Daniel E. Sichel

The demand for money

Publisher Summary The relation between the demand for money balances and its determinants is a fundamental building block in most theories of macroeconomic behavior. The demand for money is a critical component in the formulation of monetary policy, and a stable demand function for money has long been perceived as a prerequisite for the use of monetary aggregates in the conduct of policy. The repeated breakdown of existing empirical models in the face of newly emerging data has fostered a vast industry devoted to examining and improving the demand for money function. This process has been aided by a growing arsenal of econometric techniques that has permitted more sophisticated examinations of dynamics, functional forms, and expectations. These techniques have also provided researchers with a wide variety of diagnostic tests to evaluate the adequacy of particular specifications. The chapter reviews underlying theoretical models to re-examine measurement and specification issues such as the definition of money and the appropriate scale and opportunity cost variables. It discusses the estimation issues, criticisms, and modifications in the partial adjustment model.

Measuring Capital and Technology: An Expanded Framework

Business outlays on intangible assets are usually expensed in economic and financial accounts. Following Hulten (1979), this paper develops an intertemporal framework for measuring capital in which consumer utility maximization governs the expenditures that are current consumption versus those that are capital investment. This framework suggests that any business outlay that is intended to increase future rather than current consumption should be treated as capital investment. Applying this principle to newly developed estimates of business spending on intangibles, we find that, by about the mid-1990s, business investment in intangible capital was as large as business investment in traditional, tangible capital. Relative to official measures, our framework portrays the U.S. economy as having had higher gross private saving and, under plausible assumptions, fractionally higher average annual rates of change in real output and labor productivity from 1995 to 2002.

Can financial innovation help to explain the reduced volatility of economic activity

The stabilization of economic activity in the mid 1980s has received considerable attention. Research has focused primarily on the role played by milder economic shocks, improved inventory management, and better monetary policy. This paper explores another potential explanation: financial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and firms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of simple empirical techniques to identify links between the observed moderation in economic activity and the influence of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization.

Explaining a Productive Decade

This paper analyzes the sources of U.S. productivity growth in recent years using both aggregate and industry-level data. We confirm the central role for information technology (IT) in the productivity revival during 1995-2000 and show that IT played a significant, though smaller, role after 2000. Productivity growth after 2000 appears to have been boosted by industry restructuring and cost cutting in response to profit pressures, an unlikely source of future strength. In addition, the incorporation of intangible capital into the growth accounting framework takes some of the luster off the performance of labor productivity since 2000 and makes the gain during 1995-2000 look larger than in the official data. Finally, we examine the outlook for trend growth in labor productivity; our estimate, though subject to much uncertainty, is centered at 2-1/4 percent a year, faster than the lackluster pace that prevailed before 1995 but somewhat slower than the 1995-2006 average.

Information Technology and Productivity: Where are We Now and Where are We Going?

Productivity growth in the U.S. economy jumped during the second half of the 1990s, a resurgence that many analysts linked to developments in information technology (IT). However, shortly after this consensus emerged, demand for IT products fell sharply, leading to a debate about the connection between IT and productivity and about the sustainability of the faster growth. ; This article contributes to this debate in two ways. First, the authors provide updated estimates of the proximate sources of growth using a growth accounting framework that focuses on information technology. Their results confirm that the acceleration in labor productivity after 1995 was driven by the greater use of IT capital goods and the more rapid efficiency gains in the production of these goods. Second, to assess whether the pickup in productivity growth is sustainable, the authors analyze the steady-state properties of a multisector growth model. This exercise generates a range for labor productivity growth of 2 percent to 2 3/4 percent per year, which suggests that much-and possibly all-of the resurgence is sustainable. ; The analysis also highlights that future increases in output will depend on the pace of technological advance in the semiconductor industry and on the extent to which products embodying these advances diffuse through the economy.

Cyclical Patterns in the Variance of Economic Activity

This paper models the conditional mean and variance of real GNP and its components using asymmetric exponential generali zed autoregressive conditional heteroskedasticity, a model previously applied only to financial variables. The results im ply that the variance of real GNP is higher following negative innovatio ns than positive innovations and that this asymmetry arises in the cyclically sensitive sectors. Further evidence links this asymmetry to the phase of the business cycle: the conditional variance appears to be largest around business cycle troughs. The evidence of asymmetry in conditional variance is robust to alternative models of output growt h, including split-trend and threshold specifications.

THE PRODUCTIVITY SLOWDOWN: IS A GROWING UNMEASURABLE SECTOR THE CULPRIT?

The productivity slowdown of the early 1970s continues to puzzle economists. A frequent explanation of this puzzle is that mismeasurement of output has worsened enough to help account for the apparent shortfall of output growth. Griliches (1994) highlighted one channel through which this worsening measurement could occur. He raised the possibility thatbecause output growth in the service sector likely is undermeasuredthe rising share of services has led to greater undermeasurement of overall economic growth. This paper demonstrates that this argument is of little quantitative significance. Even under assumptions most favorable to the hypothesis, the rising share of services has had only a small impact on measurement error. These resultsalong with evidence from Baily and Gordon (1988)make mismeasurement of output an improbable explanation for the productivity slowdown in aggregate data.

How Fast do Personal Computers Depreciate? Concepts and New Estimates

This paper provides new estimates of depreciation rates for personal computers using an extensive database of prices of used PCs. Our results show that PCs lose roughly half their remaining value, on average, with each additional year of use. We decompose that decline into age-related depreciation and a revaluation effect, where the latter effect is driven by the steep ongoing drop in the constant-quality prices of newly-introduced PCs. Our results are directly applicable for measuring the depreciation of PCs in the National Income and Product Accounts (NIPAs) and were incorporated into the December 2003 comprehensive NIPA revision. Regarding tax policy, our estimates suggest that the current tax depreciation schedule for PCs closely tracks the actual loss of value in a zero-inflation environment. However, because the tax code is not indexed for inflation, the tax allowances would be too small in present value for inflation rates above the very low level now prevailing.

Explaining a productive decade

This paper analyzes the sources of U.S. productivity growth in recent years using both aggregate and industry-level data. We confirm the central role for information technology (IT) in the productivity revival during 1995-2000 and show that IT played a significant, though smaller, role after 2000. Productivity growth after 2000 appears to have been boosted by industry restructuring and cost cutting in response to profit pressures, an unlikely source of future strength. In addition, the incorporation of intangible capital into the growth accounting framework takes some of the luster off the performance of labor productivity since 2000 and makes the gain during 1995-2000 look larger than in the official data. Finally, we examine the outlook for trend growth in labor productivity; our estimate, though subject to much uncertainty, is centered at a year, faster than the lackluster pace that prevailed before 1995 but somewhat slower than the 1995-2006 average.

Money Demand: The Effects of Inflation and Alternative Adjustment Mechanisms

The paper first reconciles a variety of specification tests for partial adjustment money demand models and points out a fundamental identification problem which makes it impossible to distinguish between the real and nominal partial adjustment models if inflation has an independent effect on the long-run demand for money. The paper also finds that empirical estimates of simple partial adjustment models have some undesirable properties and then considers the shortand long-run effects of inflation in a more general distributed lag model.