Houston H. Stokes

Real Money Balances: An Omitted Variable from the Production Functions?

SEVERAL writers have argued that real money balances are a factor of production.1 No one, however, has directly tested the hypothesis that real money balances are a factor input.2 The purpose of our paper is to report the results of such a test. We find that real money balances, regardless of definition, enter significantly in a Cobb-Douglas production function fitted to annual data over the period 1929-1967 for the private domestic sector of the United States economy. Quantity indices of output, capital and labor, published by Christensen and Jorgenson (1970) and adjusted both for quality changes and rates of utilization, are employed to estimate the production function. Data for nominal money balances are taken from Friedman and Schwartz (1970). Our results have important implications for production function analysis, the explanation of total factor productivity, and monetary growth theory. The plan of the paper is as follows. Section II deals with a brief discussion of the rationale for the presence of real balances in the production function. In section III we present the production function used in the study and discuss the data employed. Results are given in section IV. A summary and conclusions follow in the final section.

German Banks and German Growth, 1883–1913: an Empirical View

Almost without exception interpretations of the remarkable growth of the German economy before the First World War stress the role of the German banking system, in general, and that of the universal or Kreditbank, in particular. The most subtle and penetrating view of this question is that developed in Alexander Gerschenkrons essays, “Economic Backwardness in Historical Perspective†and “Prerequisites of Modern Industrialization.†According to this view, “backward†countries which experience successful industrializations do so by making institutional “substitutions†which enable them to compensate for or even to turn to their advantage their initial deficiencies of productive factors. The institution which is “substituted†in Germany to perform this function is the Kreditbank. This interpretation places special emphasis on the growth-inducing character of these banks, but is also open to the possibility that an industrialization led by such institutions might have entailed certain costs. In fact, Professor Gerschenkron explicitly invites help in assessing these costs in commenting: “it would be a fruitful undertaking in research to explore and perhaps to measure and compare the difficulties, the strains, and the cost which were involved in the various processes of substitution ….†Thanks to the work of Ekkehard Eistert, who has constructed a reliable set of statistics on the German banking system in this era, it is now possible to attempt such a “fruitful undertaking.†Making use of these data, an econometric model has been constructed to test the hypothesis that the manner in which the Kreditbanken allocated credit contributed to the growth of German non-agricultural output. Our findings strongly suggest that the credit allocation policy of these banks was inhibiting rather than stimulating the German economy in the period for which data are available and that previous interpretations are in need of serious revision. It appears that, in Gerschenkrons terms, the “cost†of bank-led industrialization was far greater than anyone has previously suggested.

Why Are the Effects of Money-Supply Shocks Asymmetric? Evidence from Prices, Consumption, and Investment

This paper investigates why the effects of money on output are asymmetric. We show that Covers (1992) methodology is a special case of a more general model which enables us to distinguish between two sets of theories consistent with the output asymmetries: a convex aggregate supply, and a pushing-on-a-string view. We find that the effects of money on prices are symmetric, which is consistent with both sets of theories being operative at once. We also show that consumption responds symmetrically to money, whereas the response of fixed investment is characterized by asymmetries very similar to those that affect output. Finally, we find that the asymmetries in the effects of money supply shocks are intensified by increases in the rate of inflation.

On the asymmetric effects of money-supply shocks: international evidence from a panel of OECD countries

We examine whether the asymmetric effect of money on output is an international phenomenon, and investigate the reasons for this asymmetry. Quarterly data from the 1963-93 period for a panel of twelve OECD countries strongly support asymmetry internationally: negative money-supply shocks are shown to have a stronger effect on output than positive shocks. Our methodology also enables us to distinguish between two sets of theories consistent with the output asymmetries: a convex aggregate supply and a credit view. We find that the effects of money on prices are generally symmetric, which may be consistent with both sets of theories being operative at once.

Real Money Balances: An Omitted Variable from the Production Function? A Reply

ln Q -0.1988 + 0.6922 ln L (2.8) (4.7) + 0.5896 In K 0.0223 In MF (4.3) (0.2) + 0.2106InMc + 0.0018T. (3.7) (0.4) R = 0.986 D.W. = 1.03 The results indicate that the real money balances held by firms seem to have no significant effect on output. The level of money held by consumers retains its significance. These results are again consistent with induced innovation approach but not with the production factor approach.

Determinants of the Female Occupational Distribution: A Log-Linear Probability Analysis

The present study examines the determinants of two aspects of occupation which have been found to have important influences on female wages: the skill level associated with the occupation and the sex composition of the occupation (typically female versus male or integrated). Using a log-linear probability technique and data from the National Longitudinal Surveys, Young Women Cohort, hypotheses drawn from the economic and sociological literature are tested.

A Note on the Stochastic Structure of the Velocity of Money: Some Reservations

position which relies on the assumption that velocity is stable or at least predictable.1 We offer counter-evidence indicating that the Gould-Nelson findings are highly period sensitive, having been obtained for the period 1869-1960. The problem with using this period is that it actually represents a conglomeration of three separate periods, each with distinct historical characteristics.2 By the use of a more homogeneous period (1879-1940), originally suggested by Fried man, we have found that there is a substantial drift in the velocity series and that the movement of the velocity series can be distinguished from a

Time-varying criteria for monetary integration: evidence from the EMU

Abstract How can we determine whether an economy will benefit from membership in a monetary union? While economic theory has proposed a number of widely accepted criteria, virtually all empirical studies apply them as if they were time-invariant. The purpose of this paper is to show that unless the dynamic nature of these criteria is explicitly taken into account, the results will be flawed and misleading. We focus on 13 EU countries and two specific criteria: the relative size of output shocks and their synchronization. Using quarterly data from the 1961:1 to 1997:4 period, we show that the parameters relevant to these criteria have exhibited substantial variability over time for essentially all countries in our sample. Our time-varying parameters allow us not just to avoid the flaws of the conventional method, but also to discuss the optimal timing of forming or joining a monetary union.

Oil Market Share Dynamics: A Markov Chain Analysis of Consumer and Producer Adjustments

We develop an “optimal market share rule” model of cartel behavior which when applied to the OPEC cartel appears capable of explaining its stability and responses to changed market events. In particular, by attaching importance to market shares based approximately on costs, OPEC members can by maintaining optimal shares deter deviant member attempts to break cartel rules. After a thorough discussion of the theory, the model is tested empirically using a Markov probability model.The estimated Markov transition matrix is further decomposed into what Theil has called the exchange matrix and the mean passage matrix. Dynamic adjustment processes in the market are revealed by the latter while an emerging pattern of OPEC member surveillance of consumers is revealed by the former which facilitates cartel stability. Inspection of these matrixes further suggests that after the formation of OPEC there is evidence of less potential for producer conflict while there appears more evidence for consumer conflict. While these results must be tentative in view of the fact that they have been estimated using a simplified two consumer — two producer model and limited data, it is argued that the results are highly suggestive and the approach in this study can be extended to cover all producer and consumers, and can be integrated into a complete model of the world oil market.

German Banking and Japanese Banking: A Comparative Analysis

Wherever there are banks there are arguments about the macro-economic effects of banking policy. One of the best theoretical formulations of the effect of German banking on German development appears in Alexander Gerschenkrons “Economic Backwardness in Historical Perspective†and “Reflections on the Concept of Prerequisites of Modern Industrialization.†This problem is given an empirical treatment in “German Banks and German Growth, 1883–1913: An Empirical View,†by Hugh Neuburger and Houston H. Stokes. Our intention in this paper is to test further our previous findings and to contrast our findings for Germany with those for post-World War II Japan. While the two situations are not entirely comparable they are similar enough to make such a comparison worthwhile.