Monetary policy

This thesis examines how the various instruments of monetary and fiscal policy work in the presence of fixed and flexible exchange rates. Based on the pioneering work of Mundell and Fleming, the traditional view assigns fiscal policy as being highly suitable for a fixed exchange rate regime, while stimulative monetary policy is effective in raising output under floating exchange rates. Once the implicit assumptions of constant prices and wages are relaxed, the conclusions of the original model no longer hold. With the introduction of wage indexation as a mean to adjust nominal wages to changes in the price level, the initial results of policies of the Mundell-Fleming type are reversed. Finally, it was examined how the practical implications of policy actions of the United States and West Germany could be applied to the theoretical models.

This thesis theoretically and empirically analyzes the effectiveness of
alternative monetary control procedures in the United States in recent years. The
overall strategy of monetary policy is described and the implications of the
federal funds rate and non-borrowed reserves targeting procedures for interest
rate volatility and money demand stability are discussed. Tests of linear
restrictions using dummy variable specifications as well as ex post forecasts
suggest that there has been a change in the interest elasticity as well as the
intercept of the money demand function in 1979. The empirical specifications
examined in this study use a partial-adjustment model and employ appropriate
econometric techniques to obtain consistent and efficient coefficient estimates.
Finally a reduced-form model of the money market is used to compare out-of-sample
forecasts from alternative operating procedures.

In economic theory, the question has regularly arisen as to
how far the growth rate of the money supply and the rate of
inflation could influence the development of the economy in
the long run. This concentrates basically to the question
whether money - dynamically considered - is neutral or not.
We intend to review in this study the present state of monetary
theory as it appears from the literature. We shall be
focusing on the question whether money maintains the feature
of neutrality in a framework of growth theory.

Because of the interdependent relationship existing between economic units
in society, the money supply and macroeconomic factors, a need to identify
a concept of money best able to explain and predict likely responses of
economic units to changes in economic variables arises. Such an identification
is important to the Federal Reserve which bears responsibility for formulating and implementing monetary policy. The issue of identifying a relevant
definition of money and a detailed review of previous analyses attempting
to define the best concept of money empirically is discussed herein,
along with the results from a test using Box-Jenkins techniques on several
money concepts and income. This time series study reinforces contentions
that changing relationships between money and near monies and new developments
in regulations governing financial institutions have rendered the
existing monetary aggregates less useful as devices for gathering information
about the economy and as tools in conducting monetary policy.

Contemporary finance theory suggests that the appropriate goal of the management of a corporation should be to maximize the contribution of the shareholder's ownership in the corporation to the shareholder's wealth. A related objective of the firm's management that is consistent with this prime objective should be to minimize the cost of all inputs into the firm's income producing process. This would include minimizing the cost of the capital required to fund the firm's operations. This study examines the cost of debt to firms issuing new debt. Using a sample of new debt issues between 1988 and 1993 drawn from a listing compiled by the Capital Markets Division of the Federal Reserve Board of Governors, this study finds that when underwriters are categorized by recent (last year) experience, the issuing firm's choice of an underwriter does not affect the offering yield required of the issuer in excess of several benchmark yields. Excess yield is tested with respect to 3-month treasury bills, 10-year constant maturity treasury securities, the average contemporary yield on AAA rated corporate bonds, and the average contemporary yield on new corporate issues carrying the same rating. The results do suggest that the issuing firm's choice of underwriter does affect the underwriter spread that the issuer will be charged. The implication of the results to corporate issuers of new debt is that choosing an experienced underwriter (defined in the study as having appeared in the listing of the top ten underwriters of corporate debt reported by Wall Street Journal in the previous year) could lead to reduced overall net interest costs stemming from the reduced underwriter spread.

In an attempt to reduce runaway inflation, the Ecuadorian government froze citizens' checking and savings accounts for a year in March 1999. Nevertheless, Ecuador still experienced hyperinflation later that year. On January 9, 2000, Ecuador established dollarization as a desperate attempt to restore confidence in the economy. In order to test for dollarization's impact on economic growth, I employ an econometrics model with total factor productivity as the dependent variable. I then use dollarization as the independent variable of interest, and other control variables such as oil, and trade. The results reported in this paper suggest that dollarization has a significant positive impact on Ecuador's economic growth.