David Demery

Unanticipated monetary growth, output and the price level: U.K. 1946–1977☆

Abstract This paper develops and estimates using annual data from 1946–1977 a three-equation model of the U.K. economy, in which output is affected only by unanticipated monetary growth whereas the price level is influenced by both anticipated and unanticipated changes in money supply. Expectations of monetary growth are assumed to be Muth-rational. The model was estimated using efficient procedures, and tests of the over-identifying restrictions were generally favourable to model specification. Some features of the price equation are unsatisfactory and the results in this section must be considered tentative.

A quarterly model of unanticipated monetary growth, output and the price level in the U.K. 1963–1978

Abstract This paper develops and estimates using quarterly data from 1963 to 1978 a three-equation model of the U.K. economy, in which output is affected only by unanticipated monetary growth whereas the price level is influenced by both anticipated and unanticipated changes in the money supply. Expectations of monetary growth are assumed to be Muth-rational. The model was estimated using efficient procedures and tests of the over-identifying restrictions were favourable to the model specification. In particular, anticipated monetary growth was found to have no significant effect on output.

Rational expectations in macroeconomics : an introduction to theory and evidence

Preface. 1. Expectations in Macroeconomics. 2. The Theory of Rational Expectations. 3. Testing the Rational Expectations Hypothesis. 4. Rational Expectations and a Flexible Price Macroeconomic Model. 5. Criticisms of the Flexible Price Rational Expectations Model. 6. Rational Expectations and Macroeconomics: Two Influential Empirical Studies. 7. Criticism and Reappraisal of the Lucas and Barro Models. 8. Real Business Cycle Theory. 9. Rational Expectations and the Real Income Hypothesis. 10. Summary and Conclusions.

Economic Growth and Geographic Proximity

Abstract Using data on 92 countries, 90 European regions, and 48 US states we present results suggesting that physical distance between economies has little role to play in explaining the spatial correlation of growth rates.

Incomplete information and the time series behaviour of consumption

Pischke (1995) uses both microeconomic and macroeconomic US data to test the idea that, within an otherwise standard PIH framework, ignorance by agents of aggregate labour income can account for the observed degree of excess smoothness and sensitivity in consumption. His tests involve only the second moments of aggregate consumption and labour income. In this paper our main aim is to identify and test the restrictions his model implies for aggregate consumption dynamics, using US quarterly data over the period 1959-1996, but our framework allows us also to test an earlier, related model of Goodfriend (1992). We find that both models can be formally rejected: ignorance of aggregate labour income cannot by itself account for aggregate consumption dynamics; some other relaxation of the assumptions of the standard PIH is required. We give an example of one possible such relaxation and present evidence indicating that Pischkes version of imperfect information may, within that framework, have a significant role to play. Copyright

Partial adjustment and the permanent income hypothesis

Abstract The paper extends the permanent income hypothesis to incorporate two alternative theories of partial adjustment. The first is the conventional forward-looking quadratic costs of adjustment model; the second develops the idea that adjustment of consumption to changes in permanent income are faster the more advanced is the notice of such changes. Both theories can in principle account for the ‘excess smoothness’ and ‘excess sensitivity’ phenomena highlighted in recent research. Both models are applied to U.S. and U.K. quarterly data. The second model appears to provide a more satisfactory explanation of consumption in the two countries.

SAVING AND RATIONAL EXPECTATIONS: EVIDENCE FOR THE U.K.

Macdonald and Speight (I989), hereafter MS, report tests of the rational expectations-permanent income hypothesis, hereafter REPI, based on quarterly UK data from I966. I-I986.3. They find that the formal restrictions implied by REPI can be rejected. Moreover, in striking contrast to the predictions of REPI and the results presented in Campbell (I987) for the United States and Campbell and Clarida (1987) for Canada and the United Kingdom, they find that saving positively Granger-causes the change in labour income. MSs results are, however, based on a seriously miscalculated real labour income series. In this paper we present tests of REPI based on a measure of labour income corrected for both this error and for a conceptual flaw in their definition. Our main findings are that, in accordance with REPI, saving negatively Granger-causes the change in labour income, but that the restrictions implied by REPI can be strongly rejected whether or not allowance is made for transitory consumption.

Unanticipated money growth, output and unemployment in West Germany, 1964—1981

ZusammenfassungUnerwartete Erhöhung der Geldmenge sowie Produktion und Arbeitslosigkeit in Westdeutschland von 1964 bis 1981. — Dieser Aufsatz testet die Hypothese von der Wirkungslosigkeit politischer MaΒnahmen von Lucas-Sargent-Barro, wobei ein Vierteljahresmodell der westdeutschen Wirtschaft mit vier Gleichungen benutzt wird, die den Zeitraum 1964-1981 abdecken. Die erste Gleichung dient dazu, rationale Prognosen der Geldmengenexpansion abzuleiten; die Schätzfehler ergeben Schätzungen für die unerwartete Geldmengenerhöhung. Die Auswirkungen von erwartetem und nicht erwartetem Wachstum der Geldmenge auf “reale” GröΒen — BIP, Index der Industrieproduktion und Arbeitslosigkeit — werden untersucht. Das benutzte Schätzverfahren liefert konsistente und effiziente Schätzungen. Die Ergebnisse weisen deutlich auf die Existenz rationaler Erwartungen und struktureller Neutralität hin, d.h., nur die unerwartete Expansion der Geldmenge hat reale Wirkungen.RésuméCroissance inanticipée de la masse monétaire, production et chómage en Allemagne de l’Ouest 1964-1981. — Cet article examine l’évidence empirique de la «proposition d’inefficacité politique» de Lucas-Sargent-Barro en appliquant un modèle trimestriel de quatre-équations pour l’Allemagne de l’Ouest de la période 1964-1981. La première équation est utilisée pour obtenir des estimations des prévisions rationnelles de la croissance monétaire; les erreurs de la fonction donnent des estimations de la croissance inanticipée de la masse monétaire. L’auteur analyse les effets de la croissance anticipée et inanticipée en masse monétaire sur les variables «réelles», c’est-á-dire, sur le PIB, l’indice de la production industrielle et le chómage. Il obtient des estimations consistantes et efficientes. Les résultats donnent une évidence forte pour des expectatives rationnelles et la «neutralité structurelle», c’est-á-dire, seule la croissance inanticipée en masse monétaire a des effets réels.ResumenCrecimiento monetario no anticipado, producción y desempleo en Alemania Occidental 1964-1981. — Este articulo examina la evidencia empfrica de la «proposición de politica inefectiva» de Lucas-Sargent-Barro usando un modelo trimestral de cuatro ecuaciones de la economia de Alemania Occidental (cubriendo el periodo 1964-1981). La primera ecuación es utilizada para derivar estimaciones de pronösticos racionales de crecimiento monetario; sus errores suministran estimaciones del crecimiento monetario no anticipado. El articulo examina el impacto del crecimiento monetario anticipado y no anticipado sobre las variables «reaies» — Producto Bruto Interno, indice de producción industrial y desempleo. Se obtienen estimaciones consistentes y eficientes. Los resultados suministran una fuerte evidencia tanto para expectativas racionales como para «neutralidad estructural» (p.ej., solo el crecimiento monetario no anticipado tiene efectos reales).

Demographic change and the UK savings rate

Microeconomic data are used to explore the effects of a changing age-structure on the UKs aggregate personal savings rate. The findings suggest that changes to the populations age structure have had detectable, sustained, but, relative to the yearly changes observed in the savings rate over the previous century, modest effects on aggregate personal sector savings. It is estimated that the projected changes to the UKs age structure over the next 40 years are likely to raise the UKs savings rate but by no more than two percentage points. No basis is found for the view that the aggregate savings rate will decline as a result of the anticipated ageing of the UK population.

The Behaviour of Nominal Interest Rates in the United Kingdom, 1961-1973

In November 1973 the rate of interest on UK Treasury bills was 12.83 per cent, which was then the highest recorded rate this century. Other interest rates on similar types of assets were also at historically very high levels. But although it is clearly important to understand why such high and undesirable rates have occurred, there are in fact very few empirical studies into what determines UK interest rates. (One such study is Ball, 1965.) Accordingly, in this paper we present and test, using UK data, a number of theories put forward to explain nominal interest rate behaviour. The paper is organized as follows. In Sections I and II we present and test alternative theories of interest rate behaviour, and in Section III we discuss the policy implications of these tests.