James M. Holmes

‘Optimal’ model selection when the true relationship is weak and occurs with a delay

Abstract A Monte Carlo comparison of five model selection criteria indicates that when the true relationship is weak and delayed, Theils (1961) criterion or the selection of the most significant lag structure is most likely to result in the correct inference.

The Specification of the Demand for Money and the Tax Multiplier

This paper modifies the standard IS-LM curve model by making the demand for money a function of taxes as well as of national income and the rate of interest. It finds that as a result, the tax multiplier may be positive and a progressive income tax may be less of a built-in stabilizer than a proportional income tax. These curious analytical results have as yet unknown empirical content, but cannot be rejected a priori.

Memory and market stability: The case of the cobweb

Abstract When optimizing agents use their memories in a non-linear cobweb model, it will be asymptotically stable: instability and chaos cannot occur. This contrasts with the results when agents are forgetful. However, short run fluctuations are erratic and sensitive to initial conditions.

The Purchasing-Power-Parity Theory: In Defense of Gustav Cassel as a Modern Theorist

Tz proposition advanced in this paper is that the purchasingpower-parity theory expounded by Gustav Cassel is not the theory generally attributed to him. The purchasingpower-parity theory of Cassel is an operational theory with two propositions. The first is that monetary factors are the most important long-run determinants of the exchange rate under a flexible exchange-rate standard. The second is that tariffs and hindrances to trade, transport costs, capital flows, and expectations are, random deviations aside, the remaining determinants of the exchange rate under a flexible exchange-rate standard. Cassel formulated this theory so that it applied not only to a flexible exchangerate standard but also to the gold standard. In this more general formulation the primary determinants of the price of a countrys goods domestically were monetary factors, and the secondary determinants were tariffs and hindrances to trade, transport costs, capital flows, and expectations. Two different interpretations of Cassels purchasing-power-parity theory are given in the literature. The first interpretation is that changes in monetary factors, measured by some index of prices in one country relative to another country, are the sole determinants of the ex-

The Relation between Unemployment and Excess Demand for Labour: An Examination of the Theory of the Phillips Curve

The main theoretical basis for the Phillips curve has been provided by R. G. Lipsey [5], who obtained the downward sloping relationship between the rate of change of money wage rates and unemployment by relating the rate of change of money wage rates to excess demand or supply of labour and using unemployment as a measure of that excess demand or supply.2 There have been several recent efforts to modify

A New Test of Money-Income Causality

This paper investigates the prima facie causal relationship between money and income employing a methodology--the multiple rank F test--the results of which are invariant to monotonic transformations of all variables and robust over alternative distributions of the errors. In contrast to prior functional-form dependent parametric analyses, evidence of prima facie causality between money and income is found for the 1970-88 time period. This evidence is consistent with an elementary theoretical framework in which the direction and strength of causality is dependent upon the definition of money. Copyright 1992 by Ohio State University Press.

A Direct Test of Friedman's Permanent Income Theory

Abstract After reviewing Friedmans time series model, this article presents a test of whether or not permanent consumption and transitory income are correlated. We conclude utilizing essentially the same data series and the same measure of permanent income as Friedman that a significant positive correlation exists between these variables as well as between permanent and transitory income.

Small sample properties of the multiple rank F-test with lagged dependent variables

Abstract The parametric and multiple rank F -tests are compared using Monte Carlo methods in a leading linear lagged dependent variable model for different error distributions, sample sizes and strengths of relationship.

A Condition for Independence of Permanent and Transitory Components of a Series

Abstract This article derives a necessary condition for the independence of permanent and transitory components of a series when the permanent component is any weighted average of past, present and future values of the observed series and the transitory component is the difference between the contemporaneous observed and permanent values of the series. This restrictive necessary condition is derived assuming a most elementary stochastic specification of the observed series. A specific example of the restrictiveness of this condition is afforded if the permanent component of a series is generated by the Koyck or exponentially-weighted expectations model. For this leading example it is possible to derive the theoretical correlation between the permanent and transitory components of the series as a positive valued function of the coefficient of expectations adjustment. Finally, we discuss the importance of these results to Friedmans [3] permanent income theory and suggest a modification of that theory.

Keynesian Involuntary Unemployment and Sticky Nominal Wages

This paper presents a model in which sticky nominal wages and Keynesian involuntary unemployment result as a consequence of the intertemporal optimization decisions of profit-maximizing monopsonistic firms and fully rational and informed workers in an uncertain environment. Uncertainty associated with the business cycle and its impact on product price generates disequilibrium wages and identifies the labor demand function in contractions and the supply of labor in expansions. The theoretical prediction of a negative relationship between real wages and employment during contractions and a positive relationship during expansions is strongly supported by the empirical evidence presented. Copyright 1996 by Royal Economic Society.