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Über dieses Buch

This book is a slightly revised version of my doctoral thesis which I wrote during my time as an assistant at the Faculty of Economics of the University of Magdeburg. I am grateful that I had the opportunity to write my the­ sis in the stimulating atmosphere of this young and lively faculty. lowe a great amount of gratitude to my supervisor Prof. G. Schwodiauer who con­ stantly encouraged my work and helped to improve it in many discussions. I also would like to thank Prof. K-H. Paque and Prof. P. Flaschel who, as members of my doctoral committee, commented on various details of this study in a very constructive manner. At various stages of my work I received helpful comments from many colleagues of mine, in particular T. Konig and A. Wohrmann. However, it goes without saying that I retain full responsi­ bility for all remaining errors. Contents Introduction 1 I Money, inflation, and capital formation in the long run: general remarks 5 1 Summary of the literature: theoretical aspects 7 2 Summary of the literature: empirical aspects 19 3 Further reflections on money 29 II Money, inflation, and capital formation: the perspective of overlapping generations models 43 4 The Diamond model with money as single outside asset 45 4. 1 The model. . . . . . . . 46 4. 2 Equilibrium conditions. 51 4. 3 Policy effects 58 4. 4 Discussion. 61 4. 5 Appendix . 63 5 Variation 1: Imperfect credit markets and asymmetric information 65 5. 1 The model. . . . . . . .

Inhaltsverzeichnis

Frontmatter

Introduction

Introduction

Abstract
Should one expect that a shift to a fully anticipated, more inflationary policy can permanently improve the terms on which the community accumulates real capital ? Given the widespread belief that inflation is something which harms the economy, economic theory is surprisingly ambiguous in answering this question. In fact, a casual look at the by now classical contributions by Tobin (1965), Sidrauski (1967), and Stockman (1981) suffices to sketch this ambiguity.
Leopold von Thadden

Money, inflation, and capital formation in the long run: general remarks

Frontmatter

Chapter 1. Summary of the literature: theoretical aspects

Abstract
Modern analysis of the long run interaction of inflation and capital formation begins with Tobin’s seminal contribution in 1965. Presenting a monetary version of Solow’s growth model, Tobin (1965) considers a closed economy in which ‘outside money’ competes with real capital in the portfolios of agents. As a matter of definition, outside money is the part of the money stock which is issued by the government. Correspondingly, it represents, according to Tobin (1965), “…neither a commodity produced by the economy nor the debts of private individuals or institutions.”1 Moreover, “…its own-yield (i.e. the amount of the asset that is earned by holding a unit of the asset a given period of time) is arbitrarily fixed by the government. This may, of course, be zero but it is not necessarily so.”2
Leopold von Thadden

Chapter 2. Summary of the literature: empirical aspects

Abstract
As a result of the renewed interest in growth theory in the 1980’s due to the work by Romer (1986) and Lucas (1988), a vast amount of empirical literature has emerged which seeks to account for the remarkable variability of growth rates across countries. In this literature, numerous specifications of cross-country growth regressions have been tested to establish significant linkages between long run average growth rates and various indicators of economic policy. Together with other indicators of macroeconomic policy, the rate of inflation is widely used in these regressions as an explanatory variable, and there is a broad consensus that inflation is an important determinant of the rate of per capita growth. Drawing on this literature, we establish in this chapter a set of ‘stylized facts’, with the aim to summarize the available evidence with respect to the long run interaction between inflation and per capita growth.
Leopold von Thadden

Chapter 3. Further reflections on money

Abstract
In reviewing the literature on the superneutrality issue in chapter 1, we have exclusively focused on the ’money-taxing aspects of inflation’. However, in the light of the empirical evidence given in the previous chapter this has been an unduly narrow perspective and, therefore, we turn now to a broader discussion of the issue. First, we discuss additional channels through which sustained inflation impacts on the economy. Second, we argue that despite the striking variety of results in monetary growth theory there has emerged a solid consensus among economists, as far as ‘essential’ features of money are concerned that need to be addressed in a rigorous way. Referring to these ‘essentials’, we discuss some consequences for monetary theory in general and present a broad classification of ongoing research. Third, drawing on this classification, we introduce the second part of the book. In particular, we argue that Diamond’s version of an overlapping generation’s economy with production may well serve as a benchmark model to discuss a broad range of aspects related to the question whether one should expect money to be superneutral.
Leopold von Thadden

Money, inflation, and capital formation: the perspective of overlapping generations models

Frontmatter

Chapter 4. The Diamond model with money as single outside asset

Abstract
This chapter serves the purpose to establish a version of Diamond’s overlapping generations economy with production as a benchmark model for a detailed discussion of the superneutrality issue of money. Basic elements of the model and, in particular, the notation introduced in this chapter will be shared by all modified versions of the benchmark model presented in the following chapters.
Leopold von Thadden

Chapter 5. Variation 1: Imperfect credit markets and asymmetric information

Abstract
It is a key feature of the base model introduced in the previous chapter that intermediation between savings and investment projects comes about in a smooth and entirely frictionless way. Yet, Azariadis/Smith (1996) show that this is not an innocuous assumption. In fact, the authors demonstrate that the mechanics of the Diamond model with outside money change dramatically, once a simple information asymmetry in the credit market is introduced that creates an adverse selection problem. However, to isolate the effects which arise from the information problem in the credit market, Azariadis/Smith (1996) retain the ‘bubbly’ view on money, i.e. they assume that money balances and financial assets are perfect substitutes with identical return rates. In this chapter, we summarize the essential features of the work of Azariadis/Smith (1996) and, in particular, we reproduce the effects that lead to a reversal of the results of the base model.
Leopold von Thadden

Chapter 6. Variation 2: Random liquidity needs

Abstract
The models presented so far have been silent on why money is commonly held by agents despite being dominated in return by other assets. Instead, the whole issue has been simply defined away by virtue of the untenable assumption that all assets have equal rates of return. To treat the issue of return-dominance in such a way is hardly satisfactory, and, therefore, we turn now to a version of the Diamond model due to Schreft/Smith (1997) in which assets are no longer uniquely characterized by their return rates. Instead, Schreft/Smith (1997) present a framework with an elaborate timing of events that stresses the liquidity aspects of assets. Due to different degrees of liquidity, interest-bearing assets and money cease to be perfect substitutes, and as in the previous chapter this changes the mechanics of the base model in a significant way. Moreover, Schreft/Smith (1997) assume that the government issues not only money, but also illiquid, interest-bearing bonds which compete with capital in the portfolios of agents. Thus, compared to the base model, Schreft/Smith (1997) present a framework with a rich financial structure, and this makes it more rewarding to analyze the interaction of monetary policy and financial markets. Otherwise things are arranged in a conventional manner: capital markets operate smoothly, and trades in all markets are settled according to some centralized, frictionless trading scheme in Walrasian manner.
Leopold von Thadden

Chapter 7. Variation 3: Standard cash-in-advance constraint and endogenous savings

Abstract
In our presentation up to this point no attempt has been made to address explicitly the transactions role of money. In contrast, in this and the following chapters we discuss various aspects related to this role in more detail. As a common theme, we replace in all these chapters the ‘bubbly’ view on money as developed in the base model with versions of the alternative, ‘fundamentalist’ view on money, which asserts that money is ultimately held because certain transactions need to be settled by payment via money. Despite its strong emphasis on transaction-related aspects of money, the fundamentalist view does not dispute the importance of the store of value function of money, i.e. the transactions and the store of value function are by no means considered as being mutually exclusive. Yet, following Tirole (1985), the fundamentalist view denies the idea that money is a pure store of value which is held exclusively for speculative reasons, as stressed in the overlapping generations literature in the spirit of Samuelson (1958), Diamond (1965), and Wallace (1980). Instead, it is argued that there is a fundamental value attached to money since its use is ‘essential’ for the settlement of certain transactions, and this value allows money to be a widely accepted store of value despite being return-dominated by interest-bearing assets.
Leopold von Thadden

Chapter 8. Variation 4: Differentiated goods, multiple means of payment, and money as single outside asset

Abstract
In the previous chapter we presented a simple version of a cash-in-advance framework in order to challenge the bubbly view on money from a fundamentalist perspective. In particular, we assumed in chapter 7 that a fixed fraction of purchases needed to be settled by payment in cash. Obviously, this is a questionable assumption, and certainly it is not suited to give a satisfactory account of the long run. We therefore summarize in this chapter briefly more involved specifications discussed in the cash-in-advance literature and present then a framework which permits a more subtle discussion of the superneutrality issue.
Leopold von Thadden

Chapter 9. Variation 5: Differentiated goods, multiple means of payment, and alternative specifications of government activities

Abstract
In the previous two chapters, our treatment of government activities in our discussion of economies subject to various cash-in-advance constraints has been rather crude. However, in this chapter we present more detailed specifications of some government activities, and it turns out that modifications both of the revenue and the expenditure side of the government’s budget constraint can substantially change the interaction of inflation and capital formation. We use the framework introduced in chapter 8, and to keep the analysis as transparent as possible we concentrate on constellations with an ‘exogenous cash-in-advance constraint’. Two specifications of this set-up are considered.
Leopold von Thadden

Summary

Abstract
This study investigates the long run interaction of inflation and real economic activity as traditionally addressed in the literature on money and growth. In a prominent contribution to this literature, Tobin (1965) arrives at the well-known result that one should expect inflation and economic activity to be positively correlated. Importantly, this so-called Tobin effect hinges critically on the assumption that money and capital enter the portfolios of agents as substitutes: with inflation acting like a tax on real balances, this assumption ensures that a more inflationary policy induces a portfolio shift from money to capital, thereby leading to a higher level of overall activity. More recently, however, empirical and theoretical studies have challenged this view.
Leopold von Thadden

Backmatter

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