We model the introduction of a new payment method that competes with an existing payment method. Due to network adoption effects, there are two symmetric pure strategy equilibria in which only one of the two payment methods is used. The equilibrium where only the new payment method is used is socially optimal. In an experiment, we find that, depending on the fixed fee for acceptance of the new ...

Cointegration analysis has led to equilibrium-correction econometric systems being ubiquitous. But in a non-stationary world subject to structural breaks, where model and mechanism differ, equilibrium-correction models are a risky device from which to forecast. Equilibrium shifts entail systematic forecast failure, as forecasts will tend to move in the opposite direction to data. We explain the...

This paper analyzes the relationship between money and inflation in a small open economy, where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adj...

This study provides strong evidence for the stability of money demand of a semi-log form for the U.S., a log-log form for Japan and a semi-log form for Australia. This implies that there could be no finite satiation on the money demand curve as the nominal interest rate approaches zero and continue to stay near zero for a long period of time. The results support Friedman’s (1969) zero nominal i...

This paper studies the joint business cycle dynamics of inflation, money growth, nominal and real interest rates and the velocity of money. I extend and estimate a standard cash and credit monetary model by adding idiosyncratic preference shocks to cash consumption as well as a banking sector. The estimated model accounts very well for the business cycle data, a finding that standard monetary m...

We introduce a money demand motive in a life-cycle portfolio choice model and estimate the structural parameters that can generate limited stock market participation and plausible holdings of money, bonds and stocks. The model predicts an increase in bond holdings over the life cycle, and a declining share of money in portfolios as wealth increases. Both predictions are consistent with the data...

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best. Indeed, several influential economists suggest that money is irrelevant for monetary policy: Central banks effect economic activity and inflation by a) controlling a very shortterm nominal interest rate and b) by i...

This paper uses a panel of state-level data to test whether changes in bank loan supply affect output. Since the U.S. states are small open economies with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using these shocks as an instrumental variable, I find that shocks to ...