Monopolistic and Oligopolistic Banking: An Elementary Discussion of Commodity Money, Fiat Money and Credit, Part 3

-- Thomas Quint and Martin Shubik

This paper continues the authors' study of the modeling of money and financial institutions, starting from a simple two-good economy (Quint and Shubik, 2005a; 2005b). The main goal of the paper is to model various banking systems. The paper attempts to contrast the roles of private money lenders vs. a central bank, model an oligopolistic banking system, and note the importance of the bankruptcy or default penalty in supporting the use of fiat. An emphasis is made on the numbers and size of agents.

© 2005 Thomas Quint and Martin Shubik (http://cowles.econ.yale.edu). All Rights Reserved.

Real Balances and Industrial Output in Bangladesh: Is There a Production Relationship Between Them?

-- Akhand Akhtar Hossain

This paper examines the relationship between real balances (narrow or broad) and industrial output in Bangladesh with seasonally-adjusted monthly data for the period 1973:01-2003:06. The results of the ADF and the KPSS tests suggest that although real narrow money balances have a unit root, real broad money balances and industrial output do not seem to have a unit root. Therefore, the paper applies the bounds testing approach of Pesaran et al. (2001) to investigate the long-run relationship between real balances and industrial output, given that this approach remains valid `irrespective of whether the underlying regressors are purely I(0), purely I(1) or mutually cointegrated'. The empirical results suggest a long-run relationship between real balances and industrial output, while neither of them can be treated as a `long-run forcing variable' for explaining the other. In the associated short-run model, the coefficient of the error-correction term bears the expected negative sign and is significant, which confirms the presence of a long-run relationship between real balances and industrial output. The forecasting ability of the error-correction model is satisfactory, especially with the broad definition of money. The overall results are consistent with the view that in an underdeveloped financial system, real money balances (especially broad money balances) should be considered a complementary, if not a primary, factor of production.

© 2007 IUP . All Rights Reserved.

Exchange Rate Pass-Through in Emerging Markets

-- Michele Ca' Zorzi, Elke Hahn and Marcelo Sánchez

This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America and Central and Eastern Europe. The results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in `emerging' than in `developed' countries. For emerging markets with only one digit inflation (most notably the Asian countries), pass-through to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor's hypothesis once two outlier countries—Argentina and Turkey— are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.

© 2007 IUP . All Rights Reserved.