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Monetary Trends in the United States and the United Kingdom

Their Relations to Income, Prices, and Interest Rates

The special task of this book is to present a statistical and theoretical analysis of the relation between the quantity of money and other key economic magnitudes over periods longer than those dominated by cyclical fluctuations-hence the term trends in the title. This book is not restricted to the United States but includes comparable data for the United Kingdom.

696 pages | 6 x 9 | © 1982

National Bureau of Economic Research Monograph

Economics and Business: Economics--Money and Banking

Table of Contents

List of Charts
List of Tables
Principal Empirical Findings

1 Scope of the Study

2 The General Theoretical Framework
2.1 The Quantity Theory: Nominal versus Real Quantity of Money
2.2 Quantity Equations
2.2.1 Transactions Equation
2.2.2 The Income Form of the Quantity Equation
2.2.3 Cambridge Cash-Balances Approach
2.2.4 The Transmission Mechanism: Money to Income, Prices, Output
2.2.5 The International Transmission Mechanism
2.2.6 First-Round Effects
2.3 Supply of Money in Nominal Units
2.4 The Demand for Money
2.4.1 Demand by Ultimate Wealth Holders
2.4.2 Demand by Business Enterprises
2.5 The Keynesian Challenge to the Quantity Theory
2.5.1 Long-Run Equilibrium
2.5.2 Short-Run Price Rigidity
2.5.3 Absolute Liquidity Preference
2.6 The Adjustment Process 59
2.6.1 Division of a Change in Nominal Income between Prices and Output
2.6.2 Short-Run Adjustment of Nominal Income
2.6.3 Money Demand and Supply Functions
2.6.4 Determination of Interest Rates
2.6.5 Determination of Anticipated Values
2.7 An Illustration
2.7.1 Long-Run Equilibrium
2.7.2 The Adjustment Process
2.8 Conclusion

3 The General Statistical Framework
3.1 The Reference Phase Base as the Unit of Observation
3.1.1 Phase Reference Dates
3.1.2 Computation of Phase Base
3.1.3 Weighting of Phase Bases in Statistical Computations
3.1.4 Possible Difficulties with Reference Phase Bases
3.2 Rates of Change Computed from Phase Bases
3.2.1 Weights for Rates of Change
3.2.2 Relation between Rates of Change Computed from Successive Triplets of Phase Averages and from Overlapping Cycle Bases
3.2.3 Possible Difficulties with Rates of Change Computed from Phase Bases

4 The Basic Data
4.1 United States Data
4.1.1 Money
4.1.2 Income
4.1.3 Prices
4.1.4 Interest Rates
4.1.5 Population
4.2 United Kingdom Data
4.2.1 Money
4.2.2 Income
4.2.3 Prices
4.2.4 Interest Rates
4.2.5 Population
4.2.6 Exclusion of Southern Ireland
4.3 Combined United States and United Kingdom Data
4.4 Appendix

5 Movements of Money, Income, and Prices
5.1 United States and United Kingdom Money Balances at the Beginning and End of a Century
5.1.1 Statistical Errors
5.1.2 Financial Sophistication
5.1.3 Real Income
5.1.4 Cost of Holding Money
5.2 Long Swings in the Levels of Money, Income, and Prices
5.3 Rates of Change of Money, Income, and Prices
5.4 Conclusion
5.5 Appendix

6 Velocity and the Demand for Money
6.1 Velocity: A Will-o’-the-Wisp?
6.2 Velocity: A Numerical Constant?
6.3 Effect of Financial Sophistication
6.4 Effect of Real per Capita Income
6.4.1 Levels
6.4.2 Rates of Change
6.5 Effect of Population and Prices
6.6 Effect of Costs of Holding Money
6.6.1 Yield on Nominal Assets
6.6.2 Interest on Deposits
6.6.3 Yield on Physical Assets
6.7 Effect of All Variables Combined
6.8 Appendix A
6.9 Appendix B
6.9.1 United States Term Structure Data
6.9.2 Estimating the Parameters of the Term Structure Yields
6.9.3 The Demand for Money, with the Term Structure of Interest Rates

7 Velocity and the Interrelations between the United States and the United Kingdom
7.1 The Reference Chronology
7.2 Correlation of United States and United Kingdom Velocities and Their Determinants
7.3 Role of Common Determinants of Velocity
7.4 Money and Income
7.4.1 Combined Money Stock
7.4.2 Own-Country Money, Other-Country Money, and Other-Country Velocity
7.5 Conclusion
7.6 Appendix

8 Monetary Influences on Nominal Income
8.1 From the Demand for Balances to the Behavior of Nominal Income
8.2 Replacing Yields by Prior Income and Money
8.3 Replacing Prior Income by Prior Money
8.3.1 Income Elasticity
8.3.2 Transient Effects
8.3.3 The Effect of Nonunit Elasticity and Transient Effects on the Sum of the b’s
8.3.4 Estimates of the Transient Effect
8.3.5 Summary
8.4 Appendix
8.4.1 Relation of Nominal Income to Real per Capita Income and Yields
8.4.2 Relation of Nominal Income to Current and Prior Money and Income
8.4.3 Relation of Nominal Income to Current and Prior Money Only
8.4.4 Allowing for Transient Effects

9 Division of Change in Income between Prices and Output
9.1 Alternative Simple Explanations
9.2 Price and Output Correlations
9.3 The Effect of Lengthening the Period
9.4 Framework for Further Analysis
9.5 Effect of Money and Yields
9.6 Effect of Current and Prior Money and Prior Income
9.7 Effect of Output Capacity and Anticipations: The Phillips Curve Approach
9.8 Effect of Output Capacity and Anticipations: The Approach through Alternative Models of the Formation of Anticipations
9.8.1 Alternative Hypotheses
9.8.2 Comparison of Alternative Hypotheses
9.9 Conclusion
9.10 Appendix
9.10.1 Relation of Prices and Output to Real per Capita Income and Yields
9.10.2 Relation of Prices and Output to Current and Prior Money and Income
9.10.3 Relation of Prices and Output to Current and Prior Money Only
9.10.4 Transient Effects
9.10.5 Alternative Hypotheses about Anticipations

10 Money and Interest Rates
10.1 The Theoretical Analysis
10.1.1 Monetary Disturbances
10.1.2 Real Disturbances
10.1.3 Conclusion
10.2 Average Yields
10.3 A Digression on the Measurement of Yields
10.4 Yields in Subperiods
10.4.I.United States versus United Kingdom
10.4.2 Yields on Nominal and Physical Assets
10.5 Relation between Yields on NOIninal and Physical Assets
10.6 Nominal Yields, Price Levels, and Rates of Change of Prices
10.7 Alternative Explanations of the Gibson Paradox
10.7.1 The Fisher Explanation
10.7.2 The Wicksell-Keynes Explanation
10.7.3 Other Real Explanations
10.7.4 Other Nominal Explanations
10.8 The Structural Change in the 1960s
10.9 Correlations with Money
10.9.1 Impact and Intermediate Effects
10.9.2 Price Effects
10.10 Conclusion
10.10.1 Yields on Nominal and Physical Assets
10.10.2 Interest Rates and Prices

11 Long Swings in Growth Rates
11.1 Past Work on Long Swings
11.2 Are the Swings Episodic or Cyclical?
11.3 The Role of Money in Long Swings
11.4 The Transmission Mechanism
11.5 Summary

12 The Role of Money
12.1 The Phillips Curve
12.2 Two Extreme Theories
12.3 The Demand for Money
12.4 Common Financial System
12.5 Dynamic Effects on Nominal Income
12.6 Dynamic Effects on Prices and Output
12.7 Interest Rates
12.8 Rational Expectations
12.9 Fisher and Gibson
12.10 Long Swings

Author Index
Subject Index

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