negative effect of inflation on growth. It also contributes more evidence to the debate on the role of financial development. Once inflation and the investment rate are included in the model, a key measure of financial development no longer has a positive effect on growth, as some recent literature has found.
... The money demand implied by the credit technology has been supported with empirical evidence (see (Mark and Sul 2002) and (Gillman and Otto 2002)) and is consistent with facets of the inflation experience along the balanced-growth path that also have empirical support (Gillman and Kejak 2005), (Gillman, Harris, and Matyas 2004), (Gillman and Nakov 2003). 4 This consistency strengthens the paper's intuition. ...
This paper conducts a Ramsey analysis within an endogenous growth cash-in-advance economy with policy commitment. Credit and money are alternative payment mechanisms that act as inputs into the household production of exchange. The credit is produced with a diminishing returns technology with Inada conditions that implies along the balanced-growth path a degree one homogeneity of effective banking time. This tightens the restrictions found within shopping time economies while providing a production basis for the Ramsey-Friedman optimum that suggests a special case of Diamond and Mirrlees (1971).
... This substitution towards leisure causes the return on human capital (Equation (16)) to fall and the growth rate to fall (Equation (17)). There is a subsidiary effect of an increased capital to effective labour ratio in both goods and human capital sectors, a Tobin (1965) effect (see Gillman and Nakov, 2003), until the real return on physical capital falls sufficiently to reestablish equilibrium with the return to human capital. 3 This reallocation of inputs mitigates the fall in the growth rate because of inflation, but is a secondorder effect that leaves the growth rate still lower as a result of inflation. ...
The paper presents a model in which the exogenous money supply causes changes in the inflation rate and the output growth rate. While inflation and growth rate changes occur simultaneously, the inflation acts as a tax on the return to human capital and in this sense induces the growth rate decrease. Shifts in the model's credit sector productivity cause shifts in the income velocity of money that can break the otherwise stable relationship between money, inflation, and output growth. Applied to two accession countries, Hungary and Poland, a VAR system is estimated for each that incorporates endogenously determined multiple structural breaks. Results indicate Granger causality positively from money to inflation and negatively from inflation to growth for both Hungary and Poland, as suggested by the model, although there is some feedback to money for Poland. Three structural breaks are found for each country that are linked to changes in velocity trends, and to the breaks found in the other country. Copyright (c) The European Bank for Reconstruction and Development, 2004..
... Gillman and Nakov (2001) find cointegration evidence in support of the co-movement of the input ...
The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961-1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior.
This paper aims to discover the influence of inflation rate, exchange rate, global’s oil price and FDI toward halal industry in 48 OIC’s member Countries. This research uses data by Statistical, Economic and Social Research and Training Centre for Islamic Countries (Sesric), world bank and Thomas Reuters with quantative approach and were analyzed by using panel data analysis. According to the result it is have positive significant influence to the halal industry in 48 OIC Countries. Inflation rate have a significant positive influant; exchange rate have a non significant positive influant; global’s oil price have a significant negative influant; and FDI have a non-significant negative influant toward the increasing of the unemployment rate in 48 OIC’s Countries.Keywords: Halal Industry, Inflation, Exchange Rate, Global’s Oil Price, FDI
The paper identifies monetary economic features of the post-transition Croatian economy, with a view towards using inflation rate targeting to reach European Union (EU) inflation targets as required by EU accession. If focuses on the demand for real money balances, the Fisher equation of interest rates, and the effect of nominal money on output, for Croatia over the 1994-2002 period. The real money demand is found to be stable using cointegration techniques after the inclusion of inflation rate in addition to the nominal interest rate. Including the inflation rate ameliorates the failure of the nominal interest rate to move one-for-one with inflation as predicted by the Fisher equation of interest rates, which is found not to hold. In addition a vector error-correction model finds that money grow rates Granger-cause output growth rates, in line with the literature on the negative effect of inflation on growth. With a stable money demand and indications of the negative growth effect of inflation, the targeting of a low inflation rate emerges as a plausible policy for establishing EU monetary accession criteria and for increasing economic growth.
King et al. (1991) evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the
stochastic trend properties of postwar U.S. macroeconomic data. They find
a common stochastic trend in a three-variable system that includes output,
consumption, and investment, but the explanatory power of the common
trend drops significantly when they add money balances and the nominal
interest rate. In this paper, we revisit the cointegration tests in the spirit of
King et al., using improved monetary aggregates whose construction has
been stimulated by the Barnett critique. We show that previous rejections of
the balanced growth hypothesis and classical money demand functions can
be attributed to mismeasurement of the monetary aggregates.
The paper analyses the effectiveness of the current Croatian regional fiscal policy in terms of its potential effects on stimulating economic growth in the war-affected regions. It is investigated whether sector (production vs. services), firm size, and the after-tax profit affect the investment behaviour in terms of the profit share re- investment. We estimate single and multigroup structural equation models treating firm size and re-investment behaviour as latent variables. The result suggest significant differences between production and service sector firms, and also some differences between firms of different sizes in respect to their re-investment tendencies. Namely, we find the relationship between the latent size normalised to net profit and re-investment share most pronounced among small and medium production firms, while such effect was not found for service sector and large firms. The results suggest that the enterprise size and sector do affect profit-share re- investment and that a more efficient fiscal policy could be designed by differently treating firms of different sectors and sizes.
The article starts with Haslag's (1998) model of the bank's demand for reserves and reformulates it with a cash-in-advance approach for both financial intermediary and consumer. This gives a demand for a base of cash plus reserves that is not sensitive to who gets the inflation tax transfer. It extends the model to formulate a demand for demand deposits, yielding an M1-type demand, and then includes exchange credit, yielding an M2-type demand. Based on the comparative statics of the model, it provides an interpretation of the evidence on monetary aggregates. This explanation relies on the nominal interest as well as technology factors of the banking sector. (JEL E31, E13, O42) Copyright 2004, Oxford University Press.
A cash-in-advance, endogenous growth, economy defines financial development within a banking sector production function as the degree of scale economies for normalized capital and labor. Less financially developed economies have smaller such returns to scale, and can be credit constrained endogenously by a steeply sloping marginal cost of credit supply. The degree of scale economies uniquely determines the marginal cost curvature and the unit cost of financial intermedition, which is expressed in terms of an interest differential. The interest differential result allows for calibration of the finance production function using industry data. A hypothesis of how financial development interacts with inflation and growth is tested, using fixed effects panel estimation with endogeneity tests, dynamic panel estimation, and an extended use of multiple inflation rate splines in estimation of the growth rate
The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961-1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior.
Let n observations Y 1, Y 2, ···, Y n be generated by the model Y t = pY t−1 + e t , where Y 0 is a fixed constant and {e t } t-1 n is a sequence of independent normal random variables with mean 0 and variance σ2. Properties of the regression estimator of p are obtained under the assumption that p = ±1. Representations for the limit distributions of the estimator of p and of the regression t test are derived. The estimator of p and the regression t test furnish methods of testing the hypothesis that p = 1.
The authors study the problem of optimal taxation in three infinite-horizon, representative-agent endogenous growth models. The first model is a convex model in which physical and human capital are perfectly symmetric. The authors' second model incorporates elastic labor supply through a Lucas-style technology. Analysis of these two models points out the danger of assuming that government expenditures are exogenous. In their third model, the authors include government expenditures as a productive input in capital formation, showing that the limiting tax rate on capital is no longer zero. In numerical simulations, they find similar effects on growth and welfare in all three models. Copyright 1993 by University of Chicago Press.
Using post-war data from forty-seven countries, we examine the cross-sectional relation between the mean growth rate of real product (growth) and variables suggested by the theoretical literature. Barro's hypothesis that the variability of monetary shocks adversely affects growth receives strong support, as do several other hypotheses. We also show that our variables influence growth by affecting both the fraction of product devoted to investment and the return to capital. Finally, while an index of civil liberty explains growth only marginally, it dominates the other variables in explaining investment.
This paper provides tables of critical values for some popular tests of cointegration and unit roots. Although these tables are necessarily based on computer simulations, they are much more accurate than those previously available. The results of the simulation experiments are summarized by means of response surface regressions in which critical values depend on the sample size. From these regressions, asymptotic critical values can be read off directly, and critical values for any finite sample size can easily be computed with a hand calculator. Added in 2010 version: A new appendix contains additional results that are more accurate and cover more cases than the ones in the original paper.
The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961-1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior.
This paper proposes new tests for detecting the presence of a unit root in quite general time series models. Our approach
is nonparametric with respect to nuisance parameters and thereby allows for a very wide class of weakly dependent and possibly
heterogeneously distributed data. The tests accommodate models with a fitted drift and a time trend so that they may be used
to discriminate between unit root nonstationarity and stationarity about a deterministic trend. The limiting distributions
of the statistics are obtained under both the unit root null and a sequence of local alternatives. The latter noncentral distribution
theory yields local asymptotic power functions for the tests and facilitates comparisons with alternative procedures due to
Dickey & Fuller. Simulations are reported on the performance of the new tests in finite samples.
The effects on the distribution of least‐squares residuals of a series of model mis‐specifications are considered. It is shown that for a variety of specification errors the distributions of the least‐squares residuals are normal, but with non‐zero means. An alternative predictor of the disturbance vector is used in developing four procedures for testing for the presence of specification error. The specification errors considered are omitted variables, incorrect functional form, simultaneous equation problems and heteroskedasticity.
In non-monetary neo-classical growth models, the equilibrium degree of capital intensity and correspondingly the equilibrium marginal productivity of capital and rate of interest are determined by "productivity and thrift," i.e., by technology and saving behavior. Keynesian difficulties, associated with divergence between warranted and natural rates of growth, arise when capital intensity is limited by the unwillingness of investors to acquire capital at unattractively low rates of return. But why should the community wish to save when rates of return are too unattractive to invest? This can be rationalized only if there are stores of value other than capital, with whose rates of retrun the marginal productivity of capital must compete. The paper considers monetary debt of the government as one alternative store of value and shows how enough saving may be channeled into this form to bring the warranted rate of growth of capital down to the natural rate. Equilibrium capital intensity and interest rates are then determined by portfolio behavior and monetary factors as well as by saving behavior and technology. In such an equilibrium, the real monetary debt grows at the natural rate also, either by deficit spending or by deflation. The stability of the equilibrium is also considered.
Introduction, 545. — I. A simple model, 545. — II. Some consequences of the analysis, 549. — III. The simple model and reality,
552.
We document five stylized facts of economic growth. (1) The “residual ” rather than factor accumulation accounts for most of the income and growth differences across nations. (2) Income diverges over the long run. (3) Factor accumulation is persistent while growth is not persistent and the growth path of countries exhibits remarkable variation across countries. (4) Economic activity is highly concentrated, with all factors of production flowing to the richest areas. (5) National policies closely associated with long-run economic growth rates. We argue that these facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, and that highlight the role of factor accumulation. Empirical work, however, does not yet decisively distinguish among the different theoretical conceptions of “total factor productivity growth.” Economists should devote more effort towards modeling and quantifying total factor productivity.
The study argues that inflation affects productivity and competitiveness in three basic ways. First, the business environment becomes more uncertain as inflation accelerates and, consequently, there tends to be less investment and innovation than otherwise. Second, inflation increases effective tax rates, adversely affecting the incentives to save, to invest and to work. Third, and most direct, inflation raises the prices of US goods in international markets. This may be offset by exchange-rate changes, although, as has happened, the Federal Reserve Board may raise interest rates and this can prevent the exchange rate from falling. The authors conclude that much could be done by reforming the tax codes for private individuals and for corporations to reduce the detrimental effects of inflation. This is not to say that bringing inflation under control should not remain a very high priority for this and subsequent administrations to address. But, as the authors note, some of the reforoted.
In a monetary version of the Uzawa (1965)–Lucas (1988) model of endogenous growth, this paper illustrates how a credible policy of rapid disinflation can induce temporary declines in employment and output, with the former exhibiting a significant degree of persistance; however, these temporary declines in employment and output are not associated with any nominal rigidities in the economy, and therefore do not represent dead-weight losses thhat occur along the transitio path, but are instead a part of an optimal response to the policy change. The measured welfare benefits of disinflation are seen to be higher when the transition path is taken into account.
This text presents a comprehensive treatment of the most important topics in monetary economics, focusing on the primary models monetary economists have employed to address topics in theory and policy. It covers the basic theoretical approaches, shows how to do simulation work with the models, and discusses the full range of frictions that economists have studied to understand the impacts of monetary policy. Among the topics presented are money-in-the-utility function, cash-in-advance, and search models of money; informational, portfolio, and nominal rigidities; credit frictions; the open economy; and issues of monetary policy, including discretion and commitment, policy analysis in new Keynesian models, and monetary operating procedures. The use of models based on dynamic optimization and nominal rigidities in consistent general equilibrium frameworks, relatively new when introduced to students in the first edition of this popular text, has since become the method of choice of monetary policy analysis. This third edition reflects the latest advances in the field, incorporating new or expanded material on such topics as monetary search equilibria, sticky information, adaptive learning, state-contingent pricing models, and channel systems for implementing monetary policy. Much of the material on policy analysis has been reorganized to reflect the dominance of the new Keynesian approach. Monetary Theory and Policy continues to be the only comprehensive and up-to-date treatment of monetary economics, not only the leading text in the field but also the standard reference for academics and central bank researchers.
This paper analyzes the effects of inflation variability on economic growth in a model where money is introduced via a cash-in-advance constraint. In this setting, we find that inflation adversely affects long-run growth, even when the cash-in-advance constraint applies only to consumption. At the same time, we find that inflation and growth are positively related in the short run. Furthermore, variability increases average growth through a precautionary savings motive. Since inflation and inflation variability tend to be highly correlated, the presence of uncertainty attenuates the negative long-run relationship between inflation and real growth. It also provides a partial rationale for the apparent lack of robustness in cross-country regressions of growth and inflation.
An economy is constructed in which the steady-state capital stock is inversely related to the rate of inflation, as a result that is directly opposite the usual conclusion.
Using over 100 years of U.S. data, we find that the long-run effects of inflation on consumption, investment, and output are positive. Also, great ratios like the consumption and investment rates are not independent of inflation, which we interpret in terms of the Fisher effect. However, the variability of the stochastic inflation trend is small relative to the variability of the productivity and fiscal trends. Thus, models generating long-term negative effects of inflation on output and consumption seem to be at odds with data from the moderate inflation rate environment we consider.
The article attempts to develop a general theory of the allocation of time in non-work activities. It sets out a basic theoretical analysis of choice that includes the cost of time on the same footing as the cost of market goods and treats various empirical implications of the theory. These include a new approach to changes in hours of work and leisure, the full integration of so-called productive consumption into economic analysis, a new analysis of the effect of income on the quantity and quality of commodities consumed, some suggestions on the measurement of productivity, an economic analysis of queues and a few others as well. The integration of production and consumption is at odds with the tendency for economists to separate them sharply, production occurring in firms and consumption in households. It should be pointed out, however, that in recent years economists increasingly recognize that a household is truly a small factory. It combines capital goods, raw materials and labor to clean, feed, procreate and otherwise produce useful commodities.
Thesis--University of Wisconsin. Vita. Includes bibliographical references (leaves 140-143). Photocopy of typescript.
Tail approximation of the asymptotic distribution of the log likelihood ratio test for cointegration in a vector autoregressive process is studied. In dimension 2, an approximation of weighted 2 type is derived by applying multivariate saddlepoint approximation techniques to a Fourier inversion integral.
Since the notion of cointegration was established by Engel and Granger (1987), many statistical methods have been suggested to estimate and test cointegrated models. Undoubtedly the Gaussian likelihood based method advocated by Johansen (1988, 1991) is one of the most popular choices among practitioners. In his 1988 paper, Johansen applied Anderson s (1951) maximum likelihood estimation procedure for reduced rank regression (RRR) models to isolate common stochastic trends in multiple time series. This was a remarkable breakthrough, which he and other authors have extended into various directions in the last decade. Johansen s approach is attractive in that it provides a unified set of tools of estimation, cointegration rank testing, and parametric hypothesis testing, based on the Gaussian likelihood for a vector autoregression (VAR). Although this book and other papers of Johansen are mostly concerned with reduced form models, the statistical information provided by his method is useful for applied econometricians, especially in fields where tractable dynamic structural models are not available. This book presents a concise yet comprehensive treatment of his methodology.
This paper re-examines the issue of the existence of threshold effects in the relationship between inflation and growth, using new econometric techniques that provide appropriate procedures for estimation and inference. The threshold level of inflation above which inflation significantly slows growth is estimated at 1-3 percent for industrial countries and 11-12 percent for developing countries. The negative and significant relationship between inflation and growth, for inflation rates above the threshold level, is quite robust with respect to the estimation method, perturbations in the location of the threshold level, the exclusion of high-inflation observations, data frequency, and alternative specifications. Copyright 2001, International Monetary Fund
This paper addresses the problem of representing noncausality between two sets of cointegrated variables. In this case, maximum likelihood estimates of the parameters may be derived based on Johansen's approach. Likelihood ratio tests for noncausality are derived, which are different depending on the distributions of the unit roots in the marginal subsystem and the autoregressive part of the conditional subsystem. These tests are chi-squared-distributed. A Monte Carlo experiment illustrates t he advantages of the proposed approach when compared to the usual approach based on VAR's in levels. Copyright 1992 by Blackwell Publishing Ltd
This paper gives a systematic application of maximum likelihood inference concerning cointegration vectors in non-stationary vector valued autoregressive time series models with Gaussian errors, where the model includes a constant term and seasonal dummies. The hypothesis of cointegration is given a simple parametric form in terms of cointegration vectors and their weights. The relation between the constant term and a linear trend in the non-stationary part of the process is discussed and related to the weights. Tests for the presence of cointegration vectors, both with and without a linear trend in the non-stationary part of the process are derived. Then estimates and tests under linear restrictions on the cointegration vectors and their weights are given. The methods are illustrated by data from the Danish and the Finnish economy on the demand for money. Copyright 1990 by Blackwell Publishing Ltd
This paper takes an alternative approach to the topic of money and growth by developing a model in which the effects of sustained capital accumulation on an evolving system of payments, in addition to the conventional effects of sustained inflation on growth, are examined. While the effects of inflation on growth are small, the effects of growth on the monetary system are substantial. The results are consistent with ideas about money and growth contained in work that predates that of James Tobin and Miguel Sidrauski, as well as with evidence that money and asset demands vary systematically within economies as they develop. Copyright 1994 by American Economic Association.
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
The relationship between cointegration and error correction models, first suggested by Granger, is here extended and used to develop estimation procedures, tests, and empirical examples. A vector of time series is said to be cointegrated with cointegrating vector a if each element is stationary only after differencing while linear combinations a8xt are themselves stationary. A representation theorem connects the moving average , autoregressive, and error correction representations for cointegrated systems. A simple but asymptotically efficient two-step estimator is proposed and applied. Tests for cointegration are suggested and examined by Monte Carlo simulation. A series of examples are presented. Copyright 1987 by The Econometric Society.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
One approach to the microeconomic foundations of macroeconomics problem takes the frame and the components of standard ‘neoclassical’ theory as the given starting point. One asks what can be used and what needs modification for purposes of representing the movement of a macro-system through time and into a future that is in some respects unknowable. The aim is to define and, if possible, solve the analytical problems that emerge at the levels of individual conceptual experiments, market experiments, and general equilibrium experiments. I have pursued this approach in other recent papers1 but am running into diminishing returns.
70_3/g208/makeup/g208.3d hypothesis of stationarity against the alternative of a unit root
- A Revised
- Tobin Effect
- Inflation
A REVISED TOBIN EFFECT FROM INFLATION
{Journals}Ecca/70_3/g208/makeup/g208.3d
hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54,
159-78.
Macroeconomic determinants of growth: crosscountry evidence Testing the null # The London School of Economics and Political Science
- P G Kwiatkowski
- D Phillips
- P C B Schmidt
KORMENDI, R. C. and MEGUIRE, P. G. (1985). Macroeconomic determinants of growth: crosscountry evidence. Journal of Monetary Economics, 16, 141-63
KWIATKOWSKI, D., PHILLIPS, P. C. B, SCHMIDT, P. and SHIN, Y. (1992). Testing the null
# The London School of Economics and Political Science 2003
Leijonhufvud (1977) show how inflation can reduce work effort
- Boskin
Boskin et al. (1980) and Leijonhufvud (1977) show how inflation can reduce work effort.
argues that the using up of resources in non-productive inflation tax-avoidance represents a loss
Baumol (1952) argues that the using up of resources in non-productive inflation tax-avoidance
represents a loss.
Co-integration and error correction: representation, estimation, and testing
ENGLE, R. F. and GRANGER, C. W. J. (1987). Co-integration and error correction: representation,
estimation, and testing. Econometrica, 55, 251-76.
Testing the null # The London School of Economics and Political Science
- D Kwiatkowski
- P C Phillips
- P Schmidt
- Y Shin
KWIATKOWSKI, D., PHILLIPS, P. C. B, SCHMIDT, P. and SHIN, Y. (1992). Testing the null
# The London School of Economics and Political Science 2003
- Durbin-Watson
- S E