The demand for money by private firms in a regulated economy: Theoretical underpinnings and empirical evidence for Germany 1960 - 1998

Based on a cash-in-advance approach, this paper investigates theoretically the determinants of money holdings of firms under the conditions of a highly regulated labor market and analyses empirically the demand for money of German businesses during the period 1960-1998. As a result of our theoretical analysis the demand for cash balances by firms for shadow market activities depends among other things positively on the expected wage wedge. The empirical results show that the coefficient of the wage wegde has a positive sign in the long-run cointegrating relationship and is statistically significant positive in the short-run dynamics of the error correction model. -- Auf der Grundlage eines Cash-in-advance-Ansatzes untersucht der vorliegende Beitrag die Bestimmungsgründe der Geldnachfrage von deutschen Unternehmen (1960-1998) - vor dem Hintergrund eines hoch regulierten Arbeitsmarktes. Das theoretische Modell ergibt, daß Unternehmen Kasse für Aktivitäten auf dem Markt für Schwarzarbeit unterhalten und zwar um so mehr, je größer die Kluft zwischen den Bruttoarbeitskosten und den Nettolöhnen (wage wedge) ist. Der Koeffizient der wage wedge weist ein positives Vorzeichen in der Kointegrationsbeziehung auf und ist statistisch signifikant positiv in der kurzfristigen Dynamik des Fehler-Korrektur-Modells.Money Demand by Firms,Wage Wedge,Cash-in-Advance Model,Cointegration,Error-Correction,Geldnachfrage von Unternehmen,Cash-in-advance-Modell,Kointegration,FehlerKorrektur-Modell,Lohnzusatzkosten

Policy Words and Policy Deeds: The ECB and the Euro

This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognizes the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Time series estimates reveal that interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate-interest rate relationship is more apparent when the proxy for monetary policy is the euro area-US differential than when any other proxy for monetary policy is employed.Central bank communication, Eurodollar exchange rate

The Bundesbank's Communications Strategy and Policy Conflicts with the Federal Government

In this paper we provide an estimate of the likelihood of conflict between the federal government and the Bundesbank for the 1989 – 1998 period. We rely on a novel proxy for the impact of public communication by Bundesbank officials on the probability of conflict, in addition to interest rate, exchange rate, money supply behavior, as well as electoral influences. The empirical evidence is consistent with the view that speeches by the Bundesbank President dealing with inflation and economic policy are a positive source of conflict in a probabilistic sense. Conflict was not a constant but flared up at times of economic stress and could be exacerbated by the "talking" of Bundesbank officials. --Deutsche Bundesbank,Conflict,Central Bank Communication,Political Factors

Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.Monetary policy reaction functions, Asset prices, Instruments, European Central Bank

Dectecting speculative bubbles in stock prices: A new approach and some evidence for the US

A large part of the current debate on US stock price behavior concentrates on the question of whether stock prices are driven by fundamentals or by non-fundamental factors. In this paper we put forward the hypothesis that a present value model with time-varying expected returns provides an empirically valid description of US stock price behavior in the long-run, while short-run deviations of actual share prices from present value prices are driven by nonfundamental factors like speculative bubbles and/or noise trading behavior. Our empirical findings for the US stock market covering the 1871:1 - 2000:12 period provide strong and robust support for the hypothesis that in the short-run US stock prices exhibit nonfundamental run-ups followed by crashes, while in the long-run US share prices adhere to fundamentals. --Present Value Model,US Stock Prices,Asymmetric Adjustment,Cointegration

Trading Behavior During Stock Market Downturns: The Dow, 1915 - 2004

Stock markets periodically experience sharp falls with some referred to as outright crashes. The extant literature has generally resorted to survey type evidence to determine the behavior of investors during such episodes. These kind of studies come to the conclusion that fundamentals play little role in explaining sharp stock market downturns as in October 1987. We know of no econometric study that asks whether feedback, momentum or trend chasing type behavior might explain the behavior of large stock market downturns. Resorting to a feedback trader model, we estimate a variety of asymmetric GARCH-type models. Based on daily data on the Dow Jones Industrial Average index since 1915 we find that there is evidence of positive feedback trading during episodes of stock market crashes. Hence, the econometric evidence is broadly consistent with findings based on surveys. --

Propositions Equivalent to the Continuum Hypothesis

Two sets A and B are said to have the same power if there exists a one-to-one correspondence between them. All sets which have the same power as the natural numbers are called countable and have power N0. All sets which have the same power as the real numbers are said to have the power of the continuum will be denoted by 2N0, since 2N0 can be shown to be equal to c as will be indicated in the preliminary results. Given an element a of a well-ordered set B, the set of all elements of B which procede a is called a segment of B. Every uncountable well-ordered set, all of whose segments are either finite or countable, is said to have power N1. The Continuum Hypothesis is the hypothesis that the power of the continuum is N1 that is 2N0 = N1. In the sequel, this equality will be called hypothesis H

Stock Return Seasonalities and Investor Structure: Evidence from China’s B-Share Markets

This paper investigates whether seasonalities in daily stock returns are related to the trading behavior of individual and institutional investors. The change in the investor structure of B-share markets in Shanghai and Shenzhen after the abolition of ownership restrictions in 2001 provides a unique testing environ- ment. We show that day-of-the-week eects are attenuated after the market entrance of Chinese individual investors who had previously not been allowed to trade in B-shares. Our empirical results suggest that institutional rather than individual investors are a main driving force behind such anomalies. In addi- tion, we nd evidence of reduced index return autocorrelation and US spillover eects in the post-liberalization period.Institutional Investors, Individual Investors, Stock Return Seasonalities, Chinese Stock Markets, GARCH Model

Did the Bundesbank React to Stock Price Movements?

In this paper, we investigate the relationship between stock returns and short-term interest rates. Identification of the stock return-interest rate relation is solved by using a new technique that relies on the heteroskedasticity of shocks to stock market returns. We suggest some improvements to the identification technique and its justification, as well as providing some new findings. In particular, we ask whether the Bundesbank, prior to the European Central Bank taking responsibility for monetary policy in 1999, reacted systematically to stock price movements. In contrast to the results for the US, our empirical findings for the 1985 - 1998 period show a positive, but statistically insignificant, parameter for the relationship between German stock returns and short-term interest rates at the daily frequency. The same result is found at the monthly frequency. Nevertheless, the confidence bands are wide enough that we cannot entirely exclude the possibility of a reaction at lower frequencies. The results are extremely robust to alternative methods used to identify changes in heteroskedasticity. The evidence is, therefore, inconsistent with the hypothesis of a systematic reaction of the Bundesbank to every wiggle in German stock prices. Both the historical and institutional evidence are supportive of this conclusion. -- In diesem Diskussionspapier untersuchen wir den Zusammenhang zwischen Aktienkursveränderungen und Veränderungen der kurzfristigen Zinssätze. Die ökonometrische Identifikation dieses Zusammenhangs erfolgt mit Hilfe eines neuen Verfahrens, das die Heteroskedastie von Aktienkursveränderungen ausnutzt. Wir schlagen einige Verbesserungen und Rechtfertigungen zu diesem Verfahren vor und liefern neue empirische Befunde. Im Vordergrund der Betrachtungen steht die Frage, ob die Bundesbank vor der Übernahme der geldpolitischen Entscheidungen durch die Europäische Zentralbank im Jahre 1999 systematisch auf Veränderungen der Aktienkurse reagiert hat. Im Unterschied zu den verfügbaren Ergebnissen für die Vereinigten Staaten von Amerika, finden wir auf Basis von Tagesdaten zwar einen positiven, aber statistisch nicht signifikanten Parameter für die Reaktion des kurzfristigen Zinssatzes auf Änderungen des Aktienkurses. Auf der Grundlage von Monatsdaten ist der Parameter ebenfalls positiv und statistisch insignifikant. Die Konfidenzintervalle sind aber sehr breit, so dass eine Reaktion auf der niedrigeren Frequenz nicht völlig ausgeschlossen werden kann. Die empirischen Resultate sind sehr robust gegenüber unterschiedlichen Modellspezifikationen. Die empirische Evidenz widerspricht somit der These einer systematischen Reaktion der Bundesbank auf jede Bewegung am Aktienmarkt, was durch die historischen und institutionellen Gegebenheiten gestützt wird.

Asset Prices in Taylor Rules: Specification, Estimation, and Policy Implications for the ECB

This paper estimates standard and extended Taylor rules for core countries in the euro area, namely France, Germany and Italy, as well as for the ECB. Forward, backward and forecast-based rules are estimated for a variety of samples since the late 1970s. We are particularly interested in the impact of adding asset prices to the standard Taylor rule specification. Since forward-looking Taylor rules are usually estimated via GMM we perform extensive tests for over-identifying restrictions and instrument relevance, a practice generally eschewed in previous work. We find that asset prices can be highly relevant as instruments rather than as separate arguments in policy rules. Backwardlooking Taylor rules, however, cannot be rejected outright. Forecast-based rules perform best using the root mean squared error metric but produce coefficients implying that central banks may be too aggressive at fighting inflation. Encompassing tests are therefore required to select the ?best? policy rule and these suggest that policy rules need to have a mix of forward and forecast-based elements. Furthermore too aggressive reactions to stock prices in particular would have led to an implausible monetary policy. Hence, asset prices appear at best to serve as indicators of the direction of interest rates and not as a variable that the ECB directly reacts to. --reaction function,asset prices