Michael D. Bordo

Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a preemptive monetary policy in the context of a stylized model. We find that the optimal policy depends on the economic conditions in a complex, nonlinear way and cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

Money, Sticky Wages, and the Great Depression

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depressions downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933. Key Words: Dynamic General Equilibrium Model, Sticky Wages

The Effects of Monetary Change on Relative Commodity Prices and the Role of Long-Term Contracts

The traditional explanation for the pattern of commodity price adjustment to monetary change, which stresses factors affecting the short-run elasticities of supply and demand in different markets, does not take into account price flexibility. This paper offers an explanation for the pattern of commodity price adjustment to monetary change based on differing degrees of price flexibility across industries, where price flexibility is determined by contract length. An extension to product markets of the theory of implicit long-term wage contracts leads to a simple hypothesis which explains the pattern of industry and sectoral price response to monetary change by implicit contract length, the latter being determined by relative price variability. Tests of this hypothesis across broad sectors and industries using postwar U.S. data produce favorable results. Also confirmed by the empirical evidence is the pattern of industry and sectoral price response to monetary change suggested by the tradition approach.

Currency Substitution and the Demand for Money: Some Evidence for Canada

RECENTLY, THE POSSIBILITY THAT foreign and domestic currencies are substitutes has received considerable attention (see [1, 2, 3, 10, 19, 21]). Currency substitution has important implications for the working of flexible exchange rates. If the degree of currency substitution is high, small changes in the money supply would induce large changes in the exchange rate. Furthermore, currency substitution would transmit the effect of monetary disturbances from one country to another. Indeed, significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence. This paper examines the empirical importance of currency substitution in the framework of the demand function for money. If currency substitution is important, the expected change in the exchange rate should be a significant determinant of the demand for home currency. In section 2, we undertake such a test for the Canadian demand for money during the recent flexible exchange rate period. There is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate. Our own tests confirm these results for Canadian data since 1970.

A Tale of Two Currencies: British and French Finance During the Napoleonic Wars

The record of British and French finance during the Napoleonic wars presents the striking picture of a financially strong nation abandoning the gold standard, borrowing heavily, and generating inflation, while a financially weaker country followed more “orthodox†policies. This paradoxical behavior is explained by Britains strong credibility that allowed more flexible policies, while Frances poor reputation forced reliance on taxation.

The Future of Emu: What Does the History of Monetary Unions Tell Us?

A rotary piston engine with a plurality of sets of annular members forming cylinders and annular segment pistons moving inside the cylinders and provided with a hollow shaft and a core shaft extending coaxially therethrough and with a common shaft. A transmission is provided for connecting the central and core shafts to the common shaft whose axis is eccentric to the other two shafts. A central ring arrangement is provided which is connected by links to double-crank connectors mounted on the central and core shafts by links. The positions of the links may be varied to change the phase between the pistons and cylinders of the sets. The piston operates on the Stirling principle.

Measuring real economic effects of bailouts: historical perspectives on how countries in financial distress have fared with and without bailouts

In this paper we first trace the changing nature of banking, currency and debt crises from the last century to the present. Each type of crisis has transmogrified in the presence of official intervention and the creation of a safety net. A similar pattern is observed for international rescue loans. We then present evidence suggesting that the incidence has increased and the severity of financial crises has changed little in emerging markets from the pre-1914 era to the present. Finally we assess the impact of IMF loans on the macro performance of the recipients. A simple with-without comparison of countries receiving IMF assistance during crises in the period 1973-98 with countries in the same region not receiving assistance suggests that the real performance of the former group was possibly worse than the latter. Similar results obtain adjusting for self-selection bias and counterfactual policies.

The long-run behavior of velocity: The institutional approach revisited

In this paper we provide evidence using annual data for the period 1880 to 1986 that institutional variables are significant determinants of velocity in the United States, United Kingdom, Canada, Sweden and Norway. This evidence supplements our earlier findings (Bordo and Jonung, Cambridge University Press, 1987) for annual data ending in the early 1970s. We present eVidence that several proxies for institutional change in the financial sector are significant determinants of the long-run velocity function; that for the majority of countries the long-run velocity function incorporating institutional determinants has not undergone significant change over the last 10 to 15 years; and that out of sample forecasts over the last 10 to 15 years based on our institutional hypothesis are superior to those based on a benchmark long-run velocity function for a number of countries. these results suggests that failure to account for institutional change in the financial sector such as may be captured by our proxy variables may well be one factor behind the recently documented instability and decline in predictive power of short-run velocity models incorporating dynamic adjustment and higher frequency data.

Exchange Rate Regime Choice in Historical Perspective

In this paper, I survey the issue of exchange rate regime choice from the perspective of both the industrial and emerging economies taking an historical perspective. I first survey the theoretical issues beginning with a taxonomy of regimes. I then examine the empirical evidence on the delineation of regimes and their macroeconomic performance. The penultimate section provides a brief history of monetary regimes in industrial and emerging economies. The conclusion considers the case for a managed float regime for todays emerging economies.

Good Versus Bad Deflation: Lessons from the Gold Standard Era

Deflation has had a bad rap, largely based on the experience of the 1930s when deflation was synonymous with depression. Recent experience with declining prices in Japan and China together with the concern over deflation in Europe and the United States has led to renewed attention to the topic of deflation. In this paper we focus our attention on the deflation experience of the United States, the United Kingdom, and Germany in the late nineteenth century during a period characterized by low deflation, rapid productivity growth, positive output growth, and where many nations had a credible nominal anchor based on gold: circumstances which have resonance with the world of today. We identify aggregate supply, aggregate demand, and money supply shocks using a structural panel vector autoregression. We then use historical decompositions to investigate the impact that these structural shocks had on output and prices. Our findings are that the deflation of the late nineteenth century reflected both positive aggregate supply shocks and negative money supply shocks. However, the negative money supply shocks had little effect on output. This we posit is because the aggregate supply curve was very steep in the short run during this period. This contrasts greatly with the deflation experience during the Great Depression. Thus our empirical evidence suggests that deflation in the nineteenth century was primarily good.