LAGGED EFFECTS OF MONETARY GROWTH RATES ON INTEREST RATES

by

MATHIAS ETTA EGBE, B.A., M.S.B.A., M.A

A DISSERTATION

IN

ECONOMICS

Submitted to the Graduate Faculty of Texas Tech University in

Partial Fulfillment of the Requirements for

the Degree of

DOCTOR OF PHILOSOPHY

Approved

í/ Accepted

Dean of the Graduate School

December, 1984

' ' 'Y ' ACKNOWLEDGMENTS

I wish to thank Dr. Ronald D. Gilbert for his patience

and guidance throughout this research. My appreciation is

also extended to the other committee members, Dr. Lewis E.

Hill and Dr. Robert L. Rouse. I also wish to express my

thanks to Dr. Sujit K. Roy for his guidance and especially

in his efforts in securing the Shazam software used for the

study. I would also like to extend my gratitude to the Eco-

nomics department, the Government of the Republic of Came-

roon and Texas Instruments Inc. for providing financial as-

sistance during my undergraduate and graduate studies.

Special appreciation is extended to my wife, Valerie,

for typing the tables and figures and also for the sacrific-

es she made in our family iife. I would also like to thank

Mr. Wendell Broom for his editorial services.

11

CONTENTS

ACKNOWLEDGMENTS

CHAPTER

I. INTRODUCTION

Statement of the Problem Objectives General Procedures

Uniqueness of Study From Past Studies

II. REVIEW OF LITERATURE

Summary of Literature

III. CONCEPTUAL FRAMEWORK

Survey Of Theoretical Underpinnings An Economy without any Exchange Opportunities Production and Consumption Takes Place in One

Time Period Time Preferences and Investment Opportunities Lending, Borrowing, and Time Preferences Interest Rate Determination Using Credit Mar-

ket Theory and the Edgeworth Exchange Box

Loanable Funds Theory of Interest Rate Sources of Supply and Demand of Loanable-

Funds Liquidity-Preference Theory of Interest Rate The Equivalence of the Liquidity Prefence and

Loanable-Funds Theories of Interest The Various Effects of a Monetary Growth

Disturbance on the Nominal Interest Rate The Liquidity Effect The Income Effect The Fisher or Inflationary Expectations

Effect The Financial Effect

Exposure of Hypothetical Model Role of the Rate of Interest in an Economy

111

IV. METHOD AND PROCEDURES 7 2

Basic Data and Definitions 73 United States Data 73

Money 73 Interest Rates 74

United Kingdom Data 75 Money 7 5 Interest Rate 75

Federal Republic of Germany Data 76 Money 76 Interest Rate 76 An Overview of Institutional Arrangements for

Monetary Control within the Three Coun-tries of the Study 77

Specification of Methods and Procedures 79 Other Procedures 85 Brief Outline of the Chow Test 86 Brief Outline of the Dummy Variable Test 88

V. RESULTS AND ANALYSIS 91

Segmentation of Time Period 91 United States 91

Adjusted Monthly Observations 91 Key to Table Notations and Definitions of

Variables 94 Seasonally Unadjusted Monthly Observations 94 Quarterly Observations 95

United Kingdom 95 Seasonally Adjusted Monthly Observations 95 Seasonally Unadjusted Monthly Observations 98 Quarterly Observations 98

Federal Republic of Germany 98 Seasonally Adjusted Monthly Observations 98 Seasonally Unadjusted Monthly Observa-

tions 101 Quarterly Observations 101

Possible Explanations for the Structural Diver-gence 101

Empirical Estimation Results 104 United States 106

Monthly Observations 106 Estimation Results for Ml Seasonally

Adjusted 1965-1980-Seasonally Unadjusted 1960-1980 106

Estimation Results for M2 Seasonally Adjusted 1960-1980—Seasonally Unadjusted 1959-1980 110

Estimation Results for M3 and L 113 Quarterly Observations 116

IV

Estimation Results for Quarterly Ml Seasonally Adjusted 1960-1980-Seasonally Unadjusted 1959-1980 116

Estimation Results of Quarterly M2 Seasonally Adjusted 1950-1980-Seasonally Unadjusted 1959-1980 121

Estimation Results of Quarterly M3 and L 124 United Kingdom 130

Monthly Observations 130 Estimation Results for Ml 9/1971-12/1980 130 Estimation Results for M2 133 Estimation Results for M3 6/1971-12/1980 136

Quarterly Observations 139 Estimation Results for Quarterly Ml 139 Estimation Results for Quarterly M2

I/1972-IV/1980 142 Estimation Results of Quarterly M3

I/1969-IV/1980 144 West Germany 146

Monthly Observations 146 Estimation Results for Ml Seasonally Ad-

justed 1969-1980 - Seasonally Unadjusted 1960-1980 147

Estimation Results for M2 Seasonally Ad-justed 1969-1980 - Seasonally Unadjusted 1961-1980 151

Estimation Results for M3 1969-1980 154 Quarterly Observations 157

Estimation Results for Quarterly Ml 1969-1980 158

Estimation Results for Quarterly M2 Sea-sonally Adjusted 1969-1980 - Sea-sonally Unadjusted 1959-1980 158

Estimation Results for Quarterly M3 I/1969-IV/1980 164

Revised Estimation of Equation on SAMl 1978-1980 166

Simulation Results 171

VI. SUMMARY AND CONCLUSION 17 9

Summary of Results 182 Conclusion 185

REFERENCES 191

APPENDIX

A. SOURCES OF DATA FOR THE MONETARY MEASURES AND THE TREASURY BILL RATE 201

B. DATA OF MONETARY STOCK MEASURES AND THE 3 MONTH TREASURY BILL RATE FOR THE UNITED STATES 202

C. DATA OF MONETARY STOCK MEASURES AND THE 3 MONTH TREASURY BILL RATE FOR THE UNITED KINGDOM 215

D. DATA OF MONETARY STOCK MEASURES AND THE 3 MONTH TREASURY BILL RATE FOR THE FEDERAL REPUBLIC OF GERMANY 22 3

VI

LIST OF TABLES

1. Summary of Structural Test for U.S. Data 92

2. Summary of Structural Test for U.K. Data 96

3. Summary of Structural Test for F.G.R Data 99

4. Average Annual Growth Rate of Ml, and Inflation Rate, and Short-Term Treasury bill Rate 102

5. Annual Rate of Change in Money and Prices in Six

Industrial Nations 1971-1977 105

6. United States Monthly Regression Results for Ml- 107

7. United States Monthly Regression Results for M2 111

8. United States Monthly Regression Results for M3 114

9. United States Monthly Regression Results for L 115

10. United States Quarterly Regression Results for Ml 117

11. United States Quarterly Regression Results for M2 122

12. United States Quarterly Regression Results for M3 125

13. United States Quarterly Regression Results for L 128

14. United Kingdom Monthly Regression Results for Ml 131

15. United Kingdom Monthly Regression Results for M2 134

16. United Kingdom Monthly Regression Results for M3 137

17. United Kingdom Quarterly Regression Results for Ml 140

18. United Kingdom Quarterly Regression Results for M2 143

19. United Kingdom Quarterly Regression Results for M3 145

20. West Germany Monthly Regression Results for Ml 148 21. West Germany Monthly Regression Results for M2 152

VI 1

22. West Germany Monthly Regression Results for M3 155

23. West Germany Quarterly Regression Results for Ml 159

24. West Germany Quarterly Regression Results for M2 162

25. West Germany Quarterly Regression Results for M3 165

26. United Kingdom Regression Results for SAMl 1978-1980 167

27. West Germany Regression Results for SAMl 1978-1980 168

28. United States Regression Results for SAMl 1978-1980 170

29. United States Full In-Sample Simulation And Post-Sam-ple Forecast Summary Statistics On Monthly SAMl 1978-1980 172

30. United Kingdom Full In-Sample Simulation And Post-Sample Forecast Summary Statistics On Monthly SAMl 1978-1980 172

31. West Germany Full In-Sample Simulation And Post-Sam-ple Forecast Summary Statistics On Monthly SAMl 1978-1980 173

32. United States Full In-Sample Simulation And Post-Sam-ple Forecast Summary Statistics On Quarterly SAMl 174

33. United Kingdom Full In-Sample Simulation And Post-Sample Forecast Summary Statistics On Quarterly SAMl 175

34. West Germany Full In-Sample Simulation And Post-Sam-ple Forecast Summary Statistics On Quarterly SAMl 175

VI 1 1

LIST OF FIGURES

1. Determination of the Interest Rate 46

2. Interest Rate Determination in the Credit Market 51

3. Equilibrium in the Credit Market 54

4. Equilibrium in the Money Market 59

5. Hypothetical Model 68

IX

CHAPTER I

INTRODUCTION

Statement of the Problem

A widely held view is that changes in the monetary

growth rate operate on the nominal interest rate-'- through

systematically lagged liquidity, income, and Fisher effects.

It is also widely believed that market interest rates follow

a particular time path in response to the changes in the

rate of monetary growth. This time path is important be-

cause interest rates are thought to be one of the conduits

of monetary policy.

The length of the time path followed by interest rate

reveals information concerning the lag in monetary policy's

effect. Curiosity about this time path provided the initial

motivation for earlier empirical invest igations.' After

such a general introduction on the nature of lags, their im-

•'• The rate of interest referred to henceforth is the nominal interest rate, unless otherwise specifically stated, since the demand and supply conditions in the market determines only the nominal interest rate. Moreover according to Rob-ert A. Mundell (1963), the rate of interest relevant for de-cisions regarding the allocation of wealth between money and other assets is the nominal rate.

^ Some examples of such investigations are those carried out by Phillip Cagan (1972); P. Cagan and A. Gandolfi (1969); William Gibson (1970a, 1070b, 1972); William Gibson and E. Kaufman (1968).

2

plications for monetary policy, and their effects on nominal

interest rate movement, let us turn to the specifics about

interest rates.

The major bifurcation of the more modern and advanced

theories of the determination of interest rates is between

the following two categories:

(1) Those based on the neoclassical loanable funds

theory which was earliest advanced by Leon Walras

(1900) in a general equilibrium framework, in con-

trast to the partial equilibrium approach advanced

by other neoclassicists, with Knut Wicksell (1954)

and Irving Fisher (1930) inclusive.

(2) Those based on the liquidity preference theory,

earliest advanced by Lord John Maynard Keynes

(1936).

Preceding the modern theories, however, were classical

theories pioneered by such early writers as Von Bohm-Bawerk

(1956). This study will address the neoclassical theories

of the determination of interest rates, specifically the an-

alytical separation of monetary policy effects on interest

rates into liquidity, income, inflationary expectations and

financial effects.

The basis for the neoclassical loanable-funds theory is

the notion that the real interest rate is determined by the

flow of funds supplied and demanded. It implies that "real"

interest rate will be in equilibrium when it is at a level

which equates the demand for and the supply of "loanable

funds." Fisher's (1930) pure form of the nonmonetary loana-

ble-funds theory was stated in terms of desired lending and

desired borrowing. It was this (Fisher's) nonmonetary ap-

proach that Keynes (1936) attacked as the "classical" theory

of interest.

The liquidity preference theory focuses on the supply

of and demand for money. It analyzes the nominal interest

rate in terms of money stock supplied and demanded in con-

trast to the loanable-funds theory, which does so in terms

of the flow of changes in the money stock. In addition, the

loanable-funds theory determines only the "real" interest

rate.

There is a considerable body of literature concerned

with the problem of whether these differences are substan-

tial or whether the loanable funds and the liquidity prefer-

ence theories are fundamentally identical. The fact of the

matter is that the formal equivalence of liquidity prefer-

ence and monetary loanable funds theories depends on the

model builder's vision of the world. If the rate of

interest is determined by simultaneous equilibrium in all

the market, then it is of no consequence whether we ignore

the bond market or the money market even if both money and

bonds are traded on stock and flow markets (Hicks 1967).

Also the fact that one model is framed in terms of stocks

and the other in terms of flows is an insignificant distinc-

tion if we assume that the stock model refers to end-of-

period stocks when time is divided into discrete periods

(Patinkin 1959).

Michael R. Darby (1975) argued that "standard analysis

of monetary policy effects on interest rates in terms of li-

quidity, income and inflationary expectations is incom-

plete," because it omits the financial and tax effects.

Darby's argument was that after a change in monetary policy,

substitution among securities will increase as time elapses

and so reduce or eliminate financial effects caused by

short-run financial market segmentation. Another argument

was that the standard expectations effect omits the transfer

of income tax liability on that part of the interest payment

Hence, if the expected rate of inflation goes up by one per-

centage point, the nominal interest rate must increase by

enough to cover not only the loss of principal due to infla-

tion, but also by enough to pay the taxes on that return of

principal, that is by 1 / (1-t) percentage points, t being

the marginal tax rate.

Professor Milton Friedman (1968b) in his presidential

address to the eightieth annual meeting of the American

Economic Association, emphasized the many "misunderstood"

features of the relation between money stock and interest

rates. He also mentioned the inability of the Federal Re-

serve System to control interest rates, and hailed the aban-

donment of the Federal Reserve policy of pegging bond prices

as "a desirable and inevitable step." Friedman argued that

as an empirical matter, low interest rates are a sign that

monetary policy has been "tight," in the sense that the

quantity of money has grown slowly. And high interest rates

are a sign that the quantity of money has grown rapidly.

Paul Volcker while Chairman of the Federal Reserve System

had once supported this view in his speech.^ The broadest

fact of experience runs in precisely the opposite direction

from that which the financial community and the academic

economists have taken for granted. Phillip Cagan (1972,

• See Economic Review Federal Reserve Bank of Atlanta, Sep-tember 1981, pp. 22-25. 1981 Monetary Policy: Excerpts from testimony by the Federal Reserve Chairman, Paul A. Volcker before the House Banking Committee July 2, 1981, where the chairman says

Indeed sustained monetary restraint, by encourag-ing greater confidence in the price outlook, will in time bring interest rates lower.

Also William P. Yohe and Denis S. Karnosky in 1969 wrote

High interest rates do not necessarily indicate monetary restrain. Instead, they most likely in-dicate excessive monetary ease (as measured by rapid expansion of the money supply) which results in rapid total spending and eventually inflation.

6

1969) once voiced his surprise at one of the oldest tenets

of Wall Street: that "tight" monetary policy increases the

level of interest rates and "easy" monetary policy reduces

them. Gibson (1972a) acknowledges that the monetary author-

ity had not been able to control interest rates, because to

assure low nominal interest rates they would have to start

out in what seems to be the opposite direction, that is by

engaging in a deflationary monetary policy. And similarly

to assure high interest rates, they would have to start by

engaging in an inflationary monetary policy, accepting a

temporary movement in interest rates in the opposite direc-

tion.

Here are a few notable quotations on this yet-to-be-

settled issue.

During this period, monetary growth being comparatively slow, commercial banks had to bid aggressively for additional funds, resulting in very rapid time deposit growth. In contrast from July through November 1982, business loan demand slowed, monetary growth accelerated and interest rates declined sharply (Mack Ott, 1982, pp. 1-2).

It is commonly argued that interest rates and the growth rate of money (Ml) are negatively re-lated (and this we find in many text books); how-ever, data since late 1981 indicate that this has not been the case.... From the four weeks ending November 18, 1981 to the four weeks ending February 24, 1982, Ml grew at nearly 11 percent rate, yet short-term rates increased substantially. Similarly , money growth has slowed since late February, while short-term interest rates have trended downward (U.S. Financial Data, Federal Reserve Bank of St. Louis, 1982 pp. 1-2).

It is commonly argued that, all other things equal, an increase in the rate of money growth leads to lower interest rates while a decrease leads to higher interest rates. This short-term or "liquidity" effect generally is short-lived, however as evidence ... The dramatic increase in the rate of Ml growth beginning in November 1981 initially was accompanied by 250-300 basis points decline in short-term interest rates. As this ac-celerated money growth continued for the next two months, however, short-term rates rose (Dallas S. Batten, 1983, pp. 1-2).

The most abrupt decline in interest rates oc-cured in the face of sharply rising estimates of Federal Government budget deficits and during a period of relatively modest monetary growth. In-terest rates were roughly unchanged during the last four months of 1982 even though this period was characterized by very rapid monetary growth (Gary Santoni, 1983, pp. 1-2).

For whilst an increase in the quantity of money may be expected, cet. par. to reduce the rate of interest, this will not happen if the li-quidity preferences of the public are increasing more than the quantity of money (John Maynard Keynes, 1936, pp. 173).

It therefore appears that recent empirical observations

point to the fact that an inverse relationship between the

growth rate of the quantity of money and the interest rate

cannot be taken for granted any longer. There are indica-

tions of a possible positive relationship and if that is the

case, then to lower interest rates, the monetary authority

would have to decelerate the growth rate of the quantity of

money, and to assure higher interest rates they will have to

accelerate the growth rate of the quantity of money, ceteris

paribus.

8

Lawrence T. Clark (1981) argued that "the most

controversial issue in monetary policy today is the time lag

that occurs between a change in the money stock and its ef-

fects on the gross national product." He further argued

that the empirical studies on the effects of monetary policy

have failed to be convincing. These empirical studies have

been controversial and may have failed to be convincing for

a number of reasons:

(1) The theoretical model refers to an interest rate

that is an index of the interest rate on a variety

of loans, but empirical studies have almost exclu-

sively used interest rates on highly liquid bonds.

(2) Omission of the Financial and Tax effects in earli-

er analysis.

(3) Arbitrary selection of monetary variables; for in-

stance using Ml rather than M2, monetary base or

excess reserves.

(4) Differences in the estimation or econometric models

used in the analysis.

For these reasons, Clark (1981) concluded in 1981 that more

research work is needed in this area.

Objectives

The main objective of this study is to analyze statis-

tically the hypothesis that a rapid growth of the money

stock will lower interest rates, whereas a slow growth will

mean higher interest rates.

The secondary objectives of the study are

(A) Analyze the effects of the variability of the money

stock growth rate from trend or any reference point

on the market interest rates.

(B) A structural test of the model within the main ob-

jective to investigate any institutional or struc-

tural changes in the model.

(C) A comparative analysis of the mean length of lag

within similar periods among three major industrial

countries:

(1) The United States,

(2) The United Kingdom, and

(3) The Federal Republic of Germany.

For the comparative analysis, we looked at such indica-

tors as monetary policy, size of government deficits over

the years, the financial as well as the institutional

system, and the credit and the money market regulations

enforced by the respective central banking bodies.

10

General Procedures

The basic analytical tool used to satisfy the stated

main objective was the Almon polynomial distributed lag mod-

el. The regressor variable was the distributed lag first

difference of the log of the money stock, and the dependent

variable was the first difference of the log of the short-

term Treasury bill rate. The change in the log of the abso-

lute value of the money stock between successive periods

(that is the first difference) was used as a proxy variable

for the growth rate of the money stock.

The verification for any change in the structure was

carried out using both the Chow test and the dummy variable

test.

Uniqueness of Study From Past Studies

1. This research provided an opportunity in which a

comparative analysis across major advanced capital-

ist nations was carried out, as far as the relation-

ship between the growth rate of the money stock and

the market interest rate is concerned.

^ The Chow test is that described by Gregory C. Chow (1960). And the dummy variable test is that described by Damodar Gu-jar (1970a, 1970b).

11

2. Besides, the analysis across these countries was

done using all measures of monetary aggregates, Ml,

M2, M3, and L. Most past studies have used one

measure of monetary aggregate or another, and in

about 80 percent of the cases, adjusted Ml had been

used. Many other studies have used the inflationary

expectations, which is normally a distributed lag of

past inflations. The relationship was examined in

this study using all known measures of monetary ag-

gregates. Also both the seasonally adjusted and the

seasonally unadjusted data were covered in this

study.

A preview of the various parts of this study is appro-

priate at this point. The present chapter covers the intro-

ductory material on the statement of the problem, the basic

objectives of the study, and the general procedures used to

achieved these objectives. Chapter II is a selective review

of literature related to this study. The focus of Chapter

III is the conceptual framework, and the topics discussed

are the theoretical underpinnings of the rate of interest,

the determination of the rate of interest in the credit

market, and the role of the rate of interest in an economy,

as well as an exposition of the hypothetical model used for

the research. Chapter IV deals with the specification of

the methods and procedures used, the basic data used, and

12

the definitions of monetary aggregates for the various

countries. Also covered in this chapter is an overview of

the institutional arrangements for monetary controi within

the countries in the study. Chapter V covers the results of

the research, an analysis of the results, and comparison of

these results to previous studies. Chapter VI contains a

summary of the results, an assertion of the contribution of

this research to the literature and any implications from

the results obtained.

CHAPTER II

REVIEW OF LITERATURE

It is appropriate to start the review of literature

with Irving Fisher (1930), whose price expectation theory

dates as far back as 1896 but for some reasons was ignored

by most Economists for several decades despite the mass of

evidence Fisher presented. However, the price expectation

theory has been revived in the past decade or two due proba-

bly to the substantial price changes within this period.

According to Fisher, the price expectations effect raises

the nominal rate by exactly the expected rate of the price

increase. The real rate remains unchanged. In equation

form, Fisher's effect is written as follows: (1 -»• R') = (1 -•-

R) (1 + P*) where l-^R' =l-t-R-t-P*-i- RP*; which implies

R' = R -H P* + RP*, where

R' is the nominal rate,

R is the real rate,

P* is the expected price change,

and RP* is the cross product.

Robert A. Mundell (1963), prodded by Fisher's

reservations concerning the actual price expectations effect

on the nominal rate, developed a model which "showed that

anticipated inflation or deflation is likely to raise or

13

14

lower the nominal or money rate of interest by less than the

expected rate of inflation or deflation because the real

rate does not remain unchanged." AR < ---P*

Mundell's argument is based on the fact that inflation

reduces real money balances, and that the resulting decline

in wealth stimulates increased saving. He reasoned that

foreseeable fluctuations in the rate of inflation can have

real effects on economic activity. When prices are expected

to rise, the money rate of interest rises by less than the

rate of inflation, giving impetus to an investment boom and

an acceleration of growth. Conversely when a rise in prices

is expected to end, there occurs a stock market slump, a

rise in the real rate of interest, and a deceleration of

growth.

However, Frank G. Steindl (1973) asserted that the ef-

fect of anticipated inflation on real rate cannot be deter-

mined a priori, and that the real rate rises if the de-

creased real demand for money primarily finances increased

real commodity demand and falls if real bond demands are the

principal beneficiary.

But Michael R. Darby (1975, 1976) theoretically argued

that, due to tax considerations, the nominal interest rate

will always rise more than or fall less than the anticipated

increase in prices. A rise is needed simply to pay for the

additional tax that is expected to be paid. A decrease for

15

deflationary price expectations to take account of the fact

that the investor's marginal tax rate will decrease due to a

decline in income. The higher the marginal tax rate of the

1 AP''

investor, the greater the change in the nominal rate. AR> —-P"

J. M. Keynes' (1936) liquidity preference theory, basi-

cally states that the market interest rate is determined

fundamentally by the supply of and demand for money, and

that an increase in the money stock will lower the market

interest rate and a decrease will raise the rate.

Thomas Sargent (1972) combined the Fisherian analysis

with a loanable funds model of the determination of the real

interest rate. By positing that investment is a function of

the real interest rates and the current annual change in

GNP, and that savings is a function of the real interest

rate and the level of GNP, Sargent expressed the equilibrium

real rate as a function of the level and change in GNP.

Martin Feldstein and Otto Eckstein (1970) combined the

Fisherian price expectation theory to the liquidity prefer-

ence model. Their complete model is as follows:

RC^= a- + a,Log(N ) + a_Log(YJ +a_Log(RC -RC^ ,) + ? a,P* t U l t Z t j t t-i 4=] 4 j

where M is the real per capita monetary base,

Y is the real per capita gross national product.

16

D is the real per capita government debt held by

the public,

P* is the price expectation, and

RC is the interest rate on Moody's seasoned cor-

porate AAA bonds.

The monetary base, the national product and the govern-

ment debt were used as proxy variables for the real rate. A

third-degree Almon distributed lag of past inflations was

used as a proxy variable for the price expectation. Feld-

stein and Eckstein concluded that a combination of a static

liquidity preference model and an expected inflation adjust-

ment provide an extremely good explanation of the variation

in the corporate bond interest, and also that inflation had

been the dominant force in causing the rise in interest

rates since 1965.

Yohe and Karnosky (1969), in another study, sought to

explain the fluctuations in nominal interest rate (R) solely

in terms of the variation of price expectations (P*). They

assumed that the variance of nominal interest rate is due

primarily to the variance in price expectations, and that

the variety of forces which may shock interest rates are

orthogonal to their distributed lag proxies for inflationary

expectations.

17

Yohe and Karnosky's model is as follows:

where U is the disturbance term.

Unlike earlier studies, this study showed that price

level changes since 1952 have evidently come to have a

prompt and substantial effect on price expectations and nom-

inal interest rates. This study also showed that the total

effect of price expectations on interest rates and the speed

at which they are formed appeared to have increased since

1960. Most significantly was the finding that price level

rather than "real" rates accounts for nearly all the varia-

tion in nominal interest rates since 1961. The implied

speed of response in this study was much greater than that

of Feldstein and Eckstein's study.

Jack Carr and Lawrence B. Smith (1972), in another

study, attempted to synthesize two monetary forces which af-

fect interest rates. In the spirit of Wicksell, Carr and

Smith constructed a variable to measure the difference be-

tween actual (M) and expected (M*) rate of growth of the

money supply. An increase (decrease) in the unanticipated

rate of growth of the money supply is hypothesized to lower

(raise) interest rates. The second channel by which

monetary forces influence nominal interest rate is through

18

the Fisher effect, with changes in the money supply

affecting the actual and ultimately the expected rate of in-

flation. Carr and Smith used this model:

\ = ao+a^ (M -M*_^) + a^ J^ P % U_

where U as before is the disturbance term.

Jenkins and Lim (1973) in their own study reflected the

belief that the real interest rate evolves very slowly over

time and that the variance of the nominal rate primarily

reflects the variance of price expectations. The real rate

can be shocked both by monetary policy and by the rate of

growth of the total government debt held by the general pub-

lic. The model used by Jenkins and Lim is as follows:

^ = "0 + Jo «1 («t-l - "t-l-l' ilo Vt ^ "3^* + 't

In another study, William E. Gibson and George G. Kauf-

man (1968a, 1968b) set out to determine if short-run changes

in post war interest rates primarily reflects changes in the

demand for funds or changes in the supply of funds. Short-

term interest rates were regressed on industrial output and

on one of the measures of the money supply.

In other studies, William E. Gibson (1972, 1970a)

concluded that a change in the money stock produces an

19

immediate negative effect on interest rates, but only a

little later positive effects which tended to offset the

initial negative effects. The functional relation used by

Gibson is as follows:

Ai = F(LE, lE, PE) - + +

where Ai is the first difference of the interest

rates, and LE, lE, and PE are liquidity effects, income ef-

fects and price expectation effects respectively. The signs

below indicate the direction of the effects on interest

rates. The functional relation used by Gibson is as fol-

lows: ^ ^ { (ijií. A 9M r • ^ 9t H gt t' S. 3t ' t-l' ' M 9t t-n

Phillip Cagan (1972, 1969) examined the relationship

between changes in the rate of change of money (M2) and

changes in the commercial paper rate, using reference cycle

data. He found that an increase in the monetary growth rate

in stage t has a negative effect on interest rates in stage

t, zero net effect in stage t+1, and positive effects there-

after. The model used by Phillip Cagan is as follows:

Ai = a + Bj AM + ^2^^-! '^ 3 t-2 •*" "'' n+î' t-n

Friedman's (1961) study indicated that the total lag

derived from the specific money cycle turning point is 18

months for the peak and 12 months for the trough. A study

20

similar to Friedman's is that authored by Friedman and Anna

Schwartz (1963a) in which they employed two differential

techniques, using the turning-points approach to estimate

lag. The first approach was to compare turning points of

business cycles and the second technique was to compare the

"step dates" in the rate of growth of the money stock with

turning points of the business cycle. Friedman and Schwartz

estimated the mean lags of monetary policy to be two quar-

ters for both peak and trough.

In a U.K. money-demand study examining U.S. results of

Friedman and Schwartz and U.K. data, Walters (1965) found a

strong significant relationship between the level of nominal

income and the level and change in the quantity of nominal

money. The regression results estimated the relation for

the U.K. using annual observations of nominal income on nom-

inal money balances for the period 1877-1962 and measuring

variables in the log form. The model used by Walters is as

follows: oo ^ ^ > = iSo V i "(T-t)

Woll (1972), using the more realistic but statistically

more complex concept of distributed lags, carried out a

study of the Federal Republic of Germany during the period

1952-1967 on the relationship between a change in the

quantity of money and the change in the interest rate. Woll

21

presumed that a change in the quantity of money would depend

on a constant K, the change in the interest rate i and the

change in the quantity of money in the previous period:

AM = K + a (Ai) + 6 (AM)

Woll in this study found that the length of the lag for

an expansionary monetary policy was far shorter than the lag

length for a contractionary monetary policy, a clear confir-

mation of the argument that monetary policy is not symmetri-

cal.

Manfred J. M. Neuman (1977) in his own study on the

Federal Republic of Germany (1960-1974) investigated the de-

terminants of the nominal rate of interest for an open econ-

omy, given a fixed-exchange-rates regime. A credit market

model (an extension of the Brunner-Meltzer theory of the

monetary process to an open economy) of the monetary sector

was formulated, and a reduced form solution for the interest

rate was derived. Neuman concluded that the conventional

approximation of the anticipated rate of inflation by an es-

timated polynomial lag of actual rates of inflation is in-

ferior to the use of the difference between bond and divi-

dend yield. Estimates from this study showed that an

increase of the anticipated rate of inflation by one

percentage point raises the German nominal rate of interest

by about fifty basis points during the same quarter and

symmetrically depresses the real rate on financial assets.

22

Jack Carr, Lawrence B. Smith and James E. Pesando

(1976) investigated the relationship between price expecta-

tions, income taxes and the nominal rate of interest in Can-

ada. The approach utilized the rational expectations hy-

pothesis to create a synthetic price expectations series.

Using Canadian data, these series were applied to four mod-

els of the determination of the nominal interest rate: the

Yohe-Karnosky (1969) model, the Carr-Smith (1972) model, the

Feldstein-Eckstein (1970) model, and the Jenkins-Lim (1973)

model.

This study also examined the Darby hypothesis that in-

come tax consideration will cause nominal rate of interest

in equilibrium to increase by more than the increase in the

expected rate of inflation. In the context of the four mod-

els of interest rate determination, the hypothesis that the

price expectations coefficient is significantly greater than

one was tested. The standard procedure for generating price

expectations was used, and it is the procedure which assumes

that individuals employ only the information contained in

the past history of inflation when formulating their fore-

casts of future inflation. Based on this assumption the

weights on lagged prices are estimated. This study was

inconclusive with respect to the Darby hypothesis that tax

considerations will cause nominal rate of interest to

23

increase by more than the increase in the expected rate of

inflation.

Eugene F. Fama (1975), in an innovative and provocative

study concerned with efficiency in the market for one-to

six-month U.S. Treasury Bills, provided indication that at

least during the 1953-1971 period, there was a definite re-

lationship between the present nominal rate of interest, and

the rate of inflation subsequently observed. Moreover, dur-

ing this period, the bill market seemed to be efficient in

the sense that nominal interest rates summarized all the in-

formation about future inflation rates. There was also an

indication that the real rate of interest, ignoring taxes,

seemed to be constant during this period.

Fama's methodology was drawn on the fact that the dif-

ference between the market interest rate and the subsequent

observed rate of inflation, the ejí post real interest rate

consists, by definition, of the ex ante real interest rate

plus a pure forecasting error. The hypothesis of market ef-

ficiency implying that these forecast errors must be serial-

ly random. Thus, observing ex post real rates is equivalent

to observing ejí ante real rates with random error

measurement.

In a follow-up study, Nelson and Schwert (1977) using

the same series of data as Fama (1975) concluded that

expectations of inflation have accounted for most of the

24

variation in short-term interest rates during the postwar

period, and that those expectations embody significant in-

formation beyond that contained in past inflation rates

alone.

Thomas Sargent (1973), in an earlier study of the rela-

tionship between nominal rate of interest and the rate of

inflation anticipated by the public, used a simple linear

dynamic macroeconomic model. The model was Keynesian in

structure, but it assigned important roles to price level

adjustments and anticipations of inflation. In the long

run, the model was quite classical in behavior.

Sargent ignored technological change and growth in sup-

plies of factors of production. As a consequence, he as-

sumed the full-employment level of national income to be

constant over time, where full-employment level of national

income meant that level of income which is consistent with

price stability. He further assumed that the government

neither spends nor taxes, a simplification that he argued

never affected the character of the results.

The real side of the model consisted of standard post

Keynesian consumption and investment functions. Desired

real consumption at time t was assumed to be determined by

permanent income. Money and prices were integrated into the

model via a demand function for nominal balances and a

version of the Phillips Curve.

25

Sargent concluded from this study that the relationship

between anticipated inflation and the nominal rate of inter-

est is in principle more complex than depicted by Irving

Fisher's famous formula. In addition, the perceived real

rate of interest is not a constant and thus assuming con-

stancy of the perceived real rate of interest, as had been

done in most empirical applications of Fisher's equation, is

quite a restrictive specification.

Maurice D. Levi and John H. Makin (1978) extended the

approach first undertaken by Robert Mundell (1963), of em-

ploying a general equilibrium model to question the Fisher's

(1930) hypothesis that the real rate of interest is invari-

ant with respect to changes in anticipated inflation. The

extension involved the inclusion of a labor sector and the

incorporation of the effect of taxes on nominal interest

rates as discussed by Michael Darby (1975). Money wages

were assumed to be rigid downward.

The proposition advanced in this study was that the

Fisher equation ought to be viewed as a reduced-form rela-

tionship derivable from a simple general equilibrium model,

and this model should allow for the impact of a number of

factors which affect the nominal rate of interest. These

factors include taxes on interest earnings; induced changes

in income and employment which may accompany a change in

26

anticipated inflation; real balance effects; and the size of

the interest elasticity of the demand for money. Levi and

Makin accounted for these factors by introducing a macro-ec-

onomic model which determines the impact of changes in ex-

pected inflation upon the nominal interest rate. The closed

economy model consisted of equilibrium conditions in commod-

ity, money, and labor markets with the bond market eliminat-

ed by Walras' law. The money market was expressed in stock

equilibrium terms.

The results of this study suggested that the role

played by income effects, as opposed to that played by real

balance effects, in affecting the impact of anticipated in-

flation upon nominal interest may vary over time due to

changes in the elasticity of money wages demanded with re-

spect to prices. A shift in that parameter may help to ex-

plain the discovery by Lahiri, Gibson, and William Yohe and

Denis Karnosky, of a break occurring about 1960 in the meas-

ured impact of anticipated inflation on nominal rate of in-

terest.

Ignazio Visco (1975), with a model identical to Sar-

gent's, except for the inclusion of a real balance effect

upon expenditure, showed that even in Sargent's dynamic

model after full adjustment, Mundel's comparative static

real balance effect is preserved, whereby a change in

27

anticipated inflation permanently affects the real interest

rate.

Kajal Lahiri (1976), in a doctoral thesis, tested Fish-

er's two hypotheses independently, and then in a unified

framework. The two hypotheses are; (1) that the nominal in-

terest rate for a particular asset with returns fixed in

money terms is equal to the real rate of interest plus in-

flation and (2) that distributed lags on past prices can be

used as observable proxies for the supposedly unobservable

price change expectations. Four types of expectation hy-

potheses were used by Lahiri: the weighted or distributed

lag, the adaptive, the Extrapolative and the Frenkel expec-

tation hypothesis. Lahiri concluded that his calculations

supported earlier findings by Gibson and Turnovsky that both

the interest rate equation and the expectations formation

equation had a structural break around 1960. However, when

the adaptive expectation hypothesis was used, the Chow test

of equality of regressions coefficients did not support a

break in the reduced form interest rate equation.

In a quite recent empirical investigation, Scott Hein

(1982) examined the evidence to determine whether money

demand behavior over the last two years has been erratic

enough to justify the observed volatility in money growth.

28

Hein provided evidence on short-run (quarterly) money

growth volatility. The methodology was to plot, for each

quarter since 11/1962, quarterly money growth (at an annual

rate) less the average of money growth over the prior 12

quarters. The volatility had two different dimensions. One

dimension is simply the magnitude of the deviation from

trend, and the second dimension is the frequency with which

deviations of money growth, relative to trend, change signs.

The change of sign from positive to negative of the money

growth relative to trend was most frequent in the 1980-1982

period.

Hein, after empirically investigating the demand for

money (the relationship between real money balances on the

one hand and current interest rates, real income, and lagged

real balances on the other hand) using multiple regression

analysis, concluded that there is little from his simula-

tions to indicate a "shift" in the behavioral relationship.

Thus, he summarized,

both auxiliary arguments in favor of a behavioral shift in money demand in 11/1980 lack either log-ical foundation or supportive empirical evidence (p. 32).

In another recent study, Vance V. Roley (1982) used an

efficient market model to examine the relationship between

unanticipated changes in money and interest rates. This

model assumed that investors efficiently use all publicly

29

available information in setting interest rates in the money

market. Thus, the 3-month Treasury bill yield at 3:30 p.m.

on the day of the announcement should reflect the market's

expectation of the announced money change at 4:10 p.m.

The implications of the efficient markets model as ap-

plied were as follow: First, the movement of the 3-month

Treasury bill yield from 3:30 to 5:00 p.m. on the day of the

money announcement should depend only on information ob-

tained by investors between 3:30 and 5:00 p.m. Secondly,

any relevant information obtained between 3:30 and 5:00 p.m.

on the day of the money announcement should influence the

3-month yield during this period, but new information ob-

tained from the money announcement may significantly affect

the Treasury bill yield.

The results obtained showed that the market had become

much more responsive to unanticipated changes in money since

October 1979, a month in which the Federal Reserve announced

a change in its monetary control procedures. And Vance con-

cluded that the estimated results indicated that one source

of increased interest rate volatility is the greater respon-

siveness of the market to such unanticipated changes and

also that the greater responsiveness may represent rational

behavior by investors toward the new operating procedures.

30

In the same study, Vance undertook a further empirical

examination of the relationship between unanticipated chang-

es in money and interest rates. The objectives were to de-

termine the factors that influence the size of the response

and to identify the sources of the post-October 1979 rise in

interest rate volatility. The results from this examination

suggested that about 34 percent of the volatility of the

3-month Treasury bill yield since October 1979 may be di-

rectly attributed to an increase in the market's response to

unanticipated changes in the money supply.

R, W. Hafer and Scott E. Hein (1982) in another recent

study re-evaluated the evidence suggesting that the expected

(ex ante) real interest rate on short-term financial asset

is constant. Evidence was provided counter to the hypothe-

sis that the expected real rate of return on short-term fi-

nancial assets was constant over the period 1955-1979.

While rejecting the constancy hypothesis, this study also

provided evidence consistent with conventional macroeconomic

theory, whereby increases in real money balances temporarily

lower expected real rates. This effect was contemporaneous

on a quarterly basis. Also while such an effect was

significant, it was relatively small and was offset in the

following quarter by an identical rise in expected real

rates. Thus there was no evidence of a long-run effect

31

running from changes in real money balances to changes in

real interest rates. And finally, the evidence presented

suggested that a more volatile short-run real money growth

is likely to produce more volatile real interest rate fluc-

tuations.

In another recent empirical study, John H. Wood (1983)

examined whether the connections between interest rates and

inflation experienced since the early 1950's have, in fact,

differed significantly from those observed by Fisher, that

is, whether nominal interest rates lag rather than antici-

pate inflation according to the efficient markets model by

Eugene Fama. A secondary objective was to compare the abil-

ities of the Fisher's model, and the efficient markets mod-

el, to explain the data, both before 1930 and after 1950.

Wood's estimations provided evidence that the tendency

for changes in interest rates to lag changes in the rate of

inflation has been as pronounced recently as it was during

the 19th and early 20th centuries. In addition, the expla-

natory power of the Fisher's model was superior to the effi-

cient markets model for both 1915-1927 and 1953-1982 peri-

ods.

Douglas Fisher (1968), in a further empirical

investigation of the demand for money in Britain, used

quarterly data covering the period 1951 to 1967. The basic

data were the two definitions of money, namely Ml (currency

32

plus demand deposits) and M2 (Ml plus time deposits), the

various interest rates, and income arguments. The most im-

portant finding was that the possibility of a highly unsta-

ble demand for money function in Britain since 1951 was

found to be implausible. This possibility was emphasized in

the theoretical writings of the "new orthodoxy," and more

conjecturally, in the empirical work of A. A. Walters. The

demand for money in Britain was found to be a stable func-

tion and this demand for money function has a relative short

run interest elasticity. Thus results found for Britain

were close to those obtained for the United States.

In another study, David Laidler et al. (1970) did a

further investigation of the period covered by Douglas Fisn-

er (1968). The main conclusion from this study was that

Fisher seems to have overstated the stability of the simple

formulations of the demand for money function as far as

post-war Britain is concerned. The role of the rate of in-

terest in the demand for money function was left obscured,

since Fisher's model makes the demand for money depended

only upon permanent income.

M. J. Artis et al. (1976) carried out another follow up

study of the demand for money function in the United

Kingdom. They reached the conclusion that the demand for

money function was stable as far as post-war Britain was

33

concerned. Simultaneous equations rather than

ordinary-least-squares regressions were used in this study.

F. A. den Butter and M. M. G. Fase (1981), in another

study, examined the demand for money in EEC countries, pos-

tulating that desired nominal demand for broad money, M2,

depended on expected real income, the expected price level,

the expected long-term interest rate, the expected change in

the price level, and the expected level of economic activi-

ty.

The sample period for this study was from the 1960's to

1976. The period 1/1977 to IV/1978 was use for ex ante pre-

diction. The empirical estimates showed that in the nominal

demand for money functions, the long-run income elasticities

range from 0.77 (Denmark) to 2.33 (United Kingdom) and the

price elasticity was significantly greater than unity, with

the lowest value in Belgium (1.09) and the highest value in

the United Kingdom (10.89). The long-run interest rate

elasticities clustered around -0.20. However, the United

Kingdom's demand for money function, according to this spec-

ification, was stable in the 1970's.

Michael J. Hamburger (1977), in another study, examined

the properties of the demand functions for money in Germany

and the United Kingdom. The main purpose of this study was

to inquire how the openness and institutional setting of a

34

country may influence the demand function for money and the

definition of the quantity of money appropriate for that

function. One of the principal issues considered was the

question of what interest rate or rates provide the most ap-

propriate measures of the opportunity cost of holding money.

The model used by Hamburger postulated that desired (equi-

librium) money balances (M*) are a function of interest

rates (r) and a constraint (x) i.e.,

M* = M(r,x)

Regressions for quarterly observations of German and United

Kingdom data for the period 1963 through 1970 were used.

The equilibrium elasticity of the demand for money with

respect to the short-term interest rate was -0.07 in Germany

and the long-run nominal income elasticity for Germany was

between 0.900 and 1.00. This finding was in line with other

results that have been obtained for narrow definitions of

the money supply in the United States and the United King-

dom. The response of aggregate money balances to changes in

its determinants was found to be much faster in Germany than

in the United States. The entire response to interest rate

changes was found to occur after a lag of one quarter.

In many respects the results obtained for the United

Kingdom were similar to those for Germany. Interest rates

were important determinants of the aggregate money holdings

35

over the sample period. The preferred estimation equation

for the United Kingdom was about as stable as its German

counterpart.

The conclusion was that in Britain and Germany, as in

the United States, the quantity of money demanded appears to

be a relatively stable function of two arguments, income and

interest rates.

In a very recent study, W. W. Brown and G. J. Santoni

(1983) examined the relation between changes in money growth

and changes in interest rates for the United States. The

segmentation of the period of study was based on whether the

United States was on or off the gold standard. The periods

Brown and Santoni covered were 1914-1929, 1934-1953,

1954-1970 and 1971-1983. The conclusion from this study for

the period 1971-1983 was exactly as had been hypothesized on

the proposal of this research in 1982. The model was the n

same as that used in the present study. Ai = c + E A. H , k=0 t-k

However, there are some major differences in the stud-

ies; while the present study used the log form because the

basic data was money stock, Brown and Santoni used money

growth rate and thus no log form. Also while Brown and

Santoni apparently used the ordinary least squares

procedure, the Almon lag procedure was used in the present

study, and also while only the liquidity and inflation

expectations effects of a monetary disturbance were

36

addressed in their study, the present included discussions

on the income and loanable funds effect. The securities

used for the two studies also differ.

James G. Hoehn (1983) studied the response of interest

rates to fluctuations in money growth before and after Octo-

ber 1979 for the United States. The Federal Reserve adopted

a new method of monetary control in October 1979, when the

Federal funds rate was replaced by nonborrowed bank reserves

as the primary instrument for open market operations. His

major conclusions were: that alternative monetary procedures

affect the link between interest rates and money growth;

that the Federal funds rate showed stronger responses to de-

viations of money stock from target; that movements of the

Federal funds rate were linked more immediately to money

growth; and that the reserve based procedure facilitated

more aggressive responses of the the Federal funds rate to

money growth.

The model used is as follows:

n ALog (R ) = C + E A.ALog (Ml)^ . + U

L i=0 1 t-i t

where R is the Federal funds rate,

Ml is adjusted Ml,

C is a constant,

and U is the disturbance term.

37

Milton Friedman and Anna Schwartz (1982) studied the

monetary trend in the United States and United Kingdom. On

the empirical analysis regarding the relation of interest

rates to current and prior money change, they concluded that

although their theoretical framework provides an important

insight into the empirical behavior of interest rates, the

empirical results produced no simple generalizations that

would enable an observer to predict the effects on nominal

interest rates of a monetary change.

Among the authors' other major conclusions are:

1. A single demand function for money is applicable to the

whole century and to both the United States and the Unit-

ed Kingdom.

2. The interwar period is the only period that is consistent

with the Keynesian approach.

3. For the rest of the period, the data conform better to a

quantity theory approach.

4. Nominal interest rates were not appreciably affected by

expectations of inflation or deflation before the 1960's

but they have been dominated by such expectations since.

David Demery and Nigel W. Duck (1978) studied the

behavior of nominal interest rates in the United Kingdom,

from 1961-1973. Using both the Fisher hypothesis and an

extended model of Sargent's (1969) loanable funds model,

they arrived at these two major conclusions: First, that

38

nominal interest rates rise as expectations of inflation

rise, and secondly that nominal interest rates adjust infi-

nitely quickly from one equilibrium to another. Secondly,

that it takes about nine months for 75 percent of any dise-

quilibrium to be made up and more than 15 months for 90 per-

cent of any disequilibrium to be made up. Finally the main

policy conclusion was that, success in bringing down inter-

est rates is likely to be achieved only if permanent reduc-

tion in inflationary expectations is achieved. Any policy

that does succeed in reducing expected inflation will have

its full effect on interest rates only after two years.

As a follow-up to Demery and Duck's empirical analysis,

John Foster (1979) attempted to assess empirically the ex-

tent to which inflation has influenced short-term nominal

interest rates in the United Kingdom over the period

1961-1977. He thus extended Demery and Duck's period of

study by four years.

Conclusions drawn from this study were mixed. For

pre-1967 period, the conclusion was that there was strong

evidence that inflationary expectations are an important in-

fluence on short-term nominal interest rates. But for the

post-1967 period there is only limited evidence to support

the hypothesis that inflation expectations have any role in

explaining the nominal interest rates.

39

Summary of Literature

Nearly as rapid as the spread and adoption of the Fish-

er-Phillips curve, after its rediscovery in 1958, has been

the spread and adoption of the analytical separation of mon-

etary policy effects on interest rates into liquidity, in-

come and inflationary expectations. This approach has been

lucidly presented by Feldstein and Eckstein (1970), Gibson

and Kaufman (1968a,1968b), Friedman (1968a, 1961), Neuman

(1977), Friedman and Schwartz (1963a, 1982), Cagan(1965,

1972), Gibson (1970a, 1970b, 1972), Cagan and Gandolfi

(1969), and Sargent (1973). Darby (1975, 1976) incorporated

the financial effects. Unfortunately empirical implementa-

tions have suffered from both empirical and analytical de-

fects which have made interpretation of results less con-

vincing.

CHAPTER III

CONCEPTUAL FRAMEWORK

Survey Of Theoretical Underpinninqs

In this chapter a series of rudimentary economic models

will be covered, and an effort will be made to present them

in an ascending order of reality and advancement. First a

look will be taken at an economy in which there is no oppor-

tunity for exchange of goods or services. Every individual

is self-sufficient, depending only on the output of his la-

bor and other resources. Next a look will be taken at a

model in which there exists opportunities for exchange, but

all production and consumption takes place in the same time

period, thus there is no opportunity for saving and invest-

ment. The rate of interest therefore plays no role in such

an economy.

Next a model is covered in which the time preference

dimension and opportunity for investment and saving are in-

troduced and the rationale for lending and borrowing is ad-

dressed. Since the rate of interest determines equilibrium

in the credit market, equating the amount of borrowing to

the amount of lending, interest rate determination will then

be discussed, followed by two advanced theories of interest,

40

41

specifically the Loanable-Funds theory of interest rates and

the Liquidity Preference theory of interest rates. Also, a

review will be made of the equivalence of these two theories

and how this literature is related to this study.

Finally the various effects of a monetary growth dis-

turbance on the nominal interest rate will be covered, fol-

lowed by a presentation of the hypothetical model underlying

the study. The chapter will end with a summary of the role

of the rate of interest in an economy.

An Economy without any Exchange Opportunities

This is a hypothetical case, for there is no stage of

economic progress during which the phenomenon of exchange is

known to have been entirely absent. Free exchange will make

it possible for the society as a whole to achieve a higher

welfare than can be achieved under individual autarky. In

this model the individual utility or consumption preferences

are limited by his/her wealth and production function. Thus

without an exchange market, the maximization of wealth and

the maximization of utility cannot be separated.

42

Production and Consumption Takes Place in One Time Period

Let us now relax the assumption of no opportunities for

exchange, and now assume that though exchange of goods or

services is possible, all production and consumption takes

place in one time period. All of what is produced in time

period T is all consumed in that time period. In this model

the individual utility is no longer limited by his/her pro-

duction function because he/she can now exchange what he/she

produces but cannot consume for what he/she consumes but

cannot produce. In other words one's production decisions

can now be separated from one's consumption decisions. A

person who loves to produce potatoes but prefers to consume

oranges can trade with another person who loves to produce

oranges but prefer to eat potatoes. This exchange can take

place either by barter or via a medium for multisided ex-

change such as money.

However, within this society, economics entities cannot

save nor invest. Cultural advances in such a society are ei-

ther too slow or nonexistent since the accumulation of

wealth is necessary, although not sufficient, if a society

is to improve its lot and to make cultural advances

possible.

43

Time Preferences and Investment Opportunities

Continuing the process of refining the model, let us

add the time preference dimension and the opportunity for

investment and saving, to the opportunity for exchange. Now

the question is, why do economic entities save rather than

consume all what they produce as they did earlier when there

was no time dimension, and also why do they invest? Irving

Fisher's (1930) theory squarely addresses these questions.

Fisher argued that saving-investment behavior is influ-

enced by "investment opportunities" that increase the stan-

dard of living in the long run, the cost of undertaking such

opportunities being some sacrifice of consumption in the im-

mediate short run. Since people prefer more consumption to

less, they are induced to take advantage of investment op-

portunities that have high rates of return. In fact, all

investment opportunities whose rate of return are positive

potentially fulfill the preference for more consumption to

less.

Fisher again argued that besides investment opportuni-

ties, saving-investment behavior is also influenced by time

preferences that are biased toward an impatience to consume.

He argued that people generally prefer to consume a little

more now and a little less later than to pattern it the

other way around. Suppose you are asked: Would you rather

44

take one thousand dollars out of your next year's income to

have and spend now, or would you rather forego one thousand

dollars out of this year's income to have and spend next

year? Assuming no interest, if you are like most people,

you would prefer to spend the money this year rather than

next year. This is called the positive time value of money,

meaning a dollar today is worth more than a dollar tomorrow.

Impatience to consume works as a brake on investment.

The greater the preference for current consumption over fu-

ture consumption, the less it pays to invest. In conclusion

therefore, the actual investment decision is governed by

both the impatience to consume and opportunity to invest.

In a modern economy, a person can allocate current income

between consumption and investment in any proportions that

opportunities and the monetary unit of account permit. The

acts of investment and saving, in financially more developed

nations, can usually be separated. Investment is not tied

to saving because a person can finance investment alterna-

tively through borrowing. Similarly, saving is not governed

solely by investment because saving can be employed alterna-

tively by lending.

With financial markets, economic entities use their

investment opportunities, their subjective time preferences,

and the given market rate of interest, to determine

simultaneously their quantities of saving, investment,

45

lending, and borrowing. The emphasis on this central idea

of Fisher's theory is on the rate of interest. The next

task therefore is to explore the microeconomics determinants

of lending and borrowing.

Lending, Borrowing, and Time Preferences

Basically an individual will lend or borrow if his de-

sired pattern of consumption spending over time does not

match that of his income.

Using a basic economic model which in graphical exposi-

tion, the horizontal axis measures the quantity of some

scarce commodity available now, (period 0) CO, and the ver-

tical axis measures the quantity available one period from

now, (period 1) Cl. A representative individual is assumed

to be endowed with a set of resources such that he can have

COa if he works full time to produce only current goods.

Alternatively he could work full time to produce future

goods only. His maximum now will be Cla. For a graphical

illustration of this model, see Figure 1.

The concave line connecting COa and Cla represents the

maximum quantities of CO and Cl which this individual can

get on his own given his initial endowment and ability.

This is in effect the production possibility frontier or

46

Figure 1: Determination of the Interest Rate

47

transformation curve for the representative individual and

is normally assumed to be quasi concave or strictly concave

because of the law of increasing costs (The opportunity cost

of transforming Cl into CO or vice versa increases as more

and more Cl are transformed into CO and vice versa). The

slope of this curve, the marginal rate of transformation

measures the rate at which the individual can transform CO

into Cl.

Using PO as the price of CO with a numeraire value of

1. Because Cl is the same good only one period removed, its

price, Pl, in terms of the numeraire is 1/1+r, where r is

the current rate of interest. For now we assume r is given,

but later we will examine the determinants of r. The ratio

of the current price to the future price (PCO/PCl) is equal

to 1 / (1/1+r) or simply 1+r. This is the rate at which our

individual can exchange on the market CO for Cl or vice ver-

sa. Line AB has a slope equal to this price ratio, -(1+r).

In order to maximize the value of the resources which he

owns, this individual will produce at point E, (producing

COm and Clm units of CO and Cl, respectively) where the mar-

ginal rate of transformation over time is equal to the ratio

of future to present prices, that is where the exchange line

is tangential to the production possibility frontier. The

value of this individual's wealth, POCOm + PlClm is at a

maximum.

48

In this simple model, we have given the individual the

choice of income streams. He has selected to use his re-

sources in such a way that they generate COm units now and

Clm units in the next period. However, just because he has

chosen to produce at E, with the associated time stream of

income, does not mean that this is where he will choose to

consume. The maximization of his wealth and the maximiza-

tion of his utility or consumption preferences are two dif-

ferent things when there exists a market for exchanging

present for future goods. This is what Van Horne termed the

separation theorem (1978, p. 49).

Supposing that this individual has a time preference

function characterized by the indifference curve II. In or-

der to maximize his utility, given the constraint of market

prices, he will choose point F. In other words, he will

trade some of his future income for some additional present

income. In equilibrium, he will consume COf units of CO and

Clf units of Cl. But since he is consuming more present

units than he is producing himself, he must borrow the dif-

ference (COf-COm). At the assumed given market rate of in-

terest, he must pay back one year from now some of his

future income (Clm-Clf). This individual is a net borrower.

On the other hand, if the individual's preference function

is such that it is characterizes by the indifference curve

12, he will choose to consume at G. At this point he is

49

consuming less present or current income than he is

producing himself and more future income than he is produc-

ing. This he can do by extending credit or loaning some of

his current goods to those who want more than they now have.

In exchange they must pay him back at the market rate of in-

terest with future goods. Thus at the going market rate of

interest, he prefers to consume less now than he is current-

ly earning,

Only if the consumer's indifference curve is tangent to

the market price line at point E, in other words 13, will

his income stream coincide with his consumption preference

and in that case he will neither lend nor borrow. Further-

more, as the market rate of interest changes, in other words

as the slope of the line AB changes, some people who were

lending might become borrowers and vice versa. At any time,

however, those with indifference curves lying below point E

are ultimate lenders and those above point E are borrowers.

We should now be in a position to turn to the micro-vari-

ables which together determine the rate of interest.

50

Interest Rate Determination Using Credit Market Theory and the Edge-

worth Exchange Box

Since as previously implied in our model, interest

rates are prices for earlier availability, they like other

prices are determined by the interaction of supply and de-

mand. To illustrate the way these forces affect the rate of

interest and, in turn the rate of borrowing and lending, let

us extend our model to include two individuals, A and B,

each of whom has been endowed with some amount of CO and Cl.

Using an Edgeworth exchange box, with the axis having the

same interpretation as before and for convenience letting

individual A, represented in the left hand corner be endowed

with all of the Cl and no CO. Individual B, represented in

the upper right hand corner, endowed with all CO and no Cl.

By construction, their endowment points coincide at point E.

See Figure 2 for the illustration.

Through this point we can draw their indifference

curves lAl for A and IBl for B. Because of the different

values they place on marginal units of CO and Cl, there ex-

ist potential gains from exchange. Under the assumption

that these two individuals are so insignificant relative to

the market that they perceive themselves as price takers,

we can derive their offer curves, OA and OB. These two

curves show for each rate of interest, the maximum quanti-

51

CIA CIB

Figure 2: Interest Rate Determination in the Credit Market

52

ties that each individual would be willing to exchange on

the market. Where these two curves intersect, at point H,

is the only place where the market will clear. The price

line, which passes from point E through point H, has a slope

of -d + r) where r is the market rate of interest which

equates the amount A wishes to borrow with the amount B

wishes to lend. At this r, A ends up borrowing COa units of

CO from B, leaving B with COb. In exchange A must give up

his claim to Clb units of Cl to B, leaving himself with Cla.

We notice that A borrows exactly the same amount as B is

willing to lend and his payment of future income will equal

precisely the amount B will receive, that is the quantity of

credit supplied is exactly equal to the quantity demanded.

It is this interaction which determines the rate of interest

in the market. Both traders have moved to higher indiffer-

ence curves, IA2 and IB2. Of course, this equilibrium sat-

isfies the condition of Pareto optimality such that there is

no other rate of borrowing or lending which moves both par-

ties to higher level of preference.

It is important to note that in this our simple model

of individual units, there is absolutely no place for credit

or financial intermediaries, since they cannot survive in

53

our simplified environment in which the rate the borrower

pays is the same as the rate the lender receives. With the

inclusion of financial intermediaries, we will direct our

attention to more advanced theories of the determination of

interest rates. The division is between the neoclassical

loanable funds theory and Keynes liquidity preference theory

of interest.

Loanable Funds Theory of Interest

Rate

The notion that the interest rate is determined by the

flow of funds supplied and demanded is the basis for the

neoclassical loanable-funds theory. In order words, the

loanable-funds theory of interest implies that interest rate

will be at equilibrium when it is at a level which equates

the demand for and supply of loanable-funds. Fisher's pure

form of the nonmonetary loanable-funds theory was stated in

terms of desired lending and desired borrowing. It was this

nonmonetary structure of the theory, it will be remembered,

that Keynes attacked as the classical theory of interest.

Figure 3 is an illustration of the loanable-funds theory.

54

0 % ' % Q Q

Figure 3: Equilibrium in the Credit Market

55

Sources of Supply and Demand of Loanable-Funds

The major sources of supply of loanable-funds are:

(1) Savings by households.

(2) Budget surplus by local, state, or federal govern-

ment.

(3) Increase in the money supply by the central bank.

(4) Dishoarding.

(5) Increase in financial liabilities by business firms

and financial institutions.

(6) Capital inflow from abroad.

On the other hand the main sources of demand for

loanable-funds are as follows:

(1) Investment by households and business firms.

(2) Hoarding.

(3) Budget deficit by local, state, or federal govern-

ment.

(4) Decrease in money supply by financial institutions

and government.

(5) Decrease in financial liabilities by business firms

and financial institutions.

(6) Capital outflow to foreign countries.

To state the loanable-funds theory in equation form, let us

designate Qs as the aggregate sum of all the supply

56

component sources and Qd as the aggregate sum of all the

demand component sources. Then the equation is

Qd = Qs (1)

The assumption that the aggregate supply and demand curve

will cross at some positive rate of interest appears to be

generally accepted by economists of all schools, though the

Keynesians in particular do not assume that Qs and Qd would

necessarily intersect at positive rates of interest under

conditions of full employment.

This contention is based on Keynesian theory rejection

of Say's Law, by questioning the ability of the interest

rate to synchronize the saving and investment plans of hou-

seholds, businesses and government. More generally this

view holds that savers and investors are essentially dis-

tinct groups that formulate their saving and investment

plans for different reasons which, in each instance, are

largely unrelated to the rate of interest. The fact that

modern capitalism is amply endowed with an elaborate money

market and a wide variety of financial institution does not

diminish this skepticism about the interest rate as a mecha-

nism capable of connecting the saving drain and the

investment spigot.

57

Liquidity-Preference Theory of Interest Rate

In his General Theory of Interest, Employment and Mon-

ey, John Maynard Keynes (1936) lauded a vigorous attack on

what he called the "classical" theory of interest, and pre-

sented what appeared to be an entirely new theory. It dif-

fers from the loanable-funds theory in three important

aspects:

(1) It focuses on the supply and demand for money as

the principal determinants of the interest rate.

(2) It analyzes the interest rate in terms of the stock

of money supplied and demanded, whereas the loana-

ble-funds theory analyzes the flow of changes in

the money stock.

(3) It focuses on the determination of the "nominal"

rate whereas the loanable-funds theory is primarily

concerned with "real" rate and quantities.

However, Keynes was also later accused of omitting the

real balance effect in his theory. The basic elements of

the liquidity preference theory are that the rate of inter-

est is determined in the first instance by interaction of

the supply of and demand for money stock and the demand for

money varies inversely with the interest rate because of

asset holders preferences for liquidity.

58

The logic for the inverse relationship according to the

modern opportunity cost theory is that since money is the

most liquid asset, people prefer to hold it over other as-

sets if the sacrifice of returns, which could be earned by

other assets is sufficiently small. Such is the case at ex-

tremely low interest rates. At higher interest rates, how-

ever, the sacrifice becomes larger, inducing asset holders

to switch out of cash balances and into earning assets.

Thus, people will hold less money at high rates and more at

low rates, giving a downward sloping demand-for-money curve.

Thus in mathematical equation form

9M . 9M , v __d / . s _ (2) 81 ^ ° ' ã " - °°

where Md is the demand for money,

Ms is the supply of money,

i is the nominal interest rate,

9Md, and |i are the first differentials.

The supply of money is assumed to be exogenously determined

by a central monetary policy making body, the central bank.

For a graphical illustration of the liquidity preference

theory, see Figure 4.

Keynes original explanation of the downward sloping de-

mand-for-money curve, in contrast to the modern opportunity

cost theory, was based on expectations and uncertainty as to

the future course of the rate of interest. He argued that a

given supply of money stock will not have a definite quanti-

59

Figure 4: Equilibrium in the Money Market

60

tative relation to a given rate of interest. What matters

is not the absolute level of the rate of interest, but the

degree of its divergence from what is considered a fairly

safe level.

Given any state of expectation, he reasoned that there

are two reasons for expecting that a fall in the interest

rate will be associated with an increase in the demand for

money.

(a) First is the argument that, if the general view as

to what is a safe level of interest is unchanged,

every fall in the interest rate reduces the market

rate relative to the "safe" rate and therefore in-

creases the risk of illiquidity.

(b) Secondly every fall in the interest rate reduces

the current earnings from illiquidity, which are

available as a sort of insurance premium to offset

the risk of loss on capital account; by an amount

equal to the difference between the squares of the

old rate of interest and the new.

Both the increase in the risk of illiquidity and the reduc-

tion in the current earnings from illiquidity will tend to

increase the preference for liquidity (money).

61

Keynes analyzed three broad motives of why there is a

desire to hold cash (1936, pp. 195-196):

(1) The Transaction-motive—that is the need of cash for

current transaction of personal and business exchanges. He

further subdivided this transaction-motive into:

(a) The Income-motive—The reason for holding cash here

being to bridge the interval between the receipt of

income and its disbursement.

(b) The Business-motive—Similarly cash is held to

bridge the interval between the time of incurring

business costs and that of the receipt of sale pro-

ceeds; cash held by dealers to bridge the interval

between purchase and profit realization being in-

cluded under this heading.

(2) The Precautionary-motive--Money is demanded here to

provide for contingencies requiring sudden expenditure, and

unforeseen opportunities of advantageous purchases, and also

to hold an asset of which the value is fixed in terms of

money to meet a subsequent liability fixed in terms of mon-

ey.

(3) The Speculative-motive—The object of holding cash

here is securing profit from knowing better than the market

what the future will bring forth.

62

In equilibrium the demand for money equals the supply

of money. The interest rate of money at a point in time is

then the primary equilibrating force. This theory is also a

partial equilibrium theory.

The Equivalence of the Liquidity Preference and Loanable-Funds

Theories of Interest

The discussion here is focused on the problem of wheth-

er the loanable-funds flow theory can be expressed as a

stock theory of the bond market. As noted earlier, the li-

quidity preference theory is formulated in terms of the de-

mand for money as a desired stock of money and the supply of

money being the existing stock of money. The loanable-funds

theory, on the other hand, is concerned with the demand for

and supply of a flow of loanable funds or bonds over a peri-

od of time; it is a flow theory, so even that part of it

which is concerned with desired and actual supply of money

is concerned with flows--the change in the desired and actu-

al stock of money over a period.

If a flow theory can be converted into a stock theory

(or vice versa) without any change in its implication, then

the difference between the loanable funds theory and the

liquidity preference theory is seen to be unimportant.

63

Patinkin (1959) argued that a flow theory is equivalent

to a stock theory if the assumption is made that individual

makes decisions with respect to flows over time T, as in the

loanable-funds model, and this can be shown to be equivalent

to a liquidity preference model where the individual is, in-

stead, concerned with the stock at the end of the period,

instant T+1. Patinkin concluded that the fact that the li-

quidity preference model is framed in terms of stocks and

the loanable-funds model in terms of flow is an insignifi-

cant distinction if we assume that the stock model refers to

end-of-period stocks. Also if the stock model refers to be-

ginning-of-period stocks in discrete time, the liquidity

preference and loanable-funds models are equivalent if we

assume perfect foresight.

A second problem is that even if a theory in terms of

flow concepts can be expressed equivalently in terms of

stock concepts, the liquidity preference and loanable-funds

theories would still differ because the former considers the

rate of interest to be determined by the demand for and sup-

ply of money whereas the latter considers the rate of inter-

est to be determined by the demand for and supply of bonds.

However, Hicks (1967) demonstrated that this distinction is

insignificant in a general equilibrium model where Walras's

Law holds.

64

Of the two theories of interest, the liquidity

preference theory is probably better suited for handling the

analysis of this study, the reason being that the equilibri-

um concerned with in the research is that in the money mar-

ket.

The Various Effects of a Monetary Growth Disturbance on the Nominal

Interest Rate

The Liquidity Effect

The theoretical basis for the liquidity effect is

grounded in the liquidity preference theory of interest.

And the argument here is that an expansion of the money sup-

ply will initially lower the nominal interest rate because

there will be excess money supply in the money market at the

existing nominal interest rate. This decline in the nominal

interest rate is the liquidity effect and this decline oc-

curs because a drop in the interest rate is necessary to

bring the demand for liquidity in balance with the supply.

The Income Effect

An expansion of the money supply will, as mentioned

above, lead to an excess money supply at the existing nomi-

nal rate of interest. Economic agents in their efforts to

eliminate the excess money supply in the money market or the

desires to bring the demand for liquidity in balance with

65

the supply, will purchase additional assets with their ex-

cess cash balances. Also the lower nominal interest rate

will stimulate capital expenditures on the part of business

and others. The mechanism leading to the stimulation of

capital expenditures is the income effect.

The Fisher or Inflationary Expectations Effect

Over time the increase in the demand for assets in an

effort to reduce the excess cash balances will cause both

income and prices to rise. When prices rise, lenders, in an

effort to protect themselves against the depreciation of the

real money value due to inflation, will add an additional

premium to the real interest rate. This upward adjustment

of the real rate due to expectations about a rise in the

price level is the Fisher effect.

The Financial Effect

This effect comes about as a result of the temporary

change in the banking system demand for short-term negotia-

ble bonds following an increase or decrease in the growth

rate of the money stock until loans to private customers are

expanded or contracted in proportion to the multiple

expansion or contraction of bank deposits.

66

Exposure of Hypothetical Model

The theoretical framework of our model is based on the

dynamic of the four effects of a monetary growth disturbance

on the nominal interest rate, specifically the liquidity,

the loanable-funds or financial, the income, and the infla-

tionary expectations or the Fisher effect. As discussed

previously, these effects do not all work in the same direc-

tion. The liquidity effect is a negative effect, while the

income and the inflationary expectations are positive ef-

fects. The initial phase financial effect is negative while

the second phase financial effect is positive.

It therefore means that a change in the growth rate of

the money stock which affects liquidity, inflationary expec-

tations, financial institutions' portfolios and income will

cause a movement in nominal interest rate in a direction

that cannot be determined a priori. If the combined liquid-

ity and the initial phase financial effect or what Milton

Friedman and Anna Schwartz (1982, p. 483) called the "first

round loanable-funds" effect dominates, then we would expect

a movement of the nominal interest rates in the opposite di-

rection to that of the change in the growth rate of the

money stock.

^ For an analysis of a combined liquidity and the first round loanable-funds effect, see Milton Friedman and Anna J. Schwartz (1982).

67

However, if the arithmetic sum of the inflationary

expectations, the income and the second-round-loanable-funds

effect dominates, then we would expect a movement of the

market interest rates in the same direction as the change in

the money stock growth rate.

In our hypothetical model, let us consider an economy

which starts initially at an equilibrium point A (see Figure

5 for the illustration), where money stock is Msl and market

interest rates is rl. Let the money stock in the economy be

increased from Msl to Ms2. Because of the liquidity effect,

and initially the financial effect, the rate falls from rl

to r2 where the demand for and supply of money are again in

equilibrium at point B. Income would respond to an increase

in the money stock via the real balance effect and eventual-

ly the income, and later the financial effect will shift the

demand curve from Mdl to Md2 where another temporary equi-

librium is reached at point C ^ In this special case, the

liquidity, income and financial effect completely offset

each another and the nominal interest rate returns to its

initial level. Of course in a real world setting, these ef-

fects may not completely offset each other.

2 This shift takes place only after some readjustments in portfolios by banks, households and businesses.

68

Figure 5: Hypothetical Model

69

If now expectations develop in the economy that the

rate of price change will rise, then the price expectation

effect will cause the demand curve to move upward further,

from Md2 to Md3 where equilibrium is reached at D.^ Thus

for a case in which the liquidity, income and financial ef-

fect offset each another and an inflationary expectation de-

velops, the market interest rate will rise to a higher level

than the level before an increase in the growth rate of the

money stock.

A key assumption in this model and thus in the subse-

quent reduced equation analysis, is that the demand for mon-

ey function is stable. This assumption is not unrealistic

considering the assertion of Friedman and Schwartz (1982)

that a single demand for money function is applicable to the

"3 .

' The rationale behind the price expectations shifting the demand for nominal balances is that in a period of rising prices, ceteris paribus, a proportionately larger money bal-ance is needed to carry out the larger anticipated nominal expenditures. Also rational investors taking into consider-ation the fact that interest payments to be delivered in the future as well as the principal payment will have less real value due to rising prices will charge a premium. On the other hand, borrowers considering the fact that interest payment expenditures will be tax deductible expenses will willingly accept the interest premium and this will again imply an upward bias on the market interest rate.

Also borrowers anticipating inflation will increase their demand for loans, since any principal obtained now is to be repaid in the future with dollars that are less in real value. As a consequence this effect will reinforce the shift of the demand for money curve upwards.

70

whole century to the United States and United Kingdom.

Therefore any change in the relation between the quantity of

money and the interest rate is due to an exogenous change in

the nominal money supply and not to any structural change in

the demand for money function. The implication in this case

being that any change in the liquidity preference function

is a movement along the demand curve and not a shift in the

demand curve.

Role of the Rate of Interest in an

Economy

Each person or corporation or government unit may feel

free to make saving and investment decisions, but they are

not really as free as they think. The different individual

decisions of participants in the market must be balanced.

If everyone decided to invest more than they saved, then

everyone would need to borrow, but none could, because there

would be no lenders.

Fortunately, the balancing process is facilitated

through the movement of interest rates toward an equilibri-

um. The interest rate (price of lending and borrowing

transactions) adjusts rapidly so that those who want to

borrow can find willing lenders and those who want to lend

can find willing borrowers. If everyone wanted to borrow,

the rate of interest would quickly rise to such a high level

71

that enough participants would change their minds and decide

to lend instead. The fact that the rate of interest adjusts

freely and impersonally in the market means that market par-

ticipants can behave as if their decisions are independent

of each other. The rate of interest is the "invisible hand"

that coordinates financial behavior in financial markets.

The role of the rate of interest in the financial market is

no different from any other price in any other market.

We have developed in this chapter several models, all

leading to the major goal of illustrating the role of the

interest rate in an economy and the determination of this

rate of interest. We have also covered the hypothetical

model, the two major theories of interest rate and the ques-

tion of their being equivalent, the various effects of a

monetary disturbance on the interest rate. The models de-

veloped in this chapter will be assumed in subsequent chap-

ters.

CHAPTER IV

METHOD AND PROCEDURES

The goal of this chapter is to provide an exposition of

the methodology and the procedures used as main vehicles for

carrying out the research. First, the basic data used for

the study are specified and the definitions of the various

monetary aggregates for the three countries as specified by

the central monetary authorities of each country are exam-

ined.

Next there is a brief coverage of polynomial distribut-

ed lags (both finite and infinite distributed lags), fol-

lowed by an examination of the Almon polynomial distributed

lag, which as stated earlier, is the main analytical tooi.

Some inherent advantages of the Almon lag over the ordinary

least square method and the Pascal's distributed lags are

discussed. Also examined are the characteristics of the ar-

rangements for monetary control in each of the countries.

And finally the chapter ends with a discussion of the Chow's

test and the dummy variable test, both of which are proce-

dures used to test for any structural divergence within any

time period in consideration.

72

73

Basic Data and Definitions

The basic data are monthly and quarterly time series

for both the money stock and the interest rate. The money

stock are in levels, both seasonally adjusted and seasonally

unadjusted. For the simple reasons that the components of

the monetary aggregates for the three countries are not uni-

form and the start dates of availability of the source data

are different, we will analyze the different definitions on

a country by country basis starting with the United States,

followed by the United Kingdom, then the Federal Republic of

Germany.

United States Data

Money

For the United States, the monthly time series data are

monthly averages of daily figures. These data are available

for the entire anticipated period of study, 1959-1983 and

were revised March 1982 by the Federal reserve Board of Gov-

ernors. The quarterly time series were estimated from

monthly averages.

1 For a complete list of the monthly series, see Appendix B and for a list of the sources of data, see Appendix A.

74

Interest Rates

The interest rate series we used was that on the 91-day

Treasury bill.^ We felt that the 91-day security will be su-

perior to intermediate and long-term security for the fol-

lowing basic reasons:

(1) Short-term securities are more sensitive to market con-

ditions than intermediate and long-term securities and are

therefore more likely to give a better picture of market

forces.

(2) The market in short-term Treasury securities possesses

great "depth and breadth." This security is demanded as a

liquidity vehicle in large amounts by all categories of

large money market investors; commercial banks, nonbank

financial intermediaries, state and local governments,

foreign governments and foreign banks, industrial corpora-

tions and nonprofit institutions.

(3) The default risk on Treasury bill is virtually nonexis-

tent as well as the callability feature and the differen-

tial tax treatment.

(4) They can be converted into cash at any time by selling

them in the most active of all secondary financial

markets.

^Also see Appendix B for a complete list of the monthly se-ries. Again the quarterly series were estimated from the monthly averages.

75

United Kingdom Data

Money

Our monthly time series data for the United Kingdom re-

late to "banking months" and not calendar months, because

calendar month data are not available. Each "banking month"

ends on the third Wednesday of the named month, except for

banking December which ends on the second Wednesday of De-

cember. Thus banking months vary in length. Also monthly

series before 1971 of the various monetary aggregates for

the United Kingdom are not available as only quarterly time

series were reported by the Bank of England until 1971. And

the series have different start dates related to the avail-

ability of the source data. The start dates are: October

1971 for Ml; July 1971 for M3, and May 1975 for PSL2. No

comparable United Kingdom series exist for L. For a list of

the U.K monthly time series, see Appendix C.

Interest Rate

For the United Kingdom, we use the three-month Treasury

bill rate.-'

^ For reasons why we use this interest rate, see an earlier discussion on this topic in Chapter IV.

76

Federal Republic of Germany Data

Money

In line with International practice, the Bundesbank has

defined various concepts of the money stock in the broader

and the narrow sense. A special feature in the Federal Re-

public of Germany is the concept of the central bank money

stock.

Our monthly series of Ml, M2, and M3 for Germany are

calculated from banking statistics, and are based on end-of-

month figures. Seasonally adjusted figures for Ml, M2, and

M3 as well as non-seasonally adjusted figures for M3 are not

available before 1969 because records of these monetary ag-

gregates were never kept.

Interest Rate

Also in line with international practice, Germany has a

Treasury bill rate; though with a slightly different maturi-

ty, 2 to 3 months. We use this interest rate and for rea-

sons why it was chosen, see an earlier discussion on the

topic in chapter IV.

^ For a complete list of the monthly series for the Federal Republic of Germany, see Appendix D. Also there is no com-parable series for the monetary aggregate L, as in the Unit-ed States. See also the Deutsche Bundesbank Special Series No. 7 for a comprehensive coverage on the money stock defi-nitions.

77

An Overview of Institutional Arrangements for Monetary Control within the Three Countries of the

Study

In an OECD Monetary Studies Series, institutional ar-

rangements in ten OECD countries (including the United

States, the United Kingdom, and Germany), may broadly be di-

vided into two groups; Type 1 and Type 2 systems.^

In Type 1 systems, authorities mainly operate on the

portfolio behavior of the commercial banks to influence

their liabilities directly. The most straightforward exam-

ple is the monetary-base control, a version currently prac-

tised by the Federal Reserve System of the United States.

Banks are require to maintain a minimum ratio of cash re-

serves to deposit liabilities, so that the size of the for-

mer imposes a ceiling on the level of the latter. The cen-

tral bank manipulates the size of bank's cash reserves (its

own liabilities) through open-market operations, and its own

lending policies with respect to the commercial banks (dis-

counting mechanism). Interest rates adjust to equate demand

and supply in the money and credit markets, and there is no

resort to administrative control on bank credit. An essen-

tial feature of such a system is that the central bank is

independent of the budget financing process. That is to

5 See Adrian Blundell-Wignall and Jean-Claude Chousaqui (1981).

78

say, the monetization of the public debt by financing

through the central bank is in no sense automatic.

Type 2 systems, on the other hand, are characterized by

attempts to control the money supply through its asset

counterparts by operating essentially, via administered in-

terest rates, on the portfolio behavior of the private non-

bank sector. Typically interest rates are set to influence

private sector's direct demand for government bonds which,

given the budget deficit, indirectly determine the govern-

ment's demand for bank credit. At given interest rates, the

banking system is normally committed to provide finance for

the budget deficit, and changes in the desired level of cash

reserves are readily forthcoming from the central bank. Of

the three countries in this study, the United States typi-

cally belongs to the Type 1 system, while the United Kingdom

typically belongs to the Type 2 system.° The German authori-

ties attempt to target all money aggregate affected by

switching between different type of bank deposits by non-

banks in response to interest rate changes, and some atten-

tion is paid to the interest elasticity of the demand for

money. However, it is on the liquidity and behavior of the

^ At least until 1981. Reforms in recent times in the Unit-ed Kingdom monetary policy include the abolition of the "corset," the imposition of a uniform cash reserve require-ment and more emphasis on the interest rate flexibility in general.

79

commercial banks that the German authorities operate

directly to achieve targets for some definition of the li-

abilities of the latter. In a broad sense, Germany can

therefore be considered as belonging to the same system as

the United States, the Type 1 system.'

Specification of Methods and Procedures

The basic analytical tool utilized in this study was a

polynomial distributed lags model, specifically the Almon-

lagrangean interpolation polynomial lag. The polynomial

distributed lag estimation technique forces the coefficients

of each lagged variables of an equation to lie on a polyno-

mial of degree P. In the presence of a high degree of mul-

ticollinearity, ordinary least squares estimates are not

precise. Thus, the rationale for the use of the polynomial

^ Also an obligatory minimum reserves system was introduced in Germany after the second world war but unlike in the United States it was intended to give the central bank a flexible and effective instrument of liquidity policy. Also the Bundesbank first engaged in open-market operations in the money market in 1955 and again unlike the United States, open-market operations in long-term securities are permitted only for the purpose of regulating bank liquidity and never for the primary aim of financing the public borrowing re-quirement or supporting the market as the Federal Reserve did before the Federal Reserve-Treasury accord in 1951, whereby the Federal Reserve was no longer under any obliga-tion to support government bonds. And finally the Bundes-bank regards only the central bank money stock as its inter-mediate target variable and central money indicator rather than Ml, nor M2, nor M3.

80

distributed lag technique is that it increases the precision

of the estimates. Estimates of the individual lag weights,

however will be biased generally unless the correct lag

length and degree of polynomial are specified. Therefore it

is important that the appropriate specification be deter-

mined, and there are a number of procedures and criteria for

determining the appropriate lag length and polynomial de-

gree."

The regressor variable for the study was the distribut-

ed lag first difference of the log of the money stock, while

the dependent variable was the first difference of the log

of the short-term Treasury bill rate. In a more general

form this is the model used:

ALog (RT ) = C + jl^ IQ W. ALog (M. _ ) + U ^ 3 j

where RT = Short-term Treasury bill rate,

W = Unknown constant or weight,

^ There is the minimum standard error (minimum variance) criterion used by Schmidt and Waud to investigate the lag lengths for the individual variable of the St. Louis equa-tion. Sometimes the minimum standard error is used in con-junction with the maximum R^ criterion. This was also used by Peter Schmidt and N. Waud. For a complete analysis of these criteria, see Peter R. Schmidt (1974); Peter R. Schmidt and Roger N. Waud (1973); Theil Henri (1971).

In addition, there is the Pagano-Hartley technique, a very computationally efficient procedure. For a complete discussion of the P-H technique, see Marcello Pagano and Mi chael J. Hartley (1981).

81

M = Money stock variable, uncorrelated with the

disturbance term,

U = the disturbance or error term, with a mean value

of zero and constant variance,

and t = the time subscript (monthly or quarterly).

The Wij are called the lag coefficient structure

for every j = 1,2,3, K.

Formulation of equation (3) raises certain problems.

An infinite number of parameters are to be estimated, hence

the model is nonoperational. And if we truncate each lag

distribution at some point in time, for example N, we need a

priori information to select N. Economic theory generally

is not clear as to the exact shape of the lag distribution

nor is it exact in the number of lagged terms to be includ-

ed. It follows that in testing a distributed lag model one

must decide

A. On the lagged terms of each lag distribution to in-

clude, when a finite lag distribution is used.

B. On the shape of each lag distribution.

C. On the technique to employ in estimating the parame-

ters of the lag distribution.

If we introduce the assumption that the shape of the

lag structure in equation (3) follows a Pascal distribution,

that is H.. = (1-X) "" C " ^ " X , 0<X<1. i = 1.2,...k, i=i,.. 1 - •*- »

82

then our lag distribution becomes a Pascal distribution,

which is an infinite distribution in the sense that it rang-

es from zero to infinity.

However, if we introduce the following assumptions to

equation (3)

(1) ^^"^ ^t = ±h V i t ' ' =^'2,3,

(2) W^ are calculated at X = 0, ,N-1 for a

polynomial W(x) of degree M, where N is the number of

periods over which the distributed lag extended,

(3) If M + 2 points on the curve are known, b / all the W's

can be calculated as a linear combinations of those val-TTH-Í

ues by ^ = z $ b , then our lag distribu-^ r=0 ri r ^

tion becomes an Almon-lagrangean interpolation polynomi-

al lag.

We feel the Almon lag distribution will be superior to

any other procedure for the following reasons:

1. We have a priori knowledge that even under the as-

sumption of rational expectations, a change in the

growth rate of the money stock affects the market

interest rate with a lag. Thus we can avoid Peter

Schmidt and Roger N. Waud's (1973) criticism

against the Almon distribution lag.

83

2. The Almon distribution lag is superior to the Pascal

distribution lag if the calculated weights are as-

sumed to reverse signs, because by the nature of

the Pascal distribution the weights calculated do

not reverse signs.

3. The Almon lag is not only more flexible and superior

than any ordinary least square method, but previous

studies done using ordinary least square method had

encountered a severe problem of multicollinearity

and the weights had been known to fluctuate wide-

iy.9

When Almon first introduced the polynomial distributed

lags model, she suggested that endpoint constraints always

be employed. The endpoint constraints put explicit restric-

tions on the distributed lag weights outside of their rele-

vant range and also imply homogeneous restrictions on the

lag weights inside the range via homogeneous restrictions on

the polynomial coefficients. The problem is that endpoint

constraints have no basis in economic or econometric theory

as Schmidt and Waud (1973) had pointed out. As a result,

they represent a set of ad hoc restrictions whose sole

purpose is to increase the efficiency of estimation. Taking

^ For the discussion, see the study by Yohe and Karnosky (1969).

84

this problem of endpoint constraints into consideration,

there was no economic justification for using them and thus

the weights in this study were estimated without endpoint

constraints.

Also a combination-of-criteria-approach was used for

the selection of the lag length and the degree of the poly-

nomial. The selection was based on R-Square in conjunction

with the residual variance criterion, the size of the t-val-

ues of the estimated parameters, and in addition the cri-

terion that the model does not contradict conventional eco-

nomic wisdom.

Theoretically, it is generally agreed that following a

monetary disturbance, inflationary expectations develop af-

ter a lag and are preceded by the liquidity and first phase

loanable-funds effect. Also the income effect lags rather

than leads the liquidity effect. Thus a model with entirely

positive coefficients of the estimate has a theoretical flaw

since the liquidity effect is absent.

For this reason the selection problem was not handled

only by statistical procedures. As is often cautioned, the

analyst may be convinced on a priori grounds that one

specification is more realistic than another, in which case

he should be justified in applying the former even if the

latter has a slightly smaller residual variance or a higher

R-Square.

85

10

Other Procedures

The sample observation for this study were time series

and though it may appear advantageous to maximize the de-

grees of freedom by lengthening the series, the basic struc-

ture that the model seeks to explain may have undergone im-

portant changes. And if the structure had undergone any

changes, the true coefficients for the different structures

likely would have been different and thus coefficients esti-

mated using a unified sample would not have been reliable.

The Chow test was the basic procedure used to test for

any structural divergence in the model within any given sam-

ple period. Details of the Chow test and other relevant

considerations are presented below.

-^ For a complete coverage of this topic, see Henri Theil (1971). See also Thomas H. Wannacott and Ronald J. Wannacott (1977, pp. 375).

We conclude once again that statistical theory alone does not provide absolutely firm guidelines for accepting the null hypothesis; acceptance must be based also on extrastatistical judgement. Thus prior belief plays a key role, not only in the initial specifications of which regressors should be in the equation, but also in the decision about which ones should be dropped in light of statistical evidence, as well as in the decision on how the model eventually will be used.

86

Brief Outline of the Chow Test

The test has the following major steps:

(a) Using the sample observations, obtain the ordinary

least squares estimates from the entire sample. Us-

ing these estimates, calculate the sum of squared

residuals; ^^2 ^p ^ j (Y - Y ^ t t 1=1 o p

where Yo = actual value,

Yp = estimated value,

and T = Sample size.

The sum of squared residuals has T-K degrees of

freedom, where K is the nuraber of parameters esti-

mated.

(b) Two separate subsaraples are then obtained from the

entire sample corresponding to the two different

structures hypothesized. Again obtain ordinary

least squares estimates from each subsaraple using

two regressions and calculate the sum of squared

residuals for each subsaraple; jru & ju tl t2

(c) Next calculate ^^*2 ^ ^^2_ (zû ^ + 211 2)

Then calculate the F-ratio

"*2 J:U^ /

F =

C U i + Û 2 / (T - 2K)

87

(d) Finally look up the table F-value for K and T-2K

degrees of freedom at the chosen level of signifi-

cance. If the calculated F-value is less than the

table F-value, then the two structures are the same

at the given level of significance. And the struc-

tures are different if the calculated F-value exceed

the table F-value.

To double check results obtained, the dummy variable

test, that advanced by Damodar Gujarati, was in every case

applied over the same period accepted or rejected for struc-

tural stability by the Chow test. Moreover the dummy vari-

able test was a very efficient method using the SHAZAM-'--'-

program with respect to time as the F-test value could be

obtained directly from the computer print-out, thus elimi-

nating manual calculations as with the Chow test. Whenever

there was any conflict in the two procedures (there were

only two instances and both of them with United Kingdora

data), the structure with a longer time period was selected.

•^•^ SHAZAM (Solomon, Hercules, Atlas, Zeus, Achilles, Mercu-ry) is an econometric computer program developed by Kenneth J. White now of University of British Columbia, Vancouver-Canada. Developraent of SHAZAM was began by White in 1969 at Rice University, Houston, Texas and is now available at over 180 coraputer installations in 26 countries. For a complete coverage of the SHAZAM program see Kenneth J. White, UBC SHAZAM--An Econometric Computer Program, UBC computing cen-ter, 1980.

88

Brief Outline of the Dummy Variable

Test

Let us suppose that we want to study the relation be-

tween consumption (C) and income (Y) for two set of observa-

tions Nl, and N2. Let us also assurae that consuraption and

income are linearly related as follows:

C = p + sY

To use the dummy variable technique to test for equali-

ty between the sets of coefficients for the two linear re-

gressions, introduce the dummy variable in the additive and

the multiplicative forms as follows:

C = p + rD + sY + (tDY) + U

where D = 1 if the observation lies in the

first set (Nl observations).

D = 0 if the observation lies in the sec-

ond set (N2 observations).

The coefficients r and s are differential intercept and

differential slope coefficients, respectively. If r is sta-

tistically significant, the intercept value of the first set

is obtained by p + r, p in this case being the intercept

value of the second set. If r is statistically insignifi-

cant, p then gives an estiraate of the common intercept term

of both sets. If t is statistically significant, the slope value of the first set is s + t, s being the slope value of

89

the second set in this situation. If t is statistically

insignificant, s gives the slope value which is common to

both sets. Thus with the help of the additive and multipli-

cative duramies we can tell whether two linear regressions

differ either in the intercept or the slope or both.

Therefore there are certain advantages to the duraray

variable technique over the Chow technique. First, in just

one regression we can obtain all the information we need,

whereas the Chow test is a multi-stage procedure. Second,

if two regressions are different the Chow test will show

that they are different without, however, specifying the

source(s) of the difference, that is whether the difference

is due to the intercept or the slope or both. The dummy

variable method, on the other hand, clearly points out the

source(s) of difference.

And the final procedure was a static forecast and a

static simulation of the rate of change in the interest rate

given a monetary disturbance. First in-sample static simu-

lations, followed by out-of-sample forecasts were made with

the fundamental purpose of measuring the predictive perform-

ances of the models within the sample period as well as

out-of-the saraple period.

For quarterly observations the forecast and simulation

were done using estimated parameters of the raodel covering

90

the entire period belonging to the same structure. However,

because of extremely low R-Squares for monthly observations

when longer time periods were used, forecast and simulation

with monthly data was for the period 1978-1980 and only on

SAMl.

CHAPTER V

RESULTS AND ANALYSIS

The results of the test on the structure for each time

series of the monetary aggregates are presented first, along

with an analysis of the implications of these results on

earlier studies spanning longer periods, and possible expla-

nations or reasons of the breaks in the structures. Then

the empirical estimations of the main equation are present-

ed, followed by a discussion of the meaning of the coeffi-

cients, analysis and any iraplications from these results as

well as comparisons with past studies.

Segmentation of Time Period

United States

Adjusted Monthly Observations

The Chow test showed that at the 5 percent level of

significance, there was evidence of a stable structure from

1965-1980 for Ml, whereas for the much broader monetary ag-

gregates, M2, M3, and L there was evidence of a stable

structure from 1960-1980, implying that the 1959 data group

was an outlier. The sarae tirae periods were retested using

the dummy variable test and in each instance the same

results were obtained as can be seen from Table 1.

91

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94

Key to Table Notations and Defini-tions of Variables

* Null hypothesis accepted at the 1 percent significance

level.

Null hypothesis rejected even at the .001 percent sig-

nificance level.

*** Null hypothesis accepted even at the 25 percent signif-

icance level.

SAMl = Seasonally adjusted Ml.

SAM2 = Seasonally adjusted M2.

SAM3 = Seasonally adjusted M3.

SAL = Seasonally adjusted L.

UAMl = Seasonally unadjusted Ml.

UAM2 = Seasonally unadjusted M2.

UAM3 = Seasonally unadjusted M3.

UAL = Seasonally unadjusted L.

Q-Name implies a quarterly observation of the variable

rather than a monthly. For instance Q-SAMl is the quarterly

observation of the seasonally adjusted Ml.

Seasonally Unadjusted Monthly Observat ions

With seasonally unadjusted data, there was evidence of

a stable structure for Ml frora 1960-1980 with the 1959 data

being an outlier. However, for the broader defined monetary

aggregates (Ml, M2, M3, and L) a stable structure ran from

95

1959-1980. Again the dummy variable test confirmed each of

the results obtained using the Chow test.

Quarterly Observations

The null hypothesis of a stable structure for the en-

tire sample period 1959-1980 was accepted for all quarterly

time series of the monetary aggregates, both seasonally and

seasonally unadjusted, with one exception, Ml. For Ml there

was evidence of a stable structure from 1960-1980 as is evi-

denced from Table 1.

United Kingdora

Seasonally Adjusted Monthly Obser-vations

The Chow test in the case of the United Kingdom showed

evidence of a stable structure going from January 1972 to

December 1980 for Ml and M2, whereas for M3 a stable struc-

ture went from June 1971 - December 1980. However, the dura-

ray variable test indicated a stable structure going frora

January 1973 - December 1980 for both Ml and M2, while giv-

ing identical results for M3. These results are presented

in Table 2.

96

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98

Seasonally Unadjusted Monthly Ob-servations

For the seasonally unadjusted data, both the Chow test

and the dummy variable test showed evidence of a stable

structure running through out the entire period of available

monthly series, which is September 1971 to 1980 for Ml, July

1971-1980 for M2 and June 1971-1980 for M3.

Quarterly Observations

For all the monetary aggregates, seasonally as well as

seasonally unadjusted, both tests showed evidence of a sta-

ble structure going from I/1969-IV/1980, as can be seen from

Table 2.

Federal Republic of Germany

Seasonally Adjusted Monthly Obser-vations

With the Federal Republic of Germany, there was evi-

dence of a stable structure for the entire sample period,

1969-1980, for all the monetary aggregates when both tests

were applied. The null hypothesis that the structure is

stable was accepted for each monetary aggregates even at the

25 percent significance level as is evidenced in Table 3.

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â ^

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r^ 00 oo r^ rH CN

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TH T H TH CN 00

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CN

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^ . g s ^ ^ ^ 8

ã ^ § » § ? i ^ ^ « ^ i n 8 ^ 0 0

22 22 29 59 00 oo 00 22 29 29 00 00 oo 00 00

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^ ^ r H T H T H T H Í H 3 2 S ^ ^ C ^ 0 < C n

ô'

cj îQ a

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101

Seasonally Unadjusted Monthly Ob-servations

Both tests showed evidence of a stable structure run-

ning from 1960-1980 for Ml with the 1959 data being an out-

lier; from 1961 to 1980 for M2 with the 1959 and 1960 data

being outliers, and 1969-1980 for M3 which is also the en-

tire sample period of available data.

Quarterly Observations

Again as with the United Kingdom, there was evidence

with German data of a stable structure running throughout

the sample period when both tests were applied to all the

monetary aggregates, both seasonally and seasonally unad-

justed.

Possible Explanations for the Structural Divergence

When broadly considered, there appeared to be evidence

of a structural break in the late 1950's or early 1960's for

both the United States and the Federal Republic of Germany.

As can be seen from Table 4, the divergence of the structure

in the early 1960's may have been brought about by the

drastic increase in the level of nominal interest rates and

the inflation rate. The increase in the inflation rate may

have led to the development of inflationary expectations,

102

+ •

TABLE 4

Average Annual Growth Rate of Ml, and Inflation Rate, and Short-Term Treasury bill Rate

UNITED STATES I I

1 1954-1966 1967-1982 I

^ ^

Ml growth 2.47% 6.37% I

Inflation rate 2.19 6.49 I I I

Treasury bill rate 2.86 7.20 I I +

FEDERAL REPUBLIC OF GERMANY I I +

1960-1966 1973-1980 I I 1

Ml growth 7.51% 8.7% | I I

Inflation rate 3.29 4.7 | I I

Treasury bill rate 2.91 4.40 I

which eventually lowered the time lag of interest rates ad-

justment to any monetary disturbance. The major cause of

inflation from early 1960 to early 1980 in the United States

had been the stimulus to total spending provided by an

excessive rate of expansion in the money stock. For

instance, from early 1965 to the end of 1968 the money

103

stock, on balance, grew at a 5.2 percent annual rate,

compared with a 2 percent trend rate in the 1950's.

This change in structure in the 1960's from this study,

confirmed an earlier conclusion by Klein (1975). Klein ar-

gued that there was a fundamental change in the character of

the monetary system since World War II, that before World

War II and to a lesser extend to the end of World War II,

the United States and United Kingdom were regarded as being

on specie standards. However, in post World War II and par-

ticularly in the 1960's the monetary system is completely

fiduciary.

Of course the rapid growth in the money stock accompa-

nied by accelerating inflation was understandable. But a

rapid expansion of the money stock accompanied by high and

rising nominal interest rates has appeared a paradox to many

observers, since according to modern Keynesian economic

theory, an acceleration in the rate of monetary expansion

will provide lower interest rates (see Table 4). However,

Irving Fisher around the turn of the century developed an

economic theory which provided an explanation for this ap-

parent paradox when Fisher hypothesized that nominal

interest rate is made up of two components--the "real" rate

of interest, and a premium based on expected changes in the

price level.

104

For the United Kingdom, broadly speaking, there

appeared to be a structural divergence after 1971, specifi-

cally on the seasonally adjusted narrowly defined money

stock. Also analogous to the United States experience in

the early 1960's, accelerating inflation was experienced in

the United Kingdom following the nonconvertability of the

dollar into gold as ordered by President Richard Nixon in

August 1971, with a historic high reached in 1975 of 24.2

percent annual rate.

Moreover British prices increased more rapidly than

those in any other industrial country between 1972-1977 as

is evidenced from Table 5.

Empirica1 Estimation Results

Table 6 through Table 28 presents estimates using equa-

tion (3) for the various monetary aggregates of the three

countries. For each monetary aggregate the regression esti-

mation was carried out within the time period that a stable

structure existed.

The format of the presentation will be as follows:

Monthly observations for the United States will be presented

first, followed by quarterly observation estimates. Then a

similar presentation will be made for the United Kingdom,

followed by West Germany.

105

TABLE 5

Annual Rate of Change in Money and Prices in Six Industrial Nations 1971-1977

Changes in Money (M) and Prices (P) (Annual Rate of Percentage Change) I ^

U.S CANADA JAPAN F.R.G FRANCE U.K

M 6.2 27.8 29.7 12.8 11.9 15.3 1971

P 4.3 2.9 6.3 5.3 5.5 9.4 + ^ M 7.6 15.5 24.7 13.9 14.9 15.9

1972 P 3.3 4.8 4.8 5.5 5.9 7.1

I ^ M 7.3 13.8 16.7 .7 9.8 5.1

1973 P 6.2 7.6 11.8 6.9 7.3 9.1

4 ^ M 2.8 11.7 11.5 12.2 15.2 10.8

1974 P 11.6 10.9 22.7 7.0 13.6 15.9

I 1 M 4.4 7.8 10.3 14.1 10.5 15.0

1975 P 9.2 10.8 12.0 5.9 10.2 24.2

I 1 M 5.0 6.2 14.3 10.4 12.2 14.6

1976 P 5.7 7.6 9.3 4.6 8.8 16.8

I + M 7.5 7.2 7.0 8.3 13.6 13.5

1977 P 6.5 8.0 8.0 3.9 6.4 15.9

106

United States

Monthly Observations

Estimation Results for Ml Seasonal-ly Adjusted 1965-1980-Seasonally Unadjusted 1960-1980

Table 6 presents estimation results for the United

States monthly monetary aggregate for Ml.-'- The regression

estimates for the seasonally adjusted observations covers

the time series 1965-1980 since, as can be seen from Table

1, this is the period for which there was a stable structure

in the relationship. On the other hand, the seasonally

unadjusted estimation of the equation was from 1960-1980,

which is also a time period for which there was a stable

structure in the time series.

The "best" fit for the seasonally adjusted Ml, was a

sixth-degree polynomial with a distributed lag length of 24

months, while the "best" fit for the seasonally unadjusted

1 Barten-R-Square is the coefficient of determination esti-mated using a procedure outlined by A. P. Barten. For a complete description and derivation of the Barten-R-Square, see A. P. Barten (1962).

D-W is the Durbin Watson h statistic for autocorrela-tion. For a complete description and determination of this statistic, see Durbin, James and G. Watson (1950).

VNR is the Von Neumann Ratio of autocorrelation. For a complete description, see Von Neumann John (1941).

RHOl is the autocorrelation coefficient estimation of Hatanaka. For a full discussion of this statistic, see Mi-chio Hatanaka (974).

107

+

+

TABLE 6

United States Monthly Regression Results for Ml-'-

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

Seasonally Adjusted 1965-1980

Coeff.

. -0.141 1.901 8.844 4.154 0.960 0.669 1.509 1.985 1.671 0.887 0.138

-0.270 -0.322 -0.188 -0.030 0.120 0.354 0.761 1.264 1.559 1.274 0.357

-0.500 0.029 2.163

-0.192

t

-5.33 1.50 7.61 5.14 1.18 0.91 1.89 2.61 2.40 1.22 0.19

-0.39 -0.44 -0.25 -0.41 0.17 0.46 0.98 1.68 1.85 1.44 0.42

-0.49 0.03 1.58

-0.13

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4

1960-

Coeff.

-0.161 1.317 1.844 1.438 0.716 0.337

-0.024 -0.090 0.305 0.612 0.474 0.427 0.609

-0.301 -1.308 -1.107

Unadjusted -1980

t

-1.56 3.16 4.48 3.65 2.62 1.26

-0.09 -0.34 1.17 2.31 1.80 0.27 2.17

-0.75 -3.49 -3.83

Sum of Lag Coeffs. 29 Lag Length 24 Mean lag 6 Degree of Polynom. 6 R2 0 Barten-R' 0 D-W 1 RHOl 0

097

484

37 33 55 22

5 14 1 12 0 0 1 0

249

19

17 13 33 33

+

+

108

I TABLE 6 (Continued) I I +

VNR 1.56 1.34 I SER 0.065 0.004 I

I + I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the monthly I annualized rate of growth of the money stock.I

Ml was a twelfth-degree polynomial with a lag length of 14

months. The mean lag for the seasonally adjusted Ml was

6.48 months and 1.19 months for the seasonally unadjusted

Ml.

The mean or average lag is the time that elapses until

half of the effect of a change in the independent variable

is reflected in the dependent variable. It is simply the

weighted-average lag, where the estimated coefficients are

used for the weights. When all of the weights are positive,

the formula for the mean lag is simply a weighted sum divid-

ed by the sum of the weights, but when negative coefficients

are mixed with positive coefficients, the formula is a lit-

tle more complicated.

A mean lag of 6.48 months for adjusted Ml implies that

half of the total effect of a change in the growth rate of

the adjusted money stock, Ml, is reflected on interest rates

after approximately 6 months. For the seasonally

unadjusted Ml, half the effect of the change in the growth

109

rate of the money stock is reflected in interest rates after

inly 1.20 months.

The results in both cases are consistent with a contem-

poraneous liquidity and first phase loanable-funds effects.

The coefficient of the contemporaneous change in the growth

rate of the money stock is negative (-0.14 for seasonally

adjusted Ml, -0.16 for the seasonally unadjusted Ml) and

significant for the seasonally adjusted data but insignifi-

cant for the seasonally unadjusted data. As expected, the

combined liquidity and first phase loanable-funds effect is

only temporary and quite small. This finding supports the

hypothesis of the model and also gives support to earlier

findings by Brown and Santoni (1983) and Hoehn James (1983),

and to the theoretical argument by Friedman (1968a, 1968b)

and Michael Darby (1975).

However, the R-Square, which measures the proportion of

the variation in the interest rate "explained" by the re-

gression is low, especially for the adjusted data. It is 37

percent for the seasonally adjusted Ml, and a mere 17 per-

cent for the unadjusted data. Also the Durbin Watson h sta-

tistic was low in each case, an indication that there may be

some serial correlation of the error terms.^ But more

^ However, a close look at most empirical results in the literature showed that most of them had very low R-Square for the monthly observations whenever the time period used

110

important was the fact that the sums of the coefficients on

Ml growth rate are significantly different from zero and po-

sitive in each case (29.10 basis points for adjusted Ml and

5.20 basis points for unadjusted Ml).

The sum over the coefficients of 29.10 and 5.20 basis

points for adjusted and unadjusted Ml respectively implies

that if the growth rate of Ml were to increase by 1 percent

and continue increasing at this rate, ceteris paribus, then

after 24 months, interest rate levels would have risen by

0.29 percent above the level before the start of the in-

crease in the growth rate of Ml, if the increase was on ad-

justed Ml. However, if the increase was on unadjusted Ml,

then interest rate levels would have risen by 0.05 percent

after 14 months.

Estimation Results for M2 Seasonal-ly_ Adjusted 1960-1980--Seasonally Unadjusted 1959-1980

Table 7 presents regression results for M2. The struc-

tural relationship was stable from 1960-1980 for adjusted

data, and 1959-1980 for unadjusted data and hence the esti-

mation was done over these periods. The lag length was

was moderately long (Cagan, 1972; Gibson, 1970a). This may be an indication that there is no long-run stable relationship between a change in the money growth rate and the nominal interest rate when only monthly observations are considered.

111

1 United States Mo

1

TABLE

nthly Reg

1 Seasonally Adjusted

1 T

1 T 1 Const. 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24

1 Sum of

1960-1980

Coeff.

-0.210 1.267 1.057 0.865 0.692 0.537 0.400 0.282 0.182 0.101 0.038

-0.006 -0.032 -0.040 -0.029 -0.000 0.047 0.113 0.197 0.300 0.421 0.561 0.719 0.895 1.08 1.03

Lag Coeffs. 1 Lag Lenqth 1 Mean 1. j Degree 1 R^ 1 Barten-i D-W 1 RHOl

ag of Polynom.

-R2

t

-3.23 2.46 2.52 2.59 2.62 2.56 2.28 1.73 1.08 0.55 0.19

-0.03 -0.15 -0.18 -0.13 -0.00 0.24 0.62 1.19 1.87 2.44 2.71 2.74 2.69 2.61 2.53

10.96 24 12.18 2 0.06 0.05 1.30 0.35

7

ressior i Results for M2 1

1

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20

1959-

Coeff.

-0.362 1.142 0.933 0.724 0.461 0.192 -0.015 -0.111 -0.087 0.031 0.191 0.336 0.419 0.418 0.337 0.213 0.099 0.051 0.103 0.240 0.378 0.339

Unadjusted 1 -1980 1

± t 1

-2.35 1 2.73 1 2.53 1 2.61 1 1.66 1 0.74 1 -0.06 1 -0.46 1 -0.37 1 0.14 1 0.86 1 1.47 1 1.89 1 1.90 1 1.43 1 0.89 1 0.42 1 0.20 1 0.37 1 0.88 1 1.03 1 0.82 1

6.39 1 20 1 7.48 1 8 1 0.08 1 0.05 1 1.29 1 0.35 1

112

I TABLE 7 (Continued) I I +

VNR 1.30 1.30 I SER 0.07 0.07 I

I + I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the monthly I annualized rate of growth of the money stock.I

again 24 months with a polynomial of second degree for

adjusted M2, while the lag length was 20 months and a poly-

nomial of eighth degree for unadjusted M2. The mean lags

were a bit longer than for Ml, 12.18 months and 7.48 months

for adjusted and unadjusted M2 respectively. There is also

a contemporaneous negative liquidity and first phase loana-

ble-funds effect which is also short-lived. The sum of the

coefficients on M2 growth rate is significantly different

from zero and positive in both cases (10.96 basis points for

adjusted M2 and 6.39 basis points for unadjusted M2). The

coefficients of determination are again extremely low, an

indication of a non-stable long-run relationship. There was

evidence of serial correlation of the error terms as the

Durbin Watson h statistics were low. Analogously to Ml

results earlier, a 1 percent increase in adjusted M2 growth

rate that continues unabated will raise interest rates level

by 0.11 percent after two years, while a similar increase on

113

unadjusted M2 will raise interest rates by 0.06 percent

after 20 months.

Estimation Results for M3 and L

Tables 8 and 9 present estimation results for M3 and L

respectively, The periods of a stable structure are identi-

cal to those of M2 for both adjusted and unadjusted data.

For M3, the best fit was with a second-degree polynomial and

a lag length of 11 months for both adjusted and unadjusted

data, while for L it was also a second-degree polynomial for

both but the lag length was 11 months and 4 months for ad-

justed and unadjusted data respectively. The mean lag was

6.8 months for adjusted M3, 4.0 months for unadjusted M3,

and 1 month for both adjusted and unadjusted L.

There was a contemporaneous negative liquidity and

first phase loanable funds effect again in each case and the

sums of the coefficients were all positive (5.132 basis

points for adjusted M3, 3.86 basis points for unadjusted M3,

6.7 basis points for adjusted L, and 3.40 basis points for

unadjusted L. The coefficients of determination were also

low and so were the Durbin Watson h statistics. The mean

lags for M3 and L were comparatively shorter than for M2 but

about the same length as for Ml.

114

+ -

TABLE 8

United States Monthly Regression Results for M3

Seasonally Adjusted 1960-1980

Seasonally Unadjusted 1959-1980

4

4

-F-Coeff Coeff.

• +

^

^

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all

-0.033 -0.531

-2.59 Const. -0.024

-0 0 0 0 0 0 0 0 0 0

-0

098 257 535 735 857 902 870 760 573 308 349

•0 •0

0 1 2 2 2 2 2 2 0 •0

63 20 90 92 02 04 15 39 75 07 64 83

aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all

0.405 0.606 0.741 0.898 0.008

-0.204 -0.083 0.071 0.119 0.184 0.235 0.348

-2 1 2 2 3 0

-0 -0 0 0 0 0 1

21 63 21 70 44 03 83 33 28 46 67 86 40

Sum of Lag Lag Length Mean lag Degree of 1

^ Barten-R^ D-W RHOl VNR SER

Coe

?oly

ffs.

nom.

5.132 11 .6.76 2 0.06 0.05 1.30 0.35 1.31 0.004

3.864 11 3.98 2 0.07 0.03 1.37 0.31 1.38 0.005

-F

^

Note: Units of the coefficients are in basis points per 1 percentage point change in the monthly annualized rate of growth of the money stock.

115

TABLE 9

United States Monthly Regression Results for L

+ •

+ -

Seasonally Adjusted 1960-1980

Seasonally Unadjusted 1959-1980

4 Coeff Coeff.

f

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all

-0 -0 0 1 1 1 1 1 1 0

-0 -1 -2

043 346 557 239 700 939 956 751 325 677 192 284 596

2.76 Const. -0.017 0 0 2 3 3 3 2 2 1

• 0

• 1

•2

27 72 70 82 42 00 67 30 50 43 75 09

aO al a2 a3 a4

1 0 0 0 0

566 835 392 237 371

- 2 3 3 1 0 0

.16

. 759

.05

.25

.87

.89

-F-

Sum of Lag Coeffs. 6.726 Lag Length 11 Mean lag 1.15 Degree of Polynom. 2 R2 0.07 Barten-R^ 0.06 D-W 1.32 RHOl 0.33 VNR 1-32 SER 0.005

3 4 1 2 0 0 1 0 1 0

400

12

07 05 37 31 37 005

+

Note: Units of the coefficients are in basis points T nercentage point change in the monthly

zed rate of growth of the money stock. per annua

116

Quarterly Observations

Tables 10-13 (pp. 117-130) present empirical estimation

results for United States quarterly observations. These re-

sults are virtually identical to the monthly observation re-

sults; there is a contemporaneous liquidity and first phase

loanable-funds effect which is also as expected, negative

and only temporary. The sum of the coefficients on monetary

growth change is significantly different from zero and posi-

tive. However, unlike the monthly results, the coefficients

of determination for these results are significantly high.

Estimation Results for Quarterly Ml Seasonally Adjusted 1960-1980-Seasonally Unadjusted 1959-1980

Estimation results for Quarterly Ml are presented in

Table 10. Time periods of stable structures were 1960-1980

for adjusted data and 1959-1980 for unadjusted data. The

best fit was with a lag length of 72 quarters (18 years) for

both adjusted and unadjusted data, and the degree of the

polynomial was sixth and fifth for adjusted and unadjusted

data respectively.

The mean lag was approximately a year and one half for

the adjusted data and two years for the unadjusted data.

There is a liquidity and first phase loanable-funds effect

which as expected is negative and only temporary. Also the

TABLE 10

United States Quarterly Regression Results for Ml

117

^

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Seasonall 1960-

Coeff.

. -330.55 20.79 39.5 58.56 79.25 102.05 127.42 155.65 186.86 221.07 258.17 297.95 340.10 384.25 429.97 476.75 524.09 571.42 618.17 663.76 707.61 749.16 787.85 823.16 854.59 881.69 904.04 921.29 933.13 939.29 939.59 933.90 922.15 904.34 880.53 850.87

y Adjusted 1980

t

-3.64 4.85 3.85 3.55 3.50 3.53 3.58 3.64 3.69 3.72 3.75 3.77 3.77 3.77 3.77 3.76 3.75 3.75 3.74 3.72 3.71 3.70 3.69 3.68 3.67 3.66 3.65 3.65 3.63 3.62 3.61 3.60 3.58 3.57 3.56 3.55

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1959-

Coeff.

- 79.11 3.79 3.94 5.86 9.36 14.24 20.31 27.40 35.35 44.00 53.20 62.81 72.69 82.72 92.79 102.78 112.59 122.13 131.30 140.04 148.26 155.90 162.91 169.22 174.79 179.58 183.57 186.71 189.00 190.41 190.57 189.31 187.18 184.19 180.34 180.34

Unadjusted 1980

t

-3.35 2.02 1.81 2.12 3.66 2.89 3.09 3.20 3.26 3.30 3.32 3.33 3.33 3.34 3.34 3.35 3.35 3.35 3.35 3.35 3.36 3.36 3.36 3.36 3.36 3.36 3.36 3.36 3.36 3.36

3.36 3.36 3.36 3.36 3.36 3.36

+

118

TABLE 10 (Continued) I

4.

j. T

1 a35 1 a36 1 a37 1 a38 1 a39 1 a40 1 a41 1 a42 1 a43 1 a44 1 a45 1 a46 1 a47 1 a48 1 a49 1 a50 1 a51 1 a52 1 a53 1 a54 1 a55 1 a56 1 a57 1 a58 1 a59 1 a60 1 a61 1 a62 1 a63 1 a64 1 a65 1 a66 1 a67 1 a68 1 a69 1 a70 1 a71 1 a72

1 Sum 0

Seasonally Adjusted 1960-1980

Coeff.

815.54 774.82 729.03 678.56 623.86 565.44 503.86 439,70 373,63 306.32 238.47 170.83 104.14 39.15

- 23.39 - 82.73 -138.15 -188.97 -234.55 -274.29 -307.67 -334.26 -353.69 -365.73 -370.27 -367.31 -357.04 -339.80 -316.12 -286.73 -252.60 -214.93 -175.17 -135.09 - 96.71 - 62.43 - 34.95 - 17.36

f Lag Coeff 1 Lag Length

t

3.53 3.51 3.49 3.47 3.44 3.41 3.36 3.30 3.22 3.11 2.92 2.62 2.06 1.0

-0.69 -2.25 -3.07 -3.42 -3.56 -3.63 -3.65 -3.66 -3.66 -3.65 -3.64 -3.62 -3.60 -3.58 -3.54 -3.50 -3.44 -3.36 -3.25 -3.11 -2.91 -2.67 -2.46 -2.53

s. 20522.0 72

Seasonally

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66 a67 a68 a69 a70 a71 a72

1959-

Coeff.

175.66 170.19 163.95 156.98 149.32 141.02 132.13 122,70 112.79 102.46 91.79 80.84 69.68 58.39 47.05 35.75 24.57 13.59 2.92

- 7.34 - 17.12 - 26.30 - 34.78 - 42.46 - 49.23 - 54.99 - 59.61 - 63.00 - 65.04 - 65.61 - 64.59 - 61.87 - 57.34 - 50.86 - 42.33 - 31.62 - 18.60 - 3.17

Unadjusted 1 1980 1

1

t 1 1

3.35 1 3.35 1 3.34 1 3.34 1 3.33 1 3.32 1 3.31 1 3.30 1 3.28 1 3.26 1 3.24 1 3.21 1 3.17 1 3.11 1 3.03 1 2.90 1 2.69 1 2.21 1 0.80 1 -2.53 1 -3.71 1 -3.75 1 -3.68 1 -3.62 1 -3.57 1 -3.52 1 -3.48 1 -3.45 1 -3.41 1 -3.37 1 -3.33 1 -3.28 1 -3.23 1 -3.16 1 -3.04 1 -2.87 1 -2.44 1 -0.76 1

5036.0 1 72 1

119

I TABLE 10 (Continued) I I ^

Mean lag 18.323 22.991 I Degree of Polynom. 6 5 I R^ 0.87 0.71 I Barten-R^ 0.81 0.59 I D-W 2.953 2.641 I RHOl -0.482 -0.446 I VNR 3.164 2.829 I SER 0.0763 0.1077 I

4 1

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the quarterlyl annualized rate of growth of the money stock.I

coefficients of lag 49 through lag 72 have negative signs

for the adjusted data, while coefficients of lag 54 through

72 also have negative signs. These negative coefficients

towards the end of the structure may be residuals from the

lag structure due to overshooting and undershooting. Brown

and Santoni (1983) aiso had end-of-structure negative coef-

ficients on their 1954-1970 estimation of the relationship

between changes in money growth and changes in interest

rates for U.S. monthly data. Of course without any restric-

tions placed on the coefficients, there is no particular

reason to expect them to be a smooth function of the lag.

The sum of the coefficients on monetary growth change

are again significantly different from zero and positive.

The sum of the coefficients is 20522.0 basis points and

5036.0 basis points for adjusted and unadjusted quarterly Ml

120

respectively. The iraplication here is that if the rate of

growth of adjusted quarterly Ml were to increase by 1 per-

cent and keep increasing at that rate, with all other things

held constant, then interest rates level would have risen by

205 percent after an 18 year period (72 quarters). This

means that interest rates will go up at an average rate of

11.34 percent every year or 3.80 percent every quarter.

Similarly if the increase is on unadjusted quarterly Ml,

then interest rates would have risen by 50.4 percent after

72 quarters, a 2.8 percent average annual rate or a 0.69

percent average quarterly rate.

The coefficients of determination for these estimations

were much higher than those for the monthly observations, 87

percent for the adjusted Ml and 71 percent for the seasonal-

ly unadjusted Ml. There was no evidence of any serial cor-

relation of the error terms as the Durbin Watson h statis-

tics, and the Von Neuman ratio were high.

Estimation Results cif Quarterly M2 Seasonally Adjusted 195Q-1980-Seasonally Unadjusted 1959-1980

Table 11 presents estimation results on quarterly M2.

The structures were stable for the entire time period,

1959-1980.

121

+

TABLE 11

United States Quarterly Regression Results for M2

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Seasonall 1959-

Coeff.

. -301.94 91.34

187.24 276.04 357.90 433.02 501.54 563.65 619.51 669.31 713.21 751.38 784.01 811.25 833.30 850.33 862.51 870.01 873.03 871.73 866.29 856.89 843.72 826.94 806.75 783.32 756.84 727.48 695.44 660.88 624.01 584.99 544.02 501.28 456.96 411.24

y Adjusted 1980

t

-3.73 4.73 4.18 4.00 3.91 3.86 3.82 3.80 3.78 3.77 3.76 3.75 3.75 3.74 3.74 3.73 3.73 3.73 3.73 3.72 3.72 3.72 3.72 3.72 3.72 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.70 3.70 3.70 3.69

S(

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Basonally 1959-

Coeff.

.-297.97 32.54 69.78

113.10 159.18 205.35 249.48 289.96 325.58 355.54 379.37 396.87 408.07 413.21 412.69 407.03 396.83 382.78 365.58 345.97 324.69 302.44 279.90 257.69 236.39 216.51 198.46 182.61 169.24 158.55 150.64 145.55 143.26 143.64 146.54 151.70

Unadjusted -1980

t

-3.23 4.78 4.93 4.71 4.50 4.32 4.16 4.03 3.92 3.83 3.75 3.68 3.62 3.57 3.52 3.48 3.44 3.41 3.38 3.35 3.32 3.30 3.27 3.25 3.24 3.23 3.23 3.23 3.25 3.27 3.31 3.35 3.40 3.44 3.48 3.50

+

122

I TABLE 11 (Con t inued ) I ^ +

1

t

1 t 1 a35 1 a36 1 a37 1 a38 1 a39 1 a40 1 a41 1 a42 1 a43 1 a44 1 a45 1 a46 1 a47 1 a48 1 a49 1 a50 1 a51 1 a52 1 a53 1 a54 1 a55 1 a56 1 a57 1 a58 1 a59 1 a60 1 a61 1 a62 1 a63 1 a64 1 a65 1 a66 1 a67 1 a68 1 a69 1 a70 1 a71 1 a72 1 a73 1 a74 1 a75

Seasonally Adjusted 1959-1980

Coeff.

364.32 316.37 267.58 218.16 168.27 118.12 67.89 17.78

- 32.03 - 81.34 -129.96 -177.69 -221.36 -269.75 -313.67 -355.94 -396.36 -434.72 -470.84 -504.51 -535.54 -563.73 -588.88 -610.79 -629.26 -644.10 -655.10 -662.02 -664.77 -663.04 -656.66 -645.43 -629.15 -607.60 -580.60 -547.92 -509.36 -464.72 -413.79 -356.37 -292.23

1 4->

3.69 3.68 3.67 3.65 3.61 3.53 3.27 1.77

-2.79 -3.59 -3.70 -3.73 -3.74 -3.74 -3.75 -3.75 -3.75 -3.75 -3.75 -3.74 -3.74 -3.74 -3.74 -3.74 -3.74 -3.74 -3.74 -3.74 -3.74 -3.73 -3.73 -3.73 -3.73 -3.72 -3.72 -3.71 -3.70 -3.69 -3.68 -3.65 -3.62

Seasonally

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66 a67 a68 a69 a70 a71 a72

1959-

Coeff.

158.85 167.66 177.76 188.75 200.21 211.72 222.86 233,21 242.35 249.93 255.59 259.05 260.05 258.41 253.98 246.73 236.64 223.81 208.40 190.63 170.81 149.33 126.60 103.15 79.50 56.24 33.97 13.32

- 5.12 - 20.77 - 33.13 - 41.74 - 46.29 - 46.60 - 42.65 - 34.67 - 23.12 - 8.80

Unadjusted -1980

t

3.50 3.48 3.46 3.42 3.38 3.33 3.28 3.23 3.17 3.12 3.06 3.00 2.94 2.87 2.79 2.71 2.62 2.52 2.41 2.29 2.15 1.99 1.81 1.60 1.36 1.08 0.74 0.34 -0.16 -0.78 -1.57 -2.56 -3.60 -4.28 -4.26 -3.75 -2.98 -1.44

123

f TABLE 11 (Continued)

4 Seasonally Adjusted

1959-1980 Seasonally Unadjusted

1959-1980

Coeff. Coeff.

+ •

a76 -221.18 a77 -143.01 a78 - 57.50

Sum of Lag Coeffs. Lag Length Mean lag Degree of Polynom.

^ 9 Barten-R"^ D-W RHOl VNR SER

-3.55 -3.40 -2.77

8671.6 78 10.01 4 0.90 0.84 3.133

-0.647 3.547 0.101

13793.00 72 26.410 7 0.91 0.86 3.153 -0.572 3.357 0.068

4

Note: Units of the coefficients are in basis points per 1 percentage point change in the quarterly annualized rate of growth of the money stock.

The lag lengths for the regressions were 78 quarters

for adjusted data and 72 quarters for unadjusted data, while

it was a fourth-degree polynomial and a seventh-degree poly-

nomial for adjusted and unadjusted quarterly Ml respective-

ly. The mean lags were 10.0 quarters and 26.4 quarters for

adjusted and unadjusted time series respectively.

There is also a contemporaneous liquidity and first

phase loanable-funds negative effect, which also persisted

124

for only a very short time (one quarter). Also there were

negative coefficients towards the end of each lag structure.

However, more important was the fact that the sum of

the coefficients on money growth change are positive.

(8671.6 basis points or 86 percent rise for adjusted data

and 13793.0 basis points or 137.9 percent rise for unadjust-

ed data). Also the coefficients of determination were high

and there was no evidence of autocorrelation.

Estimation Results of Quarterly M3 and L

Findings for quarterly M3 and L are presented in tables

12 and 13, respectively. The stable period of the structur-

al relation is the entire time period, 1959-1980. The best

fit for M3 and L was with a polynomial of the eighth degree

and a lag length of 66 quarters for adjusted data. For

unadjusted data it was a tenth-degree polynomial with a lag

length of 54 quarters. The mean lag was 6.81 for adjusted

M3, 29.43 for unadjusted M3, 45.34 for adjusted L, and 2.82

for unadjusted L.

1 Uni

4. T

J. t

1 Const 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 ! al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30 1 a31 1 a32 1 a33 1 a34

ted States

Seasonall 1959-

Coeff.

. -169.45 48.83 101.35 144.20 180.05 210.79 237.64 261.35 282.30 300.61 316.21 328.94 338.60 345.00 347.98 347.46 343.41 335.93 325.18 311.41 294.97 276.26 255.73 233.89 211.25 188.34 165.65 143.67 122.83 103.50 86.00 70.54 57.28 46.27 37.48 30.79

TABLE 12

Quarterly

y Adjusted 1980

t

-5.23 6.24 6.86 6.46 6.22 6.07 5.95 5.85 5.76 5.67 5.57 5.49 5.40 5.32 5.25 5.18 5.11 5.05 5.00 4.95 4.91 4.88 4.85 4.83 4.82 4.81 4.82 4.83 4.85 4.85 4.78 4.57 4.12 3.44 2.68 2.02

Regression Result

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1959-

Coeff.

- 7.181 2.401 1.157 1.174 1.683 2.264 2.726 3.024 3.188 3.286 3.387 3.548 3.804 4.163 4.612 5.119 5.639 6.124 6.527 6.809 6.943 6.915 6.729 6.406 5.981 5.503 5.027 4.617 4.335 4.240 4.382 4.800 5.512 6.524 7.815 9.346

s for M3

Unadjusted •1980

t

-2.07 2.13 1.10 0.93 1.10 1.26 2.02 1.38 1.36 1.32 1.30 1.30 1.35 1.45 1.57 1.71 1.86 1.98 2.09 2.17 2.22 2.25 2.25 2.24 2.22 2.18 2.13 2.10 2.08 2.09 2.12 2.17 2.23 2.26 2.28 2.28

I TABLE 12 (Continued)

I ^

-F

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66

Seasonally Adjusted 1959-1980

Coeff.

26.01 22.86 21.00 20.07 19.64 19.29 18.58 17.11 14.52 10.51 4.84

- 2.60 - 11,82 - 22.71 - 35.03 - 48,40 - 62.30 - 76.11 - 89.10 -100.45 -109.35 -114.97 -116.60 -113.67 -105.89 - 93.37 - 76.71 - 57.21 - 37.03 - 19.40 - 8.86 - 11.50

t

1.54 1.22 1.01 0.88 0.78 0.70 0.62 0.52 0.41 0.27 0.12 -0.06 -0.25 -0.44 -0.64 -0.84 -1.04 -1.22 -1.40 -1.57 -1.72 -1.87 -2.00 -2.11 -2.21 -2.28 -2.30 -2.23 -1.98 -1.48 -1.00 -1.44

S

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54

easonally 1959-

Coeff.

11.055 12.861 14.664 16.351 17.800 18.885 19.480 19.474 18.771 17.305 15.049 12.028 8.333 4.138

- 0.283 - 4.527 - 8.035 -10.057 - 9.605 - 5.401

Unadjusted -1980

t

2.26 2.33 2.20 2.15 2.10 2.05 1.99 1.92 1.83 1.72 1.57 1.36 1.05 0.59

-0.04 -0.83 -1.58 -2.05 -2.08 -1.35

Sum of Lag Coeffs. 6313.1 333.99 Lag Length 66 54 Mean lag 6,805 29.429 Degree of Polynom. 8 10 R2 0.89 0.60 Barten-R^ 0.84 0.47 D-W 2.507 2.334

12^

I TABLE 12 (Continued) I I ^

RHOl -0.258 -0.174 I VNR 2.632 2.407 I SER 0.0647 0.1106 I

^

Note: Units of the coefficients are in basis points per 1 percentage point change in the quarterly annualized rate of growth of the money stock.

There was again an initial temporary negative effect

and some negative coefficients at the end of the structure.

However, for adjusted L there were some negative coeffi-

cients in the middle of the structure. But the sum of the

coefficients on the money growth rate was significantly po-

sitive in every instant, 6313.1 basis points for adjusted

M3, (a 3.78 percent average annual rise) 333.39 basis points

for unadjusted M3 (a 2.47 percent average annual rise),

5198.1 basis points for adjusted L (3.15 percent average an-

nual rise), and 173.26 basis points for unadjusted L (a 0.13

percent average annual rise). Also there was no evidence o:

any serial correlation of the error terms and the coeffi-

cients of determination were moderate.

Í Un]

T

1 T

1 t 1 Const 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30 1 a31 1 a32 1 a33 1 a34

Lted States

Seasonally

TABLE 13

Quarterly

Adjusted 1959-1980

Coeff.

. -95.517 70.066 114.170 134.690 137.830 128.670 111.27 88.832 63.858 38.237 13.364

- 9.773 -30.514 -48.458 -63.403 -75.296 -84.195 -90.228 -93.573 -94.430 -93.008 -89.510 -84.127 -77.035 -68.387 -58.318 -46.947 -34.378 -20.707 - 6.023 9.581 26.007 43.149 60.882 79.066 97.538

t

-3.56 3.77 3.96 3.78 3.56 3.27 2.89 2.41 1.82 1.34 0.41

-0.31 -0.98 -1.58 -2.10 -2.55 -2.93 -3.26 -3.52 -3.74 -3.90 -4.02 -4.08 -4.08 -4.02 -3.87 -3.61 -3.13 -2.28 -0.78 1.27 2.94 3.79 4.15 4.30 4.35

Regression Results for L

Seasonally

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1959-

Coeff.

.- 4.394 3.056 2.464 3.186 4.423 5.718 6.818 7.653 8.216 8.553 8.724 8.784 8.779 8.732 8.653 8.536 8.366 8.123 7.790 7.354 9.81 6.172 5.457 4.670 3.941 3.236 2.639 2.205 1.98 2.020 2.338 2.951 3.850 5.00 6.354 7.829

Unadjusted -1980

t

-2.36 2.49 2.01 2.07 2.34 2.55 2.71 2.82 2.86 2.90 2.91 2.91 2.92 2.95 3.00 3.06 3.12 3.19 3.27 3.34 3.42 3.50 3.57 3.61 3.60 3.53 3.39 3.24 3.15 3.10 3.04 2.96 2.90 2.85 2.-79 2.71

129

I TABLE 13 (Continued)

t •"

T

1 a35 1 a36 1 a37 1 a38 1 a39 1 a40 1 a41 1 a42 1 a43 1 a44 1 a45 1 a46 1 a47 1 a48 1 a49 1 a50 1 a51 1 a52 1 a53 1 a54 1 a55 1 a56 1 a57 1 a58 1 a59 1 a60 1 a61 1 a62 1 a63 1 a64 1 a65 1 a66

Seasonally Adjusted 1959-1980

Coeff.

116.110 134,590 152.73 170,290 187.010 202,62 216,83 229.37 239.97 248.38 254.38 257.77 258.43 256.26 251,24 243.41 232,89 219,870 204,640 187,540 169,000 149,49 129,560 109.750 90.360 72.717 56.463 42.195 30.056 19,943 11.417 3.619

1 Sum of Lag Coeffs, 1 Lag Length 1 Mean lag 1 Degree of Polynom.

R^ o 1 Barten-R^ 1 D-W

t

4.37 4.36 4.35 4.33 4.31 4.29 4.27 4.26 4.24 4.22 4.21 4.19 4.18 4,16 4.15 4,13 4,11 4,09 4,07 4.05 4.02 3.98 3.94 3.89 3.84 3.77 3.71 3.65 3.61 3.59 3.56 2.92

5198.1 66 45.386 8 0.75 0.64 2.300

Seasonally Unadjusted

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54

1959-

Coeff.

9. 10. 11. 12. 13. 13. 12. 10, 8. 4. 1

- 3 - 7 -12 -16 -20 -21 -21 -19 -12

331 747 952 817 212 .022 .149 .527 .129 .979 .161 .176 .807 .428 .654 .019 .979 .922 .174 .017

-1980

t

2.62 2.50 2.36 2.20 2.03 1.83 1.60 1,33 1.02 0.63 0.15 -0.43 -1.11 -1.86 -2.56 -3.11 -3.41 -3.47 -3.42 -2.55

173.26 54 2 .819 10 0.59 0.45 2.273

-F

130

TABLE 13 (Continued) I 1

RHOl -0.151 -0.156 I VNR 2.415 2.344 I SER 0.098 0.112 I

+ 1 I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the quarterlyl annualized rate of growth of the money stock.I

United Kingdom

Monthly Observations

Our results for U.K monthly estimation results are pre-

sented in tables 14-16 (pp. 131-139). The results are simi-

lar to those obtained with United States data, specifically

the sums of the coefficients on the money growth were sig-

nificantly different from zero and positive for all the mon-

etary aggregates. Again, the coefficients of determination

were low; less than 10 percent for seasonally adjusted ster-

ling M2.

Estimation Results for Ml 9/1971-12/1980

Table 14 presents results for Ml. The estimations on

both adjusted and unadjusted Ml were from September

1971-December 1980, as this was the period for which these

time series data were available and it was also a period of

a stable structure.

131

+

TABLE 14

United Kingdom Monthly Regression Results for Ml

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Seasonally 9/1971-

Coeff.

. -0.442 0.382 0.420 0.456 0.491 0.524 0.555 0.585 0.614 0.641 0.667 0.691 0.714 0.735 0.755 0.773 0.790 0.806 0.820 0.832 0.843 0.852 0.861 0.867 0.872 0.876 0.878 0.879 0.877 0.876 0.872 0.867 0.860 0.852 0.842 0.831

Adjusted 12/1980

t

-3.52 1.39 1.59 1.80 2.01 2.22 2.41 2.59 2.77 2.92 3.06 3.17 3.27 3.35 3.40 3.44 3.48 3.50 3.51 3.51 3.51 3.50 3.49 3.47 3.46 3.44 3.42 3.40 3.38 3.36 3.34 3.32 3.30 3.28 3.27 3.25

Seasonally Unadjusted

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

9/1971-

Coeff.

-0.467 0.316 0.358 0.399 0.438 0.476 0.512 0.547 0.580 0.611 0.641 0.669 0.695 0.720 0.743 0.765 0.785 0.803 0.820 0.835 0.849 0.860 0.871 0.880 0.887 0.893 0.897 0.899 0.900 0.899 0.897 0.893 0.886 0.879 0.871 0.860

-12/1980

t

-3.34 1.08 1.28 1.50 1.71 1.93 2.15 2.35 2.55 2.73 2.88 3.02 3.14 3.24 3.31 3.37 3.42 3.45 3.47 3.48 3.48 3.47 3.47 3.46 3.45 3.43 3.42 3.40 3.38 3.36 3.34 3.33 3.31 3.28 3.27 3.26

+

^

132

+ • TABLE 14 (Continued)

• +

-F-

Seasonally Adjusted Seasonally Unadjusted 9/1971-12/1980 9/1971-12/1980

Coeff. t Coeff. t I ^

a35 0.818 3.23 a35 0.848 3.24 a36 0.804 3.21 a36 0.835 3.22 a37 0.789 3.20 a37 0.819 3.21 a38 0.772 3.18 a38 0.802 3.19 a39 0.753 3.17 a39 0.784 3.18 a40 0.733 3.16 a40 0.764 3.17 a41 0.712 3.14 a41 0.742 3.16 a42 0.689 3.13 a42 0.719 3.14 a43 0.664 3.12 a43 0.694 3.13 a44 0.639 3.10 a44 0.667 3.12 a45 0.611 3.10 a45 0.639 3.11 a46 0.582 3.09 a46 0.609 3.10 a47 0.552 3.08 a47 0.578 3.10 a48 0.520 3.08 a48 0.545 3.09 a49 0.487 3.07 a49 0.511 3.09 a50 0.452 3.07 a50 0.474 3.08 a51 0.416 3.07 a51 0.437 3.08 a52 0.379 3.07 a52 0.397 3.09 a53 0.339 3.07 a53 0.356 3.09 a54 0.299 3.08 a54 0.314 3.10 a55 0.257 3.10 a55 0.270 3.12 a56 0.213 3.13 a56 0.224 3.15 a57 0.168 3.17 a57 0.176 3.20 a58 0.122 3.26 a58 0.127 3.28 a59 0.074 3.38 a59 0.077 3.42 a60 0.024 3.36 a60 0.025 2.40

Sum of Lag Coeffs. 38.927 39.269 Lag Length 60 60 Mean lag 27.100 27.662 Degree of Polynom. 2 2 R2 0.25 0.24 Barten-R^ 0.20 0.20 D-W 1.947 1.891 RHOl 0.026 0.050 VNR 1.986 1.931 SER 0.0912 0.0913

Note: Units of the coefficients are in basis points per 1 percentage point change in the monthly annualized rate of growth of the money stock.

r

133

The results obtained here followed a really textbook

pattern, a contemporaneous and temporary negative liquidity

and first phase loanable-funds effect, followed by positive

coefficients all the way to the end of the structure. All

but 3 of the coefficients of the adjusted data were signifi-

cant as were all but 4 coefficients for the unadjusted data.

However, the coefficients of determination were not high,

but there was no evidence of any serial correlation of the

error terms,

The lag length was 60 months with a polynomial of sec-

ond degree for the adjusted data, while the lag length was

also 60 months with a polynomial of second degree for the

unadjusted data. The mean lag for both series were approxi-

mately 27 months. The sum of the coefficients on Ml growth

rate were both positive, 38.93 basis points for adjusted

data (0.08 percent average rise annually), and 39.37 basis

points for unadjusted data (also 0.08 percent average rise

annually in interest rates if money growth rate is increas-

ing at one percentage point monthly).

Estimation Results for M2

Table 15 presents the regression results for M2. The

estimation was over the period January 1972 - December 1980

for adjusted data and September 1971 - December 1980 for

unadjusted data. The lag length was 9 months with a polyno-

134

+

TABLE 15

\

United Kingdom Monthly Regression Results for M2

Const aO al a2 a3 a4 a5 a6 a7 a8 a9

Seasonally Adjusted 1/1972-12/1980

Coeff.

. -0.048 1.338 0.974 0.677 0.450 0.291 0.201 0.179 0.226 0.342 0.526

t

-2.09 1,86 2.23 2.18 1.36 0.78 0.54 0.53 0.71 0.78 0.74

S(

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

Basonally 9/1971-

Coeff.

. -0.021 0.962 0.823 0.693 0.572 0.460 0.356 0.261 0.174 0.097 0.028

-0.032 -0.083 -0.126 -0.160 -0.185 -0.202 -0.209 -0.208 -0.198 -0.180 -0.153 -0.118 -0.073 -0.020 0.042

Unadjusted -12/1980

t

-0.82 2.45 2.44 2.42 2.36 2.25 2.06 1.73 1.28 0.74 0.21

-0.23 -0.58 -0.84 -1.03 -1.18 -1.28 -1.36 -1.41 -1.44 -1.45 -1.44 -1.37 -1.20 -0.60 4.68

Sum of Lag Coeffs. Lag Length Mean lag Degree of Polynom,

^ 9 Barten-R^ D-W RHOl

5.204 9 3.06 2 0.08 0.06 1.732 0.131

2 24 1 2 0 0 1 0

5224

51

28 26 626 183

+

-F

135

I TABLE 15 (Continued) I + ^ I VNR 1.750 1.644 I SER 0,0946 0.0843

\-

Note: Units of the coefficients are in basis points per 1 percentage point change in the monthly annualized rate of growth of the money stock.

mial of second degree for adjusted data and a lag length of

24 months with also a second-degree polynomial for the unad-

justed data. The mean lag was 3 months for the adjusted

data and only 1.5 months for the unadjusted. The coeffi-

cients of determination were low in each case; however,

there was no indication of autocorrelation.

There was a contemporaneous negative effect, signifi-

cant for the adjusted M2 but insignificant for the unadjust-

ed. The coefficients of the adjusted data structure fol-

lowed a textbook pattern. But there were some negative

residual coefficients at the end of the structure for the

unadjusted data, nevertheless, none of these coefficients

was significant. More important, however, was the fact that

136

the coefficients were significantly positive for both

adjusted and unadjusted M2, 5.20 basis points and 2.52 basis

points, respectively.

Estimation Results for M3 6/1971-12/1980

Table 16 presents results for M3. The estimation peri-

od is June 1971 - December 1980 for both adjusted and unad-

justed M3. The best fit for adjusted M3 was with a lag

length of 78 months and a second-degree polynomial, whereas

for the unadjusted data, it was a lag length of 10 months

with a sixth-degree polynomial. The mean lag was 28 months

for the adjusted data and less than 1 month for the unad-

justed, Even though there was no evidence of autocorrela-

tion of the error terms, the coefficients of determination

were low.

There was a temporary negative effect and significant

for the adjusted data. There were negative coefficients in

the middle of the structure for both series; however, none

of the coefficients was significant. The sum of the total

effects were positive, 28.79 basis points and 1.99 basis

points for adjusted and unadjusted M3, respectively.

137

TABLE 16

United Kingdom Monthly Regression Results for M3

+ +

+

Seasonally Adjusted 6/1971-12/1980

Seasonally Unadjusted 6/1971-12/1980

+ Coeff. Coeff.

Const, aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

-0.352 1.728 1,638 1,550 1,464 1,381 1,300 1,220 1.143 1.068 0.995 0.925 0.856 0.790 0.725 0.663 0.603 0.546 0.490 0.436 0.385 0.336 0.289 0.244 0.201 0.160 0.122 0.085 0.051 0.019

-0.011 -0.038 -0.064 -0.088 -0.109 -0.128

1,80 2,31 2.28 2.26 2.23 2.19 2.16 2.12 2.07 2.02 1.95 1.91 1.84 1.77 1.69 1.60 1.51 1.41 1.31 1.20 1.09 0.97 0.85 0.73 0.61 0.49 0.38 0.27 0.16 0.06 0.04 •0.12 -0.21 -0.28 -0.35 -0.42

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO

-0.013 0.393 0.515 0.445 0.074 -0.178 0.0222 0.598 1.057 0.773 -0.412 -1.298

-0.59 1.81 2.04 1.57 0.27 -0,57 0,06 1.51 2.29 1.77

-0.67 -1.79

38

TABLE 16 (Continued) + -

I

1 a35 1 a36 1 a37 1 a38 1 a39 1 a40 1 a41 1 a42 1 a43 1 a44 1 a45 1 a46 1 a47 1 a48 1 a49 1 a50 1 a51 1 a52 1 a53 1 a54 1 a55 1 a56 1 a57 1 a58 1 a59 1 a60 1 a61 1 a62 1 a63 1 a64 1 a65 1 a66 1 a67 1 a68 1 a69 1 a70 1 a71 1 a72 1 a73 1 a74 1 a75 1 a76

Seasonally Adiusted 6/1971-12/1980

Coeff.

-0,146 -0,160 -0,173 -0.184 -0.193 -0,199 -0,203 -0.205 -0.205 -0.203 -0.199 -0.192 -0.184 -0,173 -0,160 -0,145 -0.128 -0.109 -0.087 -0.063 -0.038 -0.010 0.202 0.052 0.087 0.123 0.162 0.202 0,245 0,290 0.338 0.387 0.438 0.492 8.548 0,606 0.666 0.728 0.792 0.859 0.927 0.998

t

-0.48 -0.53 -0.57 -0.61 -0.64 -0.67 -0.69 -0.70 -0.71 -0.72 -0.72 -0.71 -0.69 -0.66 -0.63 -0.59 -0.54 -0.47 -0.39 -0.30 -0.19 -0.05 0.11 0.30 0.54 0.81 1.12 1.49 1.90 2.31 2.71 3.05 3.31 3.48 3.57 3.60 3.58 3.55 3.50 3.44 3.39 3.33

Seasonally Unadjusted 6/1971-12/1980

Coeff. t \

+

139

I TABLE 16 (Continued) I ^ ^

a77 1,071 3,28 I a78 1.146 3.24 I

+ ^ I

Sum of Lag Coeffs. 28.793 1.990 I Lag Length 78 10 I Mean lag 28.36 0.76 I Degree of Polyno 2 6 I R^ 0.30 0.12 I Barten-R^ 0.24 0.07 I D-W 1.658 1.830 I RHOl 0.152 0.085 I VNR 1.705 1.848 I SER 0.06 0.09 I

I 1 I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the monthly I annualized rate of growth of the money stock.|

Quarterly Observations

The United Kingdom estimation results for quarterly ob-

servations are presented in tables 17-19 (pp. 140-146).

Also as in the case of the United States, the results are

virtually identical to the monthly results and again with

the coefficients of determination for the quarterly results

also being significantly higher.

Estimation Results for Quarterly Ml

For quarterly observations, the time span of availabil-

ity of data is much longer. Thus the estimation period for

140

1 Uni^

T

1 Const 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30 1 a31 1 a33 1 a32 1 a34

ted Kingdom

Seasonally

TABLE 17

Quarterly

Adjusted I/1969-IV/1980

Coeff.

. -5.308 3.034 3.305 3.560 3.800 4.020 4.226 4.415 4.588 4.744 4.885 5.009 5.117 5.208 5.283 5.342 5.384 5.410 5.420 5.413 5.390 5.351 5.295 5.223 5.135 5.030 4.909 4.772 4.618 4.448 4.262 4.059 3.840 3.353 3.640 3.085

t

-2.06 5.17 5.03 4.24 3.56 3.09 2.76 2.52 2.34 2.21 2.10 2.01 1.94 1.89 1.84 1.80 1.77 1.74 1.72 1.71 1.70 1.69 1.68 1.69 1.69 1.70 1.71 1.73 1.76 1.79 1.84 1.90 1.97 2.21 2.07 2.40

Regression Resu.

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a33 a32 a34

1/1969-

Coeff.

-6.352 2.465 2.961 3.430 3.869 4.280 4.662 5.016 5.341 5.638 5.906 6.146 6.357 6.540 6.694 6.819 6.916 6.985 7.025 7.036 7.019 6.973 6.899 6.796 6.665 6.505 6.317 6.100 5.855 5.581 5.278 4.947 4.588 3.783 4.199 3.338

Lts for Ml

Unadjusted -IV/1980

t

-5.48 8.26 8.23 7.56 7.28 6.89 6.58 6.33 6.14 5.98 5.85 5.74 5.64 5.56 5.49 5.43 5.38 5.33 5.29 5.26 5.22 5.19 5.17 5.15 5.13 5.11 5.09 5.08 5.06 5.05 5.04 5.03 5.02 4.99 5.01 4.95

\

141

|_ TABLE 17 (Continued)

Seasonally Adjusted Seasonally Unadiusted I/1969-IV/1980 I/1969-IV/1980 I ^ Coeff. t Coeff. t I ^

a35 2.801 2.66 a35 2.864 4.88 a36 2.500 3.01 a36 2.362 4.75 a37 2.183 3.35 a37 1.831 4.45 a38 1,850 3.11 a38 1.272 3.77 a39 1.500 2.11 a39 0.684 2.34 a40 1.133 1.18 a40 0.067 0.23

^ ^

\

Sum of Lag Lag Length Mean lag

Coeffs.

Degree of Polynom.

^ 2 Barten-R^ D-W RHOl VNR SER

172.50 40 18.419 2 0.92 0.83 2.356

-0.276 2.749 0.033

204.00 40 18.314 2 0.97 0.94 3.115

-0.780 3.634 0.021

+ ^ Note: Units of the coefficients are in basis points

per 1 percentage point change in the quarterly annualized rate of growth of the money stock.

quarterly Ml is from I/1969-IV/1980 for both adjusted and

unadjusted time series. The best fit for both was with a

lag length of 40 quarters, and a second-degree polynomial.

The mean lags were approximately 18.4 quarters for both.

There was no evidence of any serial correlation of the error

terms.

142

Coefficients of both time series followed the

hypothetical pattern; specifically negative and temporary

effects, followed by positive effects which eventually out-

weigh the negative effects. The contemporaneous negative

effect was significant in both cases. The sum of the coef-

ficients on Ml growth rate were significantly positive,

172.50 basis points for adjusted Ml and 204.00 basis points

for unadjusted Ml,

Estimation Results for Quarterly M2 I/1972-IV/1980

The period of a stable structure was from

I/1972-IV/1980. The results were virtually identical to

those of Ml, a temporary negative effect followed by posi-

tive effects except for the last lag, the 30th lag, which

had a negative coefficient in both cases but were insignifi-

cant. The lags length were 30 quarters, with a second-de-

gree polynomial in both time series. The mean lags were re-

spectively 15.55 quarters and 14.93 quarters. Also there

was no evidence of autocorrelation. The sum of the lag ef-

fects were positive; 100.19 basis points for adjusted M2 and

123.08 basis points for unadjusted M2. The regression

results are presented in Table 18.

143

1 United Kingdom

t 1 s

t

1 Const. 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30

1 Sum of

easonally

TABLE 18

Quarterly

Adjusted I/1972-IV/1980

Coeff.

-2.638 -0.681 0.057 0.746 1.385 1.975 2.516 3.007 3.449 3.841 4.184 4.478 4.723 4.918 5.063 5.160 5.207 5.204 5.152 5.051 4.901 4.701 4.452 4.153 3.805 3.408 2.961 2.465 1.920 1.325 0.681

-0.012

Lag Coeff 1 Lag Length

t

-1.50 -0.52 0.04 0.43 0.72 0.94 1.11 1.24 1.35 1.45 1.52 1.59 1.65 1.70 1.74 1.78 1.82 1.85 1.88 1.90 1.93 1.95 1.97 1.99 2.00 2.02 2.04 2.05 2.06 2.07 2.09

-1.75

s. 100.19 30

Regression Results for M2 1

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30

1/1972-

Coeff.

-3.262 0.095 0.878 1.606 2.280 2.900 3.465 3.976 4.333 4.836 5.185 5.479 5.720 5.905 6.038 6.115 6.139 6.108 6.023 5.884 5.690 5.443 5.141 4.785 4.375 3.910 3.392 2.819 2.192 1.152 0.775 -0.014

1

Unadjusted 1 -IV/198Û 1

4-t 1

-2.93 1 0.13 1 1.03 1 1.63 1 2.03 1 2.31 1 2.52 1 2.67 1 2.79 1 2.88 1 2.95 1 3.02 1 3.07 1 3.11 1 3.15 1 3.19 1 3.21 1 3.24 1 3.26 1 3.28 1 3.30 1 3.32 1 3.33 1 3.35 1 3.36 1 3.37 1 3.38 1 3.39 1 3.41 1 3.42 1 3.44 1

-0.01 1

123.08 1 30 1

144

TABLE 18 (Continued)

I 1 14.926 2 0.93 0.88 3.123 -0.585 3.748 0.0379

I +

Note: Units of the coefficients are in basis points per 1 percentage point change in the quarterly annualized rate of growth of the money stock.

Mean lag Degree of R2 Barten-R^ D-W RHOl VNR SER

Polynom. 15.552 2 0.96 0.93 3.249 -0.743 3.899 0.0291

Estimation Results of Quarterly M3 I/1969-IV/1980

The estimation was done over I/1969-IV/1980. The re-

gressions were done using an eighth-degree polynomial for

both adjusted and unadjusted data, with lag lengths of 36

and 30 quarters, respectively. The mean lags were 8 quar-

ters for both time series. There was no indication of auto-

correlation.

There was a contemporaneous negative effect in each

case and the coefficients from the adjusted data had a very

smooth function. The cumulative sum of the lagged

coefficients on M3 growth rate were both positive, 2891.1

basis points and 192.92 basis points for adjusted and

unadjusted M3, respectively. These estimations are

presented in Table 19.

145

1 Uni

1 T

1 t

1 t 1 Const 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30 1 a31 1 a32 1 a33 1 a34

ted Kingdom

Seasonally

TABLE 19

Quarterly

Adiusted I/1969-IV/1980

Coeff.

. -27.789 5.531

13.123 20.790 28.444 36.027 43.497 50.820 57.969 64.916 71.636 78.100 84.283 90.156 95.693 100.860 105.640 109.990 113.870 117.250 120.070 122.260 123.750 124.440 124.220 122.970 120.540 116.790 111.570 104.750 96.229 85.996 74.008 60.526 45.868 30.615

t

-6.39 8.23 7,25 6,98 6,87 6.81 6.78 6.76 6.74 6.72 6.70 6.68 6.64 6.61 6.57 6.54 6.52 6.52 6.53 6.56 6.62 6.71 6.81 6.81 7.06 7.17 7.25 7.28 7.25 7.16 7.01 6.80 6.52 6.09 5.40 4.35

Regression Resu

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30

1/1969-

Coeff.

-4.074 6.574 9.027 7.030 4.432 2.922 2.870 3.913 5.438 6.813 7.577 7.500 6.59 5.058 3.230 1.482 0.165 -0.470 -0.308 0.607 2.084 3.812 5.427 6.566 6.960 6.489 5.236 3.492 1.697 0.302

-0.488 -1.106

Lts for M3

Unadjusted -IV/1980

t

-1.66 4.69 3.47 1.39 0.59 0.33 0.32 0.52 1.00 2.00 2.48 1.72 1.16 0.79 0.51 0.26 0.04 -0.14 -0.15 0.56 2.48 4.33 4.98 3.41 2.10 1.31 0.81 0.47 0.22 0.04 -0.09 -0.41

\

146

+ -TABLE 19 (Continued)

4 Seasonally Adjusted

I/1969-IV/1980 Seasonally Unadjusted

I/1969-IV/1980

Coeff. Coeff.

\-

a35 a36

15.653 2.252

2.95 0.84

4

-í-

Sum of Lag Coeffs. 2891.100 Lag Length 36 Mean lag 8 Degree of Polynom, 8 R2 0.99 Barten-R^ 0.99 D-W 3.644 RHOl -0.842 VNR 4,008 SER 0,012

120.92 30 8 8 0.88 0.82 2.885 -0.461 3.065 0.090

Note: Units of the coefficients are in basis points per 1 percentage point change in the quarterly annualized rate of growth of the money stock.

4

West Germany

Monthly Observations

Tables 20-22 (pp. 148-157) present monthly estimation

results for West Germany. However, though some of the coef-

ficients of determination were comparatively higher than for

the United States and United Kingdom, the results obtained

were mixed. The sum of coefficients on monetary growth rate

were positive for Ml; both seasonally and seasonally

unadjusted, negative for seasonally adjusted M2 but positive

147

for seasonally unadjusted M2 and negative for both

seasonally and seasonally unadjusted M3. Also there was

some abnormal behavior on models with negative sum of coef-

ficients on monetary growth rate, specifically the constant

terms were positive, an indication of no contemporaneous li-

quidity nor first phase financial effect. But when the li-

quidity and the first phase financial effects started, they

persisted for a considerable long time.

Estimation Results for Ml Season-ally Adjusted 1969-1980 ^ Season-ally Unadjusted 1960-1980

Table 20 presents estimation results for Ml. Estima-

tions for the seasonally adjusted Ml were done over the

period 1969-1980 because this was a period for which data

were available and also there was no break in the structural

relationship. For the seasonally unadjusted Ml, estimations

were done over the period 1960-1980. The lags length were

72 and 24 months for adjusted and unadjusted Ml respective-

ly. The mean lags were 34.5 and 18.9 months respectively.

The results in both cases were consistent with a

contemporaneous liquidity and first phase loanable-funds

effects. The coefficient of the contemporaneous change in

the growth rate of the money stock was negative and

significant for both adjusted and unadjusted data (-0.864

148

+

TABLE 20

West Germany Monthly Regression Results for Ml

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Seasonall 1969-

Coeff.

. -0.864 0.920 0.865 0.835 0.825 0.833 0.856 0.893 0.941 0.998 1.062 1.131 1.204 1.280 1.357 1.434 1.510 1.584 1.655 1.723 1.787 1.847 1,902 1,952 1.996 2.035 2.069 2.098 2.120 2.137 2.149 2.156 2.159 2,157 2.151 2,141

y Adjusted 1980

t

-3,09 1,03 1,16 1.33 1.55 1,81 2.10 2.39 2.66 2.89 3.08 3.23 3.35 3.44 3.50 3.53 3.55 3.53 3.53 3,51 3.48 3.45 3.41 3.38 3.35 3.32 3.29 3.26 3.24 3.22 3.20 3.18 3.17 3.16 3.15 3.15

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

1960-

Coeff.

-0.035 -0.830 0.054 0.018 -0.195 -0.290 -0.217 -0.376 0.166 0.330 0.426 0.461 0.461 0.458 0.475 0.515 0.564 0.591 0.566 0.474 0.326 0.174 0.098 0.177 0.425 0.676

Unadjusted 1980

t

-1.69 -2.23 0.18 0.07

-0.74 -1.16 -0.96 -0.17 0.76 1.51 2.01 2.16 2.06 1.98 2.10 2.35 2.55 2.57 2.45 2.09 1.38 0.67 0.36 0.60 1.32 1.75

+

\

t

149

+ -TABLE 20 (Con t inued )

4

1 a35 1 a36 1 a37 1 a38 1 a39 1 a40 1 a41 1 a42 1 a43 1 a44 1 a45 1 a46 1 a47 1 a48 1 a49 1 a50 1 a51 1 a52 1 a53 1 a54 1 a55 1 a56 1 a57 1 a58 1 a59 1 a60 1 a61 1 a62 1 a63 1 a64 1 a65 1 a66 1 a67 1 a68 1 a69 1 a70 1 a71 1 a72

Seasonally Ad" 1969-1980^

Coeff.

2.128 2.112 2.093 2.072 2.048 2.024 1.998 1.971 1.943 1.915 1.888 1.860 1.832 1.805 1.778 1.751 1.725 1.699 1.672 1.645 1.617 1.588 1.557 1.522 1.485 1.442 1.394 1.339 1.276 1.203 1.119 1.022 0.910 0.781 0.633 0.463 0.268 0.047

1 Sum of Lag Coeffs. 1 Lag Lenqth 1 Mean lag

usted

t

3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.13 3.13 3.13 3.12 3.11 3.10 3.09 3.07 3.05 3.03 3.00 2.97 2.93 2.90 2.85 2,81 2.76 2.71 2.66 2.61 2.56 2.51 2.47 2.43 2.39 2.36 2.35 2,37 2.51 7.74

112.38 72 34.454

Seasonally Unadjusted 1960-1980

Coeff. t

5.864 24 18.915

\

150

I TABLE 20 (Continued) I j^ 1

Degree of Polynom. 5 8 I R" 0.52 0.09 ! Barten-R^ 0.48 0.05 I D-W 2.20 2.38 I RHOl -0.11 -0.19 I VNR 2.24 2.39 I SER 0.066 0.085 I

I 1 I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the monthly I annualized rate of growth of the money stock.I

for adjusted Ml, -0.865 for unadjusted Ml). The negative

effects were only temporary. However, the unadjusted data

structure had negative coefficients in the middle of the

structure, but none of the coefficients was significant.

The coefficients of adjusted Ml fitted the hypothetical mod-

el perfectly. The sum of the coefficients on Ml growth rate

were significantly positive in both cases, 112.38 basis

points for adjusted Ml and 5,86 basis points for unadjusted

Ml. The R-Square for the unadjusted data is extremely low,

but moderate for the adjusted Ml. There was no evidence of

any serial correlation of the error terms.

151

Estimation Results for M2 Seasonally Adjusted 1969-1980 ^ Seasonally Unadjusted 1961-1980

Table 21 presents estimation results for M2, adjusted

and unadjusted. The lags length were respectively 72 and 24

months. The mean lags were 30.33 and 11,04 months respec-

tively,

The period of estimation was 1969-1980 for adjusted M2

and 1961-1980 for unadjusted M2, The regressions were car-

ried out using a sixth-degree polynomial for adjusted M2 and

a second-degree polynomial for unadjusted M2, The R-Square

for the unadjusted data are again very low.

The results of adjusted M2 were not consistent with a

contemporaneous liquidity and first phase loanable-funds ef-

fects, as the contemporaneous change in the growth rate of

adjusted M2 was positive and significant (0.673). The sum

of the lagged effects on M2 growth rate was negative for ad-

justed M2 (-100.670 basis points) and positive for unadjust-

ed M2 (2.281 basis points). The -100.67 basis points for

adjusted M2 imply that if the growth rate of M2 were to con-

tinue increasing by 1 percent, ceteris paribus, then after

72 months, interest rates level would have decreased by 1

percent as well. That is 0.33 percent average decrease

annually,

152

1 West Germany

1 t

1 t

1 t 1 Const 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30 1 a31 1 a32 1 a33 1 a34

Seasonally

TABLE

Monthly Reg

Adjusted 1969-1980

Coeff.

0.673 -2.329 -2.190 -2.083 -2.004 -1.947 -1.908 -1.882 -1.866 -1.857 -1.853 -1.852 -1.850 -1.848 -1.844 -1.836 -1.825 -1.810 -1.790 -1.766 -1.737 -1.705 -1.668 -1.629 -1.587 -1.544 -1.498 -1.453 -1.407 -1.362 -1.318 -1.277 -1.238 -1.202 -1.170 -1.143

t

4.54 -3.15 -3.49 -3.57 -3.48 -3.34 -3,22 -3.17 -3.16 -3.22 -3.31 -3.45 -3.61 -3.79 -3.99 -4.18 -4.37 -4.54 -4.69 -4.82 -4.91 -4.98 -5.03 -5.04 -5.03 -5.00 -4.94 -4.85 -4.75 -4.62 -4.47 -4.31 -4.16 -4.01 -3.87 -3.75

21

ressior i Results for M2

Seasonally

Const, aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

1961-

Coeff.

-0,118 -0,289 -0.191 -0.101 -0.020 0.052 0.116 0.171 0.217 0.255 0.284 0.304 0.315 0.318 0.312 0.297 0.273 0.241 0.200 0.151 0.093 0.026

-0.050 -0.135 -0.227 -0.330

Unadjusted -1980

t

-0.72 -1.31 -1.02 -0.64 -0.15 0.43 1.00 1.49 1.85 2.09 2.24 2.32 2.36 2.37 2.35 2.28 2.18 2.00 1.72 1.32 0.79 0.20 -0.36 -0.82 -1.17 -1.43

\

153

+ TABLE 21 (Con t inued)

+ • + •

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66 a67 a68 a69 a70 a71 a72

Seasonally Adjusted 1969-1980'

Coeff.

-1.120 -1.102 -1.089 -1.081 -1.078 -1.081 -1.088 -1.001 -1.118 -1.138 -1.163 -1.190 -1.219 -1.249 -1.280 -1.311 -1.340 -1.367 -1.390 -1.408 -1.421 -1.427 -1.425 -1.414 -1.393 -1.361 -1.317 -1.261 -1.191 -1.108 -1.001 -0.898 -0.771 -0.631 -0.477 -0.310 -0.131 0.058

Sum of Lag Coeff Lag Length

t

-3.65 -3.58 -3.54 -3.52 -3.53 -3.58 -3.65 -3.74 -3.87 -4.01 -4.16 -4.32 -4.49 -4.65 -4.81 -4.95 -5.09 -5.22 -5.33 -5.43 -5.52 -5.59 -5.64 -5.64 -5.58 -5.45 -5.23 -4.93 -4.57 -4.16 -3.73 -3.31 -2.91 -2.53 -2.18 -1.81 -1.32 9.51

s. -100.670 72

Seasonally Unadjusted 1 1961-1980 1

i

Coeff. t 1 i

2.281 1

24 1

+

154

I TABLE 21 (Continued) I I ^

Mean lag 30.330 11.042 I Degree of Polynom. 6 2 I R^ 0.62 0.03 I Barten-R^ 0.58 0.02 I D-W 2.53 2.27 I RHOl -0.27 -0.13 I VNR 2.57 2.28 I SER 0.0599 0.0883 4

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the monthly I annualized rate of growth of the money stock.I

Estimation Results for M3 1969-1980

Table 22 presents estimation results for M3. Estima-

tions were carried out over the period 1969-1980. The

length of the lags were 72 months for both series and the

degree of polynomial was tenth for adjusted M3 and fifth for

unadjusted M3. The mean lags were 38.35 and 31.86 months

respectively. There was neither a contemporaneous liquidity

nor a first phase loanable-funds effect for both series.

The sum of the lagged effects were negative, -103.23 basis

points for adjusted M3 and -46.04 basis points for unadjust-

ed M3.

TABLE 22

West Germany Monthly Regression Results for M3

155

+

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Seasonall 1969-

Coeff.

0.811 -1.022 -1.390 -1.329 -1.013 -0.571 -0.103 0.320 0.651 0.861 0.937 0.879 0.695 0.402 0.021

-0.425 -0.911 -1.414 -1.910 -2.380 -2.804 -3.170 -3.464 -3.683 -3.821 -3.878 -3.857 -3.763 -3.604 -3.390 -3.133 -2.842 -2.532 -2.214 -1.899 -1.597

y Adjusted 1980

t

3.06 -0.94 -1.07 -0.88 -0.68 -0.42 -0.09 0.32 0.73 1.00 1.08 1.00 0.79 0.45 0.02

-0.44 -0.90 -1.31 -1.66 -1.96 -2.23 -2.47 -2.69 -2.90 -3.10 -3.26 -3.37 -3.40 -3.34 -3.18 -2.93 -2.63 -2.31 -1.99 -1.70 -1.44

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1969-

Coeff.

0.350 -0.013 -0.115 -0.212 -0.302 -0.387 -0.467 -0.540 -0.608 -0.670 -0.727 -0.778 -0.823 -0.863 -0.898 -0.928 -0.953 -0.972 -0.989 -1.000 -1.001 -1.011 -1.011 -1.001 -1.001 -0.992 -0.980 -0.966 -0.950 -0.933 -0.913 -0.893 -0.872 -0.850 -0.827 -0.805

Unadjusted -1980

t

2.99 -0.11 -0.75 -1.04 -1.21 -1.34 -1.45 -1.56 -1.66 -1.75 -1.83 -1.91 -1.97 -2.02 -2.06 -2.09 -2.11 -2.13 -2.13 -2.13 -2.13 -2.12 -2.12 -2.11 -2.11 -2.11 -2.11 -2.12 -2.13 -2.14 -2.16 -2.17 -2.20 -2.22 -2.25 -2.28

\

t

\

156

I TABLE 22 (Con t inued) I I ^

\

\

\

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66 a67 a68 a69 a70 a71 a72

Sum o

Seasonally Adjusted 1969-1980

Coeff.

-1.320 -1.073 -0.863 -0.694 -0.570 -0.489 -0.450 -0.452 -0.488 -0.554 -0.642 -0.746 -0.858 -0.971 -1.079 -1.176 -1.258 -1.322 -1.367 -1.394 -1.405 -1.405 -1.400 -1.397 -1.404 -1.429 -1.477 -1.544 -1.660 -1.790 -1.934 -2.072 -2.173 -2.193 -2.070 -1.727 -1.063 0.049

f Lag Coeff Lag Length

t

-1.22 -1.02 -0.86 -0.73 -0.64 -0.58 -0.57 -0.60 -0.66 -0.76 -0.87 -0.99 -1.11 -1.23 -1.33 -1.41 -1.48 -1.53 -1.57 -1.59 -1.60 -1.60 -1.57 -1.51 -1.44 -1.36 -1.30 -1.27 -1.27 -1.32 -1.42 -1.56 -1.75 -1.96 -2.12 -2.15 -2.01 6.34

s. -103.23 72

Seasonally

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66 a67 a68 a69 a70 a71 a72

1969-

Coeff.

-0.782 -0.760 -0.737 -0.716 -0.696 -0.676 -0.657 -0.639 -0.623 -0.608 -0.594 -0.582 -0.570 -0.561 -0.552 -0.544 -0.537 -0.532 -0.526 -0.521 -0.516 -0.511 -0.505 -0.499 -0.490 -0.480 -0.467 -0.451 -0.432 -0.407 -0.378 -0.343 -0.301 -0.252 -0.194 -0.125 -0.047 0.043

Unadjusted 1 -1980 1

4. t 1

4. -2.30 1 -2.32 1 -2.34 1 -2.35 1 -2.35 1 -2.35 1 -2.34 1 -2,32 1 -2,30 1 -2.28 1 -2.25 1 -2.23 1 -2.21 1 -2.20 1 -2.19 1 -2.17 1 -2.16 1 -2.14 1 -2.11 1 -2.07 1 -2.01 1 -1.93 1 -1.85 1 -1.76 1 -1.66 1 -1.56 1 -1.46 1 -1.37 1 -1.29 1 -1.21 1 -1.13 1 -1.06 1 -0.99 1 -0.92 1 -0.85 1 -0.74 I -0.50 1 7.11 1

-46.037 1 72 1

157

+ •

TABLE 22 (Continued) +

Mean lag 38.346 31.863 Degree of Polynom. 10 5 R^ 0.57 0.46 Barten-R^ 0.50 0.42 D-W 2.371 2.02 RHOl -0.186 0.04 VNR 2,404 2.04 SER 0.0657 0.0701

I

Note: Units of the coefficients are in basis points per 1 percentage point change in the monthly annualized rate of growth of the money stock.

Quarterly Observations

Our quarterly estimation results for the Federal Repub-

lic of Germany are presented in tables 23-25 (pp. 159-166).

Once more the quarterly results are virtually identical to

the monthly results; mixed, positive sum of coefficients for

Ml, M3, and seasonally unadjusted M2 but negative sum of

coefficients for seasonally adjusted M2. Again as for

monthly observation results, the liquidity and first phase

loanable-funds effects for seasonally adjusted M2 (the time

series with negative sum of coefficients) were not contempo-

raneous with a change in money growth rate.

158

Estimation Results for Quarterly Ml 1969-1980 —

Regression results for quarterly Ml are presented in

Table 23. The lags length were 30 and 66 quarters for ad-

justed and unadjusted quarterly Ml respectively. The mean

lags were 14.86 and 31.99 quarters, respectively.

The contemporaneous change in the growth rate of both

adjusted and unadjusted Ml was negative, which is consistent

with a contemporaneous liquidity and first phase loanable-

funds effects. The coefficients of adjusted Ml were also

consistent with the hypothetical model. The last coeffi-

cient of unadjusted Ml was negative. However, this negative

coefficient was insignificant. The sum of the coefficients

on Ml growth rate were positive, 416.11 basis points for ad-

justed Ml, and 362.76 basis points for unadjusted Ml. Both

time series had high coefficients of determination and there

is no evidence of autocorrelation.

Estimation Results for Quarterly M2 Seasonally Adjusted 1969-1980 -Seasonally Unadjusted 1959-1980

The lags length for adjusted and unadjusted M2 are 24

and 78 months respectively. The degree of polynomials are

ninth and sixth, respectively. The mean lags are 12.28

quarters for adjusted data and 36.10 quarters for unadjusted

data.

159

Í West

1

1 S

1 t

1 t 1 Const. 1 aO 1 al 1 a2 1 a3 1 a4 1 a5 1 a6 1 a7 1 a8 1 a9 1 alO 1 all 1 al2 1 al3 1 al4 1 al5 1 al6 1 al7 1 al8 1 al9 1 a20 1 a21 1 a22 1 a23 1 a24 1 a25 1 a26 1 a27 1 a28 1 a29 1 a30

Germany

easonall 1969-

Coeff.

- 9.619 - 0.735

3.036 6.017 8.427 10.434 12.157 13.678 15.047 16.289 17.412 18.410 19.268 19.967 20.486 20.807 20.915 20.802 20.466 19.909 19.142 18.182 17.048 15.760 14.337 12.795 11.138 9.357 7.424 5.284 2.853 0.004

TABLE 2 3

Quarterly

y Adjusted 1980

t

-2.14 -0.26 1.07 1.81 2.12 2.24 2.28 2.29 2.29 2.28 2.27 2.27 2.26 2.25 2.24 2.22 2.20 2.17 2.15 2.12 2.09 2.06 2.03 2.01 2.00 2.00 2.00 2.01 2.02 2.02 2.00 0.55

Regression Result

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1969-

Coeff.

-7.257 0.242 1.682 2.904 3.928 4.774 5.459 6.002 6.418 6.722 6.928 7.051 7.101 7.092 7.033 6.933 6.803 6.651 6.483 6.306 6.127 5.950 5.780 5.622 5.478 5.352 5.245 5.159 5.096 5.056 5.040 5.046 5.075 5.126 5.197 5.286

.s for Ml

Unadjusted -1980

t

-3.42 0.62 3.76 5.05 5.52 5.68 5.69 5.61 5.47 5.28 5.07 4.84 4.60 4.36 4.13 3.91 3.70 3.51 3.34 3.19 3.06 2.94 2.84 2.77 2.71 2.66 2.64 2.64 2.65 2.68 2.72 2.78 2.86 2.94 3.03 3.14

+

l

+

160

TABLE 23 (Con t inued ) + ^

Seasonally Adjusted Seasonally Unadjusted 1969-1980 iQCQ-iQQn

+

Seasonally Adjusted 1969-1980

Coeff. t

Sum of Lag Coeffs. 416.11 Lag Length 30 Mean lag 14.864

S

a33 a34 a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66

easonally 1969-

Coeff.

5.197 5.286 5.392 5.511 5.643 5.783 5.930 6.078 6.227 6.371 6.507 6.633 6.743 6.834 6.903 6.946 6.958 6.937 6.879 6.781 6.639 6.450 6.211 5.920 5.575 5.172 4.710 4.189 3.605 2.959 2.251 1.480 0.646

- 0.249

Unadjusted -1980

t

3.03 3.14 3.24 3.34 3.34 3.52 3.60 3.66 3.71 3.75 3.77 3.77 3.76 3.74 3.70 3.65 3.59 3.51 3.42 3.32 3.21 3.09 2.96 2.83 2.69 2.55 2.41 2.26 2.09 1.92 1.70 1.40 0.84

-0.45

362.76 66 31.988

• t

161

I TABLE 23 (Continued) I

Degree of Polynom, 6 5 I R^ 0,87 0.85 I Barten-R"^ 0.81 0.80 I D-W 2.941 2.449 I RHOl -0.482 0.245 I VNR 3.114 2.571 | SER 0.047 0.045 I

I 1 I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the quarterlyl annualized rate of growth of the money stock.I

I

The change in the growth rate of adjusted M2 had no

contemporaneous liquidity and first phase loanable-funds ef-

fect and thus ended up again with a negative sum of coeffi-

cients on the money growth rate (-4.08 basis points). The

unadjusted data had a contemporaneous liquidity and first

phase loanable-funds effects. However, there were negative

coefficients from lag 75 through 78. The sum of coeffi-

cients on money growth rate here is unusually high, 85,853

basis points, These absurd results with German M2, both

monthly and quarterly observations may be an indication that

there is a a flaw in the definition of the components of

this monetary aggregate. This may be the case because this

problem was not encountered with the United States and

United Kingdom monetary data. These results are present in

Table 24.

162

+

TABLE 24

West Germany Quarterly Regression Results for M2

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

Seasonall 1969-

Coeff.

0.308 0.142

-0.035 -0.749 -0.407 -0.933 -0.939 -0.824 -0.671 -0.548 -0.486 -0.472 -0.469 -0.439 -0.366 -0.273 -0.226 -0.307 -0.574 -1.01 -1.483 -1.732 -1.453 -0.513 0.609 0.077

y Adjusted 1980

t

2.68 0.85

-0.13 -1.71 -1.13 -2.04 -2.26 -2.26 -1.91 -1.57 -1.45 -1.51 -1.30 -1.05 -0.90 -0.92 -1.15 -1.06 -1.54 -3.27 -6.00 -3.44 -2.12 -1.00 2.22 2.23

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO alOl al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1959-

Coeff.

-1977.0 16.9 48.1 90.3 142.1 202.0 268.8 341.2 418.3 498.9 582.1 667.2 753.1 839.3 925.2 1010.1 1093.5 1174.8 1253.8 1329.9 1402.9 1472.5 1538.3 1600.2 1658.0 1711.6 1760.6 1805.2 1845.2 1880.5 1911.1 1936.9 1958.1 1974.5 1986.1 1993.2

Unadjusted -1980

t

-2.16 2.69 2.67 2.60 2.54 2.49 2.45 2.42 2.39 2.34 2.35 2.33 2.32 2.31 2.29 2.28 2.27 2.27 2.26 2.25 2.24 2.24 2.23 2.22 2.22 2.21 2.21 2.20 2.20 2.19 2.19 2.18 2.18 2.18 2.17 2.17

\

163

I TABLE 24 (Con t inued) I + +

Seasonally Adjusted 1969-1980

Coeff. t

Seasonally

a35 a36 a37 a38 a39 a40 a41 a42 a43 a44 a45 a46 a47 a48 a49 a50 a51 a52 a53 a54 a55 a56 a57 a58 a59 a60 a61 a62 a63 a64 a65 a66 a67 a68 a69 a70 a71 a72 a73 a74 a75 a76

1959-

Coeff.

1995.7 1993.4 1986.7 1975.6 1960.1 1940.4 1916.5 1888.6 1856.7 1821.0 1781.5 1738.5 1692.1 1642.3 1589.4 1533.6 1474.9 1413.6 1349.8 1283.8 1215.9 1146.1 1074.8 1002.3 928.8 854.7 780.3 344.9 310.7 559.2 587.6 417.8 350.4 286.0 225.2 168.7 117.2 71.4 32.2 0.6

- 22.6 - 36.2

Unadjusted -1980

t

2.17 2.16 2.16 2.16 2.15 2.15 2.15 2.14 2.14 2.14 2.13 2.13 2.13 2.12 2.12 2.11 2.11 2.11 2.11 2.10 2.10 2.10 2.09 2.08 2.07 2.07 2.06 2.05 2.03 2.02 2.00 1.98 1.94 1.91 1.86 1.78 1.66 1.46 1.06 0.04

-2.44 -3.34

164

I TABLE 24 (Continued) I ^ ^

I a77 - 39.2 -3.16 I a78 - 30,4 -3.01 I ^ I I Sum of Lag Coeffs. -14.080 85853 I Lag Length 24 78 I Mean lag 12.280 36.102 I Degree of Polynom. 9 6 I R^ 0.90 0.98 I Barten-R^ 0.83 0.84 I D-W 2.763 3.467 I RHOl 0.382 0.747 I VNR 2.883 3.900 I SER 0.0497 0.0392 I 1 I I Note: Units of the coefficients are in basis points I per 1 percentage point change in the quarterly I annualized rate of growth of the money stock.

Estimation Results for Quarterly M3 I/1969-IV/1980

Estimation results for quarterly M3 are presented in

Table 25. The lags length are 36 quarters for adjusted and

unadjusted M3. The degree of polynomials are third and sec-

ond respectively. The mean lags are 18.75 and 21.65 quar-

ters, respectively.

There is a temporary and contemporaneous negative

effect in both time series. The seasonally unadjusted M3

coefficients followed a textbook pattern. The adjusted M3

coefficients had negative signs from lag 20 through 36. The

sum of coefficients on M3 growth rate is positive in both

165

+

TABLE 25

West Germany Quarterly Regression Results for M3

Const aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

Seasonally 1/1969-

Coeff.

. - 3.212 9.849 14.521 18.347 21.376 23.376 25.246 26.185 26.526 26.320 25.616 24.463 22.912 21.012 18.813 16.364 13.715 10.917 8.018 5.068 2.117

- 0.785 - 3.588 - 6.243 - 8.700 -10.910 -12.822 -14.387 -15.556 -16.278 -16.504 -16.183 -15.268 -13.707 -11.451 - 8.450

Adjusted IV/1980

t

-1.96 2.59 3.47 3.92 4.16 4.28 4.34 4.37 4.37 4.36 4.32 4.27 4.19 4.07 3.91 3.67 3.33 3.87 2.25 1.48 0.63

-0.23 -0.99 -1.63 -2.13 -2.52 -2.82 -3.06 -3.24 -3.39 -3.51 -3.60 -3.68 -3.75 -3.80 -3.86

Seasonally

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24 a25 a26 a27 a28 a29 a30 a31 a32 a33 a34

1/1969

Coeff.

-3.336 0.396 0.727 1.047 1.355 1.651 1.935 2.207 2.467 2.716 2.952 3.177 3.390 3.591 3.780 3.957 4.123 4.276 4.418 4.548 4.666 4.772 4.866 4.949 5.019 5.078 5.125 5.160 5.183 5.194 5.193 5.181 5.15^ 5.121 5.073 5.013

Unadjusted -IV/1980

t

-2.82 0.76 1.32 1.729 2.00 2.19 2.32 2.41 2.49 2.55 2.60 2.64 2.68 2.72 2.75 2.79 2.82 2.85 2.88 2.91 2.93 2.95 2.97 2.98 2.99 2.99 2.98 2.97 2.94 2.90 2.85 2.79 2.71 2.62 2.52 2.41

\

166

I TABLE 25 (Continued) I I 1

+ Coeff. t Coeff.

I +

Seasonally Adjusted Seasonally Unadjusted I/1969-IV/1980 I/1969-IV/1980

•4-

a35 - 4.655 -3.90 a35 4.941 2.90 a36 - 0.015 -2.44 a36 4.857 2.16

I +

Sum of Lag Coeffs. 185.54 143.26 Lag Length 36 36 Mean lag 18.75 21.649 Degree of Polynom. 3 2 R2 0.81 0.70 Barten-R^ 0.74 0.57 D-W 2.547 3.475 RHOl 0.299 0.762 VNR 2.779 3.971 SER 0.0613 0.0695

I + Note: Units of the coefficients are in basis points

per 1 percentage point change in the quarterly annualized rate of growth of the money stock.

cases, 185.54 basis points for adjusted M3 and 143.26 basis

points for unadjusted M3.

Revised Estimation of Equation on SAMl 1978-1980

Because of the low coefficients of determination for

monthly observations whenever estimation was carried out

over a moderately long time period, re-estimation was car-

ried out on seasonally adjusted Ml (see Tables 26-28) for

167

l .

l .

1 t

TABLE 26

United Kingdom Regression Result

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20

Sum of Lag Le Mean 1 Degree

R2 Barten D-W RHOl VNR SER

Note: Units of

Coeff.

-0.308 -0.510 2.898 2.770 2.197 1.845 1.492 0.869

-0.001 -0.784 -1.006 -0.280 1.495 4.019 6.617 8.388 8.484 6.460 2.620

-1.720 -4.209 -1.809

Lag Coeffs. ngth ag of Polynom. ^

-R2

s for SAMl

t

-1.11 -0.51 2.98 3.05 1.84 1.45 1.48 1.58

-0.01 -0.63 -0.65 -0.20 1.48 2.26 1.90 1.60 1.31 0.97 0.48 -0.54 -2.05 -0.91

39.836 20 10.371 8 0.80 0.69 2.626

-0.333 2.790 0.0360

the coefficients are in per 1 percentage point : change in annualized rate of growth of the

1978-1980 1

1 t

4-basis pointsl the monthly | money stock.I

168

\

West

TABLE

Germany Regression Res

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

Sum of

Coeff.

- 2,956 14.649 39.582 51.407 60.942 68.220 69.884 63.374 48.731 28.753 8.129

- 7.925 -15.089 -11.099 3.584

25.724 49.913 69.745 79.394 75.321 57.740 31.361 4.851

-11.679 -11.920 - 2.229

27

ults for SAMl 1978-1980 1

Lag Coeffs. Lag Length Mean lag Degree R^ Barten-D-W RHOl VNR SER

of Polynom.

-R2

t

-2.90 2.75 2.87 2.79 2.70 2.63 2.60 2.57 2.56 2.57 2.32 -1.79 -2.09 -1.81 0.84 2.39 2.52 2.56 2.59 2.65 2.72 2.67 0.63 -1.12 -1.34 -0.81

791.36 24 9.872 8 0.97 0.95 3.506

-0.761 3.825 0.0206

1

1 t

169

each of the three countries in the study for the period

1978-1980.

The estimated coefficients for the United States fol-

lowed a textbook pattern; a contemporaneous and short-lived

liquidity and first phase loanable-funds effect, which is

negative and significant, followed by the second phase loa-

nable-funds, income, and Fisher effects which are positive

and significant as well. Also the sum of the coefficients

on the monetary growth rate change is significantly differ-

ent from zero and positive. However, since there were no

restrictions imposed on the coefficients because there was

no particular reason to expect the coefficients to be a

"smooth" function of the lag, there were occasional negative

coefficients after positive coefficients for the United

Kingdom and West German results; but in most instances these

coefficients were insignificant.

Looking at these estimates for the comparative time

period, it was not surprising to observe that the United

States had the longest mean lag. On the other hand, West

Germany had the shortest mean lag. This can be explained by

the fact that the combined liquidity and the first phase

loanable-funds effect for the United States persisted for a

considerably longer time than for any of the other two

countries and it persisted for the shortest time in West

Germany. The combined second phase loanable-funds, income,

170

1 t

1 t

TABLE

United States Regression Res

Const. aO al a2 a3 a4 a5 a6 a7 a8 a9 alO all al2 al3 al4 al5 al6 al7 al8 al9 a20 a21 a22 a23 a24

Sum of Lag Le Mean 1 Degree R2 Barten D-W

Coeff.

-16.727 -15.253 -25.833 -33.634 -40.023 -45.180 -48.470 -48.767 -44.739 -35.097 -18.803

4.760 35.661 73.327

116.490 163.190 210.770 255.980 295.160 323.880 338.150 333.610 306.320 252.940 171.100 59.736

Lag Coe: ngth ag

28

ults

:f s.

of Polynom.

-R2

j

for SAMl 1978-1980 1

t

-2.17 -1.11 -1.92 -2.43 -2.74 -2.92 -3.05 -3.23 -3.57 -4.04 -2.03 0.25 1.05 1.42 1.63 1.79 1.91 2.02 2.13 2.25 2.38 2.53 2.71 2.95 3.27 3.46

2585.20 24 20.112 6 0.95 0.92 2.902

+

171

TABLE 28 (Continued) I

RHOl -0.451 I VNR 3.166 I SER 0.0656 I

+ + I

Note: Units of the coefficients are in basis pointsl per 1 percentage point change in the monthly I annualized rate of growth of the money stock.l

and Fisher effect was again highest for the United States,

2585.2 basis points, and lowest for the United Kingdom,

39.831 basis points. The Durbin-Watson h statistics didn't

give any indication of autocorrelation for any of the three

countries.

Simulation Results

Tables 29-31 presents full in-sample and out-of-sample

simulations summary statistics for monthly observations of

SAMl for the three countries, using estimated coefficients

for the period 1978-1980. Avoiding the problem of ending-up

with excessive number of tables, results presented here, and

later with the quarterly models, are only for seasonally ad-

justed narrowly defined money, Ml.

^ The Mean-Square error of forecast is the average of the sum of the squared deviations of the predicted values from the observed values of the variable concerned. And the Root-Mean-Squared Error (RMSE) is the square root of the

172

TABLE 29

United States Full In-Sample Simulation And Post-Sample Forecast Summary Statistics On Monthly

SAMl 1978-1980

Sum of Absolute Errors Mean Error Sum of Squared Errors Mean Squared Error Mean Absolute Error Root Mean Squared Error Theil Inequality Coeff, U

In-Sample 1978-1980

0.57746 -0.01857 0.07548 0.00581 0.04442 0.07620 0.219

Out-Of-Sample 1981-1983

194.0900 4.2270

1369.5000 38.0410 5.3913 6.1678 60.4690

t

TABLE 30

United Kingdom Full In-Sample Simulation And Post-Sample Forecast Summary Statistics On Monthly

SAMl 1978-1980

+ + In-Sample Out-Of-Sample 1978-1980 1981-1983

I 1 Sum of Absolute Errors 0.30075 6.86340 Mean Error 0.00056 -0.04433 Sum of Squared Errors 0.00855 1.94430 Mean Squared Error 0.00057 0.05555 Mean Absolute Error 0.02005 0.19610 Root Mean Squared Error 0.02387 0.23569 Theil Inequality Coeff, U 0.308 3.084

173

TABLE 31 I I

West Germany Full In-Sample Simulation And Post-Sample I Forecast Summary Statistics On Monthly SAMl 1978-1980 I

I I

I ^ In-Sample Out-Of-Sample I 1978-1980 1981-1983 I

\- t Sum of Absolute Errors 0.33608 106.9100 Mean Error -0.01919 0.9307 Sum of Squared Errors 0.06307 531.9300 Mean Squared Error 0.00485 17,7310 Mean Absolute Error 0.02585 3.5638 Root Mean Squared Error 0.06965 4.2108 Theil Inequality Coeff, U 0.111 15.866

Full in-sample simulations and post-sample forecasts

summary statistics of quarterly observations on SAMl models

mean-squared error. Thus the smaller the RMSE of forecast, the better the forecast.

The Theil Inequality Coefficient, U, is the ratio of the RMSE divided by the square root of the mean sc uare successive difference of the observed values. U is equal 0, if and only if the forecasts are all perfect. Also U=l when the prediction procedure leads to the same RMSE as the naive no-change extrapolation. In other words, by using the inequality coefficient one measures the seriousness of a prediction error by the quadratic loss criterion in such a way that the zero corresponds with perfection and the unit with the loss associated with no-change extrapolation, The coefficient ranges from zero to infinity, which means it is possible to do considerably worse than by extrapolating on no-change basis. For a complete description of the derivation and interpretation of the the Theil coefficient, see Henri Theil (1966).

174

are presented on tables 32-34.

TABLE 32

United States Full In-Sample Simulation And Post-Sample Forecast Sumraary Statistics On Quarterly

SAMl

I + In-Saraple Out-Of-Sample 1969-1980 1981-1983

I + Sum of Absolute Errors 0.61202 65.2320 Mean Error -0.84D-12 -5.4360 Sum of Squared Errors 0.40798 516.3300 Mean Squared Error 0.002720 43.0280 Mean Absolute Error 0.04080 5.4360 Root Mean Squared Error 0.05215 6.5596 Theil Inequality Coeff, U 0.269 40.1320

The various models all showed evidence of a far better per-

formance within the sample period than beyond the sample.

The Theil inequality coefficient was less than one in every

instant within the sample period and so was the root mean

squared error. On the other hand, both the Theil coeffi-

cient and the root mean square were far greater than one in

most instances beyond the sample period. There was a

general trend of under-prediction beyond the sample period;

this may have been due to the excessively high and rising

nominal interest rates in the 1980's with a historic high in

175

TABLE 33

United Kingdom Full In-Sample Simulation And Post-Sample Forecast Summary Statistics On Quarterly

SAMl

+ ^ In-Sample Out-Of-Sample I 1969-1980 1981-1983 I + 1

Sum of Absolute Errors 0.11423 0.90735 I Mean Error 0.00102 0.03035 I Sum of Squared Errors 0.00330 0.12738 I Mean Squared Error 0.00066 0.01158 I Mean Absolute Error 0.02285 0.08249 I Root Mean Squared Error 0.02285 0.10761 I Theil Inequality Coeff, U 0.431 0.771 |

TABLE 34

West Germany Full In-Sample Simulation And Post-Sample Forecast Summary Statistics On Quarterly SAMl

+ + I In-Sample Out-Of-Saraple I 1978-1980 1981-1983 + •

Sum of Absolute Errors 0.48761 16.62900 Mean Error 0.00171 1.66290 Sum of Squared Errors 0.02171 39.88100 Mean Squared Error 0.00136 3.98810 Mean Absolute Error 0.03048 1.66290 Root Mean Squared Error 0.03683 1.99700 Theil Inequality Coeff, U 0.452 17.617

X

1-76

the short-term U.S. Treasury bill of 16.30 percent in May

1981, of 16.18 in March 1980 in the United Kingdom, and of

7.28 in 1981 and 1982 in West Germany.

This quotation highlights the feelings about the level

of interest rates in the 1980's.

The Administration may choose to hide its head, Ostrich-like, in the warm sand of economic dogma, but the rest of us must face facts. We cannot tolerate these sky-high interest rates—rates that until recently would have been considered usuri-ous. Congress must act to bring down these killer rates before they bring down our economy and the strength and security of our nation (Congressional Record-Senate, 1982, S699-700).

Also many other real factors besides a monetary disturbance

affect the movement of nominal interest rates and these fac-

tors are assumed-away within the sample period, since the

model coefficients are estimated without them. However,

this was not an isolated incident, as there are similar

problems of predicting interest rates movement beyond the

sample period in the literature. Another major cause could

be the high volatility of the change in the growth rate of

the money stock within this period.

For monthly SAMl forecasts, the percentage of the RMSE

of forecast to the RMSE that would have been observed if the

forecaster had confined himself to a naive no-change

extrapolation for the in-sample, was 22 for the United

States, 31 for the United Kindom, and 11 for the Federal

Republic of Gerraany. This is an indication that the German

177

model for the monthly data from 1978-1980 had the best

performance as regards predictive power, Beyond the sample

period, the percentage was 6047 for the United States, 308

for the United Kingdom and 1587 for West Germany. Thus the

United Kingdom's model predictive perforraance was best be-

yond the saraple period. The United States' model predictive

performance was the poorest beyond the sample period, and

the United Kingdom's model predictive performance was the

poorest within the sample period.

Also for the quarterly data, it was better predicting

than extrapolating on a no-change basis within the sample

period for all three countries. However, one did considera-

bly worse by predicting than extrapolating on a no-change

basis beyond the sample period for the United States and

West Germany. For the United Kingdom one did better by pre-

dicting both within and beyond the sample period. The Unit-

ed States model's predictive performance was the best within

the sample period, however it was again the poorest beyond

the saraple period. Possible explanations for the corapara-

tively poor perforraance of United States' raodels beyond the

saraple period are:

1. More rapid financial innovations have taken place in

the United States than in the other two countries

corabined.

178

2. The volatility in the change of the growth rate of

the money stock has been far higher in the United

States than in any of the other two countries.

3. Norainal interest rates in the United States are to a

much greater extent deterrained by market forces than

by any coercion on the part of the Treasury.

4. Also there has been a more rapid deregulation of the

banking industries in the United States in the past

three years than in the other countries.

CHAPTER VI

SUMMARY AND CONCLUSION

Most economies in the world have been experiencing high

levels of inflation during the past decade. At the same

time nominal interest rates have risen to extremely high

levels in these same countries, The worldwide inflation has

been attributed to several factors such as; the growth of

the Eurodollar, the loss of confidence in money, the float-

ing exchange rate system, and finally the tenfold increase

in the price of oil. Rapid growth of the raoney stock accom-

panied by high and rising nominal interest rates has ap-

peared a paradox to raany.

In the simple classroom raodel, there is a negative re-

lationship between changes in the money supply and interest

rates, as an increase in money supply implies that rates

should fall, and a decrease implies that rates should rise.

This notion is based on the theory of liquidity preference,

which models an individual desire to hold liquid assets--us-

ually taken to consist entirely of raoney. In this raodel, an

increase in the supply of raoney causes the araount supplied

to exceed the amount demanded. Thus individuals attempt to

reallocate their portfolios toward raarkets with determined

yields. However, with a fixed supply of these assets,

demand is now greater than supply, which causes the prices

179

180

of these assets to rise, or interest rates to fall, in order

to clear the market, As a result of the drop in interest

rates on these alternative assets, individuals are willing

to hold a larger amount of money.

The simple Keynesian implied inverse relation between

changes in the quantity of money and interest rates, was

widely taken for granted until as recently as the

mid-1960's, But by now it has been almost discredited by

simultaneous upward trends of the past several decades in

the quantity of money, nominal income, inflation, and inter-

est rates,

Is this recent observation inconsistent with the liq-

uidity preference theory? The answer to this question is no.

The liquidity preference function or effect still implies a

negative relationship between money and interest rates. The

theoretical and empirical argument is that, this liquidity

effect is not permanent, it is a temporary effect that dis-

sipates rapidly given efficient financial and capital mar-

kets,

This argument, first raised by Milton Friedman (1968a),

and other follow-ups were in reaction to the emergence in

the advanced countries of accelerating raoney growth and

rising interest rates that made it impossible to continue to

regard a stable or permanent Keynesian liquidity preference

function relating the nominal quantity of money inversely to

181

the nominal interest rates as an adequate tool for analyzing

the effect of monetary changes on interest rates. Empirical

work in this regard were largely along the lines pioneered

by Irving Fisher, Most of the earlier studies largely con-

firmed Fisher's results, particularly his conclusion that

inflationary expectations were formed on the basis of a long

past period and only slowly adjust to experience. This con-

clusion was the basis for his interpretation of the Gibson

paradox, the long observed positive correlation between in-

terest rates and the level of prices. However, recent stud-

ies tend to suggest that the period of experience on which

expectation are based has shortened drastically after the

mid-1960's

The raajor goal of this study was to further test for

the existence of a stable liquidity preference runction us-

ing the raost recent data, extending the analysis to cover

more than two countries, deriving models for all the mone-

tary aggregates frora Ml to L with both seasonally and sea-

sonally unadjusted data, and finally covering quarterly in

addition to monthly observations. The initial sample was to

be 1959-1980 with 1981-1983 data used for the measurement of

the predictive performance of the models beyond the period

of study, However, some of the estiraation periods were

actually shorter due to nonavailablity of data for some

182

countries and also due to the nonexistence of a stable

structure throughout this period in raany cases.

The analysis was carried out using an Almon polynomial

distributed lag. This procedure was chosen because of its

inherent advantages over other procedures such as the ordi-

nary least square. Some of these advantages are its flexi-

bility and the nonexistence of the problem of multicolli-

nearity and also the high frequency of its use in the

literature. The Chow and dummy variable tests were used in

determining the periods of stable structure within the sam-

ple period,

Suraraary of Results

The tirae spans of stable structures were different for

the different countries and monetary aggregates. Even for

the same monetary aggregate, the structures were sensitive

to the seasonality as well as the aggregation of the data.

Thus the sarae monetary aggregate sometiraes exhibited one

tirae span of a stable structure for the raonthly data and a

different one for the quarterly data.

Also the models did not seem to fit any particular

polynomial or lag length. The polynoraials and lag lengths

were random for each country. Regarding monthly data, we

found a positive relationship between the rate of change of

183

the money stock and interest rates for all the monetary

aggregates in the case of the United States. For instance,

the results for the seasonally adjusted Ml in Table 6 indi-

cate that the total effect on the rate of growth of interest

rates due to a change in the growth rate of the money stock

is 29.047 less 0.141, giving a net effect of 28.956. Thus

if the monthly rate of growth of the money stock were to in-

crease by one percent and to continue increasing at that

rate, then interest rates would have risen by 28.9 basis

points after 24 months or in a two-year period, everything

else staying constant. Half the net effect would have been

realized (the mean lag) after 6.48 raonths, a little over one

half of a year.

In the case of the United Kingdom, we also found a po-

sitive relationship for all the monetary aggregates. For

example, frora the seasonally adjusted Ml result in Table 14,

the net effect was 38.485, after a sixty-raonth lag, iraplying

that interest rate would have risen by 38.39 basis points

after 5 years if the raonthly growth rate of the raoney stock

were to increase by one percent and continue growing at that

rate for 5 years, with all other things constant.

With the Federal Republic of Germany, we had mixed

results for the monthly aggregates. There was a positive

relationship for Ml and a negative one for M2 and M3.

184

For all three countries, and for all the monetary

aggregates, with the exception of West Gerraan M2 and M3,

there was a conteraporaneous liquidity effect which was neg-

ative as expected. The coefficient of this contemporaneous

change in the growth rate of money was not only negative,

but it was quite small in raost cases and only teraporary.

However, with the coefficients of determination for

these raonthly models very low, re-estimation was carried out

for the 1978-1980 period on seasonally adjusted Ml for all

the three countries. For each country, we found a positive

relationship and a liquidity effect which is not perraanent.

In this short period, the net effect in the case of the

United Kingdora was virtually unchanged, 39.528 (see Table

27) but the net effect for the United States and West Germa-

ny increased to 2585.70 and 791.36 respectively. The coef-

ficients of determination were relatively higher and there

was no indication of any autocorrelation problera.

Regarding quarterly data, the results were virtually

identical to the monthly results, but with relatively higher

coefficients of determination. Again a positive relation-

ship was found for all quarterly monetary measures, with the

exception of West German M2 and M3. With quarterly data the

effects persisted for much longer lags and the net effects

were also much greater. For instance, the net effect for

seasonally adjusted Ml, was 20192 (see Table 10) after a 72

185

quarters (18 years) lag for the United States, 167.92 (see

Table 17) after 40 quarters (10 years) lag for the United

Kingdom and 406.491 (see Table 23) after 30 quarters (7.5

years) for West Germany. The raean lags were 18.323 quarters

for the United States, 38.346 for the United Kingdom, and

14.864 for the Federal Republic of Germany.

The raodels performed very well as regards prediction

within the sample period; both the root mean square error

and the Theil inequality coefficient were less than one in

every case. However, the performances of the models' pre-

dictions were not as good beyond the sample period, as the

Theil inequality coefficients were in every case greater

than one. But none of the root mean square errors exceeded

a value of 7.0.

Conclusion

Results of this study largely support Brown and Santo-

ni's conclusion less than a year ago that, in the United

States for the period 1971-1980, there was a positive rela-

tionship between the nominal interest rate and the money

supply. However, their conclusion was arrived at only on

the basis of estiraation of the seasonally adjusted raonthly

Ml. But this study indicates that this relationship is true

frora the early-1960's to 1980 and not only for the

186

seasonally adjusted Ml but also for the broader raonetary

aggregates, seasonally as well as seasonally unadjusted

data. Thus these results broadly suggest that an increase

(decrease) in the raonetary growth rate that persists for

more than one month or one quarter will give rise to an in-

crease (decrease) in interest rates, ceteris paribus, for

the United States. These results are also consistent with

estimations by Jaraes G. Hoehn (1983, p. 8), when he re-

gressed the first difference of the log of the federal funds

rate on the distributed lag first difference of the log of

Ml money stock. He reported positive sum of Ml growth coef-

ficients. Results also give evidence of the sarae conclusion

for the United Kingdora, with both monthly and quarterly

data. However, no simple generalization could be raade in

the case of West Gerraan results, since results indicated a

positive relationship for Ml and a negative relationship for

M2 and M3.

The findings here are also consistent with Gibson and

Cagan's earlier conclusion. Gibson's (1970b, p. 298) empir-

ical estiraations showed that

changes in the rate of monetary change have immediate and significant negative effect on market interest rates. However, following this negative effect, adjustments in the rate of income increase and soon begin to exert pressure to return interest rates to their original level, three to nine months after the rate of raonetary increased was changed.

187

Cagan (1972, p. 103) on the other hand concluded that

an increase in the monetary growth rate in stage t has a negative effect on interest rates in stage t, zero effect in stage t+1, and positive effects thereafter.

However, the findings from our study are not consistent with

Gibson's conclusion, with regard to the period of interest

rates returning to their original level. After the 1960's,

interest rates returned to their original level much faster

(in less than three raonths in most cases); and this view is

supported by Yohe and Karnosky's findings which concluded

that price level changes since 1952 have evidently come to

have a prompt and substantial effect on price expectations

and norainal interest rates.

These results also suggest that some earlier studies

that have carried out estimation over very long periods, may

have the problem of coefficients being estimated over peri-

ods belonging to different structures and thus were not true

c.oef f icients. For exaraple, Gibson (1970b) carried out a

study of the relation between interest rates, and current

and past rates of change of money growth, monthly observa-

tions within the period 1947-1966. If the redefinition of

Ml has not changed the data so rauch, then the estimations

for this study were done across two different structures as

there is evidence of a structural break in the early 196 's.

Also Cagan's (1972) study which covered the period

188

1910-1965, regressing the commercial paper rate on lagged

values of monetary growth rate, may have a sirailar problem

unless the redefinition of the monetary aggregate Ml did

change the data structure substantially. And our period of

structural divergence, broadly speaking for the United

States and United Kingdom, corresponds to those of sorae ear-

lier studies. Klein (1975) reported that there was a funda-

raental change in the character of the monetary system since

World War II, and that the United States and the United

Kingdom have changed from being on specie standards before

World War II, to being on a fiduciary raonetary systera in

post World War II, particularly in th 1960's. Also Kajal

(1976) concluded that his calculations supported earlier

findings by Gibson and Turnovsky that both the interest rate

equation and the expectations forraation equation had a

structural break around 1960, when he used the distributed

lag, the extrapolative, and the Frenkel expectation hypothe-

sis. Yohe and Karnosky (1969) also found that the total ef-

fect of price expectations on interest rates and the speed

at which they are formed appeared to have increased since

1960.

Even though this study has failed to be conclusive for

all the monetary aggregates of all the countries in the

study, it at least suggests that a conclusive assertion can

be raade on the narrowly defined raonetary aggregate Ml

189

(seasonally as well as seasonally unadjusted, and raonthly as

well as quarterly aggregated data) of all the three coun-

tries. And the assertion is that the liquidity function is

not a stable or perraanent effect and that the direction and

magnitude of the change in short-term interest rates will

mirror the change in monetary growth. This is consistent

with some earlier studies with similar results. For exam-

ple, Brown and Santoni (1983) deraonstrated that data for the

raost recent period reveal a statistically significant but

economically anemic liquidity effect that dissipates rapid-

ly. This was to be expected, given efficient financial and

capital markets.

Because of time and budget constraints, only three

countries were covered in this study. Besides the number of

countries, there are also other limitations to this re-

search. Other nonraonetary factors affecting the level of

interest rates in the economy were not incorporated into the

models. These nonraonetary variables such as the government

budget deficit or surplus, and the level of economic activi-

ty (either an expansionary stage or a recessionary stage)

obviously do influence the deraand for credit by both the

governraent and the private sector. For instance the

magnitude of the budget deficit and its effect on the level

of interest rates as well as other economic variables has

190

been a major concern in the United States Congress and in

the financial communities both inside and outside the United

States in recent months, especially in countries such as

Mexico, Argentina, and Brazil which are under huge debts to

banks in the United States.

For these reasons, it is suggested that further inves-

tigations be done covering other countries and the nonmone-

tary factors affecting the level of interest rates in the

economy should be incorporated into the models before any

specific complete generalizations can be raade.

Despite these shortcomings, this study's major contri-

bution to the literature is the fact that the findings here

with recent data and across three countries, give support to

both the theoretical arguments and the empirical estimations

which showed that a stable or permanent liquidity preference

function relating the norainal quantity of raoney inversely to

the nominal interest rates is an inadequate tool for analyz-

ing the effect of monetary changes on interest rates.

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APPENDICES

A, Sources of Data for the Monetary Stock Measures and

the Treasury Bill Rate

B, Data of Monetary Stock Measures and the 3-Month

Treasury Bill Rate for the United States

C. Data of Monetary Stock Measures and the 3-Month

Treasury Bill Rate for the United Kingdom

D. Data of Monetary Stock Measures and the Equivalent

of the 3-Month Treasury Bill Rate for the Federal

Republic of Gerraany

iOO

APPENDIX A

SOURCES OF DATA FOR THE MONETARY MEASURES AND THE TREASURY BILL RATE

(1) Bank of England's Quarterly Bulletin, Statistical Annex,

(2) Federal Reserve Board of Governors Publishing Depart-

raent, Washington D, C.

(3) Federal Reserve Bulletin.

(4) International Econoraic Conditions, Federal Reserve Bank

of St, Louis,

(5) Monthly Report of the Deutsche Bundesbank, Statistical

Section.

(6) Organization For Econoraic Co-operation and Development

Financial Statistics Monthly.

(7) Organisation For Economic Co-operation and Developraent

Financial Statistics, "Interest Rates 1960 - 1974", Pub-

lication DE L'OCDE, 2 rue Andre - Pascal, 75775 Paris

Cedex 16 - no. 37.451 (June 1976).

(8) Statistische Beihefte zu den Monasberichten der Deut-

schen Bundesbank.

201

APPENDIX B

^tlt ?^ MONETARY STOCK MEASURES AND THE 3 MONTH TREASURY BILL RATE FOR

THE UNITED STATES

202

203

SEASONALLY ADJUSTED

YEAR SAMl SAM2 SAM3 SAL INTEREST RATE

^ocnSÍ ^^^*^ 286.5 288.1 374.2 2.82 195902 140.3 287.7 289.3 374.7 2.70 195903 140.7 289.2 290.7 376.3 2.80 195904 140.6 290.0 291.6 377.5 2.95 195905 141.6 292.3 293.8 380.6 2.84 195906 142.1 294.0 295.5 383.2 3.21 195907 142.6 295.2 296.7 385.6 3.20 195908 142.8 296.4 297.9 387.7 3.38 195909 142.0 296.8 298.1 388.4 4.04 195910 141.4 296.5 297.9 388.3 4.05 195911 141.3 297.1 298.3 388.8 4.15 195912 140.9 297.7 298.9 388.4 4.49 196001 141.0 298.1 299.4 389.6 4.35 196002 140.9 298.5 299.7 390.6 3.96 196003 140,9 299.4 300,7 391.8 3.31 196004 140,6 300,1 301,3 392,2 3,23 196005 140,7 301.0 302.3 392.8 3.29 196006 140.7 302.4 303.8 394.6 2.46 196007 141.3 304.2 305.7 396.4 2.30 196008 142.4 307.0 308.5 398.3 2,30 196009 142,3 308.5 310.2 400.5 2.48 196010 142.0 309.5 311.3 401.5 2.30 196011 142.0 310.9 312.8 402.4 2.37 196012 141.9 312.3 314.3 403.4 2.25 196101 142.2 314.0 316.2 405.7 2.24 196102 142.8 316.6 319.0 408.2 2.42 196103 143.1 318.4 320.9 409.8 2.39 196104 143.3 319.9 322.6 411.9 2.29 196105 143.9 322.3 325.2 414.6 2.29 196106 144.1 324.3 327.5 416.8 2.33 196107 144.2 325.6 329.0 418.8 2.24 196108 144.8 327.7 331.2 420.7 2.39 196109 145.1 -329.6 333.3 422.6 2.28 196110 145.5 331.2 335.0 425.0 2.30 196111 146.1 333.4 337.3 428.0 2.48 196112 146.5 335.5 339.4 430.5 2.60 196201 146.6 337.5 341.5 433.4 2.72 196202 147.0 340.2 344.6 436.4 2.73 196203 147.3 343.2 348.0 440.4 2.72 196204 147.8 345.5 350.6 443.5 2.73 196205 148,2 347.5 352.7 445.8 2.68 196206 147.9 3-49.3 354,9 448.6 2.73 196207 147.9 350.9 356.5 450.3 2.92 196208 147.9 352.9 358.6 453.2 2.82 196209 147,7 354.9 .360.9 455.8 2.78 196210 148,1 357.2 363.5 457.4 2.74 196211 148.7 359.9 366.5 461.9 2.83 196212 149.2 362.8 369.7 465.9 2.8^ 196301 149.7 365.2 372.5 468.6 2.91

204

ICiAK

196302 196303 ,---. 196304 196305 196306 -196307 196308 196309 196310 196311 -196312*-^ ' 196401 196402 196403 196404 196405 196406 196407 196408 196409 — 196410 196411 196412 196501 196502 rs65a3---— 196504 196505 1-96506 196507 196508 196509 196510 196511 196512 196601 196602 196603. 196604 196605 a.96606 196607 196608 196609 196610 196611 196612 ._ 196701 196702 196703 196704

bAMl

150.3 150.6 151.1 151.8

• 151.9 152.8 153.2 153.4 154.0 155.1 154.7 155.2 155.8 156.0 156.4 156.9 157.2 158.5 159.4 160.4 160.9 161.5 161.9 162.4 162.5

-ie3.i-163.7 163.3 163.9 164.7 165.3 166.5 167.7 168.4 169.5 170.8 171.3 172.2 173.5 172.9 173.3 172.1 172.5 173.6 172.9 173.1

.. 173.7 173.6 174.7 176.5 176.0

SAM2

368.1 370.9 373.3 376.1 378.5 381.2 383.7 386.1 388.4 391.7 391.7 395.4 397.9 400.1 401.9 404.4 407.2 410.3 413.7 417.1 419.3 422.3 425.1 427.8 430.8

-'433.6 435.7 437.3 440.3 443.1 446.1 449.8 452.9 455.9 •459.5 462.3 465.0 467.6 469.7 470.5

..^s 471', 7 471.3 473.2 476.1 476.5 478.1

.. ,.481.3 482.6 486.2 490.7 493.0

SAM3

375.6 378.7 381.4 384.4 387.0 389.8 392.8 395,5 398.2 402.1 402.1 406.6 409.6 411.9 413.9 416,9 420,1 423.5 427.2 431.0 433.8 437.2 440.2 443.7 447.1 450.2 452.6 454.7 458.2 461.6 465.2 469.6 473.5 476.7 480.7 483.7 486.5 489.5 492.8 494.2 495.9 496.8 498.6 501.4 500.5 501.2 504,9 508,3 513.9 519.4 521.9

SAL

472.6 475.8 478.0 481.7 484.2 486.7 490.9 494.8 496.9 501.5 501,5 506,0 509.0 511.4 513.7 517.2 521.1 523.7 526.5 531,2 534.5 537.7 540.5 543.5 546.9 550.6 553.6 556.6 561.0 565.1 568.8 572.9-576.7 580.6 584.5 588,3 591.7 594,7 598.6 600.7 602.6 603.1 604.9 608.3 609.5 612.5 616.5 619.1 624.0 624.4 631.4

INTEREST

2.92 2.89 2.90 2.92 2.99 3.18 3.32 3.38 3.45 3.52 3.52 3.52 3,53 3.54 3.47 3.48 3.48 3.46 3.50 3.53 3.57 3.64 3.84 3.81 3.93 3.93 3.93 3.89 3.80 3.84 3.84

- 3.92 4.03 4.09 4.38 4.59 4.65 4.59 4.62 4.64 4.50 4.80 4.96 5.37 5.35 5.32 4.96 4.72 4.56 4.26 3.84

205

Il^iAK

196705 196706 196707 196708 196709 196710 196711 196712 196801 196802 196803 196804 196805 196806 196807 196808 196809 196810 196811 196812 196901 196902 1S690.3 . ., 196904 196905 196906 196907 196908 196909 ..,-., 196910 196911 196912 • 197001 197002 197003 197004 197005 J.97006 197007 197008 197009 197010 197011 197012 -197101 197102 197103 197104 197105 197106 197107

bAMl

177.4 178.8 180.0 181.5 182.5 183.5 184.2 185.1 186.0 186.5 187.5 188.6 190,0 191,4 192,5 193,8 194.8 196.1 198.0 199.4 200.8 201.4 202.1 202,8 202.8 20a.4 203.8 203.7 204.2 205.0 205.6 205.8 208.0 206,4 207.9 209.3 209.6 209.9 210.3 212.3 213.9 214.6 215.4 216.5 217.7 219.2 •221.2 222.7 224.7 226.2 227.3

SAM2

498.2 503.0 507.3 512.0 515.9 519.5 522.6 526.6 528.7 532.1 534.9 537.3 540.7 544.3 547.2 551.3 555.6 559.6 564.5 569.4 571.4 574.2 576.7 577.8 578.8 580.9 581.7 582.5 584.6 586.0 588.1 591.3 591.0 589.4 591.7 592.9 596.1

...- 599.3 601.3 606.3 611.8 616.5 621.9 628.8 634.5 643.5 653.4 662.4 670.8 677.1 682.0

SAM3

527.2 532.6 537.4 542.5 546.9 550.4 554.2 558.6 560.5 564.1 567.5 569.3 572.5 576.0 580.4 585.6 590.7 596.0 602.2

-- 608.4 608.8 610.1 611. S*'"' 612.3 612.6

..613.5 611.3 609.2 610.2 '••-610.4 611.5 614.1 612.4 610.8 614.7 619.2 623.5 626.0 633.3 641.9 651.1 658.3 665.8 675.2 683.6 694.6 706.7 713.7 722.2 729.4 735.8

SAL

635.^ 640.5 644.6 650.5 655.7 659.9 664.6 670.1 674.1 679.1 683.6 687.2 691.2 697.6 703.4 709.7 715.9 722.0 727.9 733.9 736.5 740.6 744.9 747.5 748.3 751.0 750.4 750.9 754.8 756.9 760.2 765.2 765.3 765.5 770.3 774.3 777.5 781.6 787.8 794.3 799.9 805.3 810.3 816.5 823.3 831.4 840.7 846.8 852.7 860.6 869.1

INTEREST

3.60 3.54 4.21 4.27 4.42 4.56 4.73 •4.97 5.00 4.98 5.17 5.38 5.66 5.52 5.31 5.09 5.19 5.35 5.45 5.96 6.14 6.12 6.02 6.11 6.04 6.44 7.00 6.98 7.09 7.00 7.24

- 7.82 7.87 7.13 6.63 6.51 6.84 6.68 6.45 6.41 6.13 5.91 5.28 4.87 4.44 3.69 3.38 3.85 4.13 4.74 5.39

206

YEAR SAMl SAM2 SAM3 SAL INTEREST

197108 228.1 197109 228.9 197110 229.4 197111 229.8 197112 230.6 197201 232.7 197202 234.5 13-7203 236.9 197204 238.3 197205 238.7 197206 239.5 197207 241.4 197208 243,6 197209 245,8 197210 247,6 197211 249.0 197212 251.9 197301 254,5 197302 254,8 197303 254.6 197304 255.6 197305 257,8 197306 259,9 197307 260,5 197308 260,8 197309 ".-r-260.9 197310 261.9 197311 263.9 197312 • 265.8 197401 267.0 197402 268.3 197403 269.3 197404 269.9 197405 270.7 197406 271.9 197407 272.5 197408 273.2 197409 274.0 197410 275.1 197411 276.8 197412 . 277,4 197501 277,4 197502 278.1 197503 V.. 280.0 197504 279.5 197505 282.5 197506f :* • 286.3 197507 286.9 197508 288.1 197509 289.0 197510 288.3

6 8 7 . 8 6 9 4 . 3 6 9 9 . 8 7 0 6 . 9

" 7 1 3 , 6 7 2 0 . 4 7 2 9 . 2 7 3 8 . 0 7 4 2 . 6 7 4 7 . 6 7 5 4 . 5 7 6 3 . 1 7 7 2 . 6 7 8 1 . 4 7 8 9 . 2 7 9 7 . 4 8 0 6 . 4 8 1 4 . 4 8 1 9 . 5 8 2 1 . 6 8 2 4 . 8 8 3 2 . 2

^^^839. 9 8 4 2 . 6 8 4 5 . 8 8 4 6 . 7 .,, 8 4 9 . 7 8 5 6 . 8 8 6 3 . 2 8 6 7 . 2 8 7 3 . 1 8 8 0 . 0 • 8 8 1 . 3 8 8 4 . 1 8 8 8 . 5 8 9 0 . 9 8 9 4 . 5 8 9 8 . 5 -9 0 2 . 3 9 0 8 . 7 9 1 1 . 2 9 1 4 , 9 9 2 3 , 7 9 3 5 . 6 9 4 4 . 8 9 5 8 . 3 9 7 4 . 0 9 8 4 . 8 9 9 3 . 9

1 0 0 3 . 0 1 0 0 7 . 8

7 4 1 . 3 7 4 3 . 0 7 5 6 . 5 7 6 5 . 0 7 7 3 . 3 7 8 1 . 0 7 9 1 . 1 8 0 0 . 4 8 0 6 . 6 8 1 4 . 0 8 2 2 . 7 8 3 2 . 1 8 4 3 . 0 8 5 3 . 0 8 6 1 . 2 8 7 2 . 4 8 8 2 . 8 8 9 2 . 1 9 0 3 . 1 9 1 4 . 3 9 2 0 . 1 9 2 8 . 9 9 3 8 , 2 9 4 6 . 4 9 5 5 . 8

.., 9 6 3 . 2 9 6 7 . 6 9 7 4 . 8 9 8 1 . 4 9 8 8 . 8 9 9 9 . 4

' - 1 0 0 9 . 2 1 0 1 6 . 6 1 0 2 5 . 0 1 0 3 4 , 3 1 0 3 9 . 8 1 0 4 5 . 0

- - 1 0 5 0 , 7 1 0 5 3 . 8 1 0 6 0 . 0

' ^ - 1 0 6 4 . 3 1 0 6 9 . 1 1 0 7 7 . 6 1 0 8 7 . 1 1 0 9 1 . 8 1 1 0 2 . 3 1 1 1 5 . 7 1 1 2 4 . 8 1 1 3 1 . 6 1 1 4 2 . 7 1 1 4 8 . 0

8 7 4 . 9 8 8 1 . 1 8 8 7 . 4 8 9 4 . 8 9 0 3 . 2 9 1 1 . 2 9 2 1 . 7 9 3 2 . 4 9 3 9 . 3 9 4 6 . 5 9 5 6 . 2 9 6 5 . 7 9 7 7 . 0 9 8 7 . 5 9 9 7 . 3

1 0 1 1 . 2 1 0 2 3 . 6 1 0 3 4 . 2 1 0 4 6 . 6 1 0 5 8 . 7 1 0 6 6 . 3 1 0 7 7 . 2

. 1 0 8 9 . 6 --1 0 9 9 . 1 1 1 1 0 . 6 112012 1 1 2 6 . 7 1 1 3 6 . 1 1 1 4 3 . 8 1 1 5 3 . 3 1 1 6 7 . 2 1 1 7 9 . 5 1 1 8 8 . 5 1 1 9 7 . 6 1 2 0 8 . 7 « 1 2 1 5 . 8 1 2 2 4 . 0 1 2 3 2 . 4 1 2 3 8 . 2 1 2 4 5 . 1 1 2 4 9 . 8 1 2 5 6 . 7 1 2 6 6 . 2 -1276 ,3 1 2 8 2 . 9 1 2 9 5 . 3 1 3 0 9 . 6 1 3 1 9 . 7 1 3 2 9 . 5 1 3 4 2 . 2 1 3 5 1 . 4

4 . 9 3 4 . 6 9 4 . 4 6 4 . 2 2 4 . 0 1 3 . 3 8 3 . 2 0 3 . 7 3 3 . 7 1 3 . 6 9 3 . 9 1 3 . 9 8 4 . 0 2 4 . 6 6 4 . 7 4 4 . 7 8 5 . 0 7 5 . 4 1 5 . 6 0 6 . 0 9 6 . 2 6 6 . 3 6 7 . 1 9 8 . 0 1 8 . 6 7 8 . 2 9 7 . 2 2 7 . 8 3 7 . 4 5 7 . 7 7 7 . 1 2 7 . 9 6 8 . 3 3 8 . 2 3 7 . 9 0 7 . 5 5 8 . 9 6 8 . 0 6 7 . 4 6 7 . 4 7 7 . 1 5 6 . 2 6 5 . 5 0 5 . 4 9 5 . 6 1 5 . 2 3 5 . 3 4 6 . 1 3 6 . 4 4 6 . 4 2 5 . 9 6

20

YEAR SAMl SAM2 SAM3 SAL INTERES^

197511 291.2 1018.7 1160.4 1368.5 5.48 197512 291.0' 1026,9 1166.2 1376.6 5.44 197601 292,6 1037.5 1174.4 1386.6 4.87 197602 294.6 1052.6 1187.1 1400.4 4.88 197603 295.8 1062.5 1198.7 1413.6 5,00 197604 297,8 1073.4 1210.0 1426.6 4.86 197605 299.9 1088.2 1222.9 1440.7 5.20 197606 300.1 1093,2 1230.5 1450.8 5.41 197607 300.9 1101.1 1239.9 1462.9 5.23 197608 302.9 1115.9 1253.7 1477.9 5.14 197609 303.6 1128.3 1263.7 1487.1-^^5.08 197610 306.5 1141.8 1274.4 1499.6 4.92 197611 307.5 1155.6 1288.4 1515.4 4.75 197612 310.4 1171.2 1305.0' 1531.4 4.35 197701 313.4 1184.0 1316.4 1543.9 4.62 197702 315.4 1196.8 1329.7 1559.8 4.67 197703 317.4 1209,5' 1344.0 - '1576.4 4.60 197704 320.0 1220,9 1355,5 1590,6 4.54 197705 320.8 1232.9 1370.7 1608.0 4.96 197706 322.4 ^241.5 1382.8 1623.6 5.02 197707 324.5 1250.4 1395.8 1639.8 5.19 197708 326.2 1260.7 1410.1 1657.3 5.49 197709 328.6 12,71,1 ...1423.4 1673.0 5.81 197710 331.2 1279.0 1435.6 1689.5 6.16 197711 333.3 1289.2 1451.7 1709.7 6.10 197712 335.5 1297.7 1464.6 1724.3 6.07 197801 339.5 1307.2 1477.4 1741.5 6.44 197802 339.4 1313.7 1488.2 1755.7 6.45 197803 340.8 1323.5 1505.2 1776.6 6.29 197804 344.7 1331.8 1519.5 1794.5 6.29 197805 347.9 1342.4 1537.4 1816.2 6.41 197806 350.2 1349.5 . 1.547.0' 1830.3 6.73 197807 352.0 1356.0 1559.2 1846.8 7.01 197808 353.7 1365.9 1574.3 1865.2 7.08 197809 357.3 • 1377.5 1588.6 1881.8 7.85 197810 358.5 1385.4 1598.2 1894.8 7.99 197811 360.6 1394.9 1615.7 1919.3 8.64 197812 363.2 1403.9 1629.0 1938.9 9.08 197901 363.9 1409.4 1637.1 1952.7 9.35 197902 364.5 1417.1 1648.0 1968.2 9.32 197903 367.7 1431.3 1664.1 1994.6 9.48 197904 373.4 1445.4 1678.7 2017.0 9.46 197905 372.7 1455.1 1692.2 2040.7 9.61 197906 377.3 1469.7 1707.8 2069.1 9.06 197907 381.0 1479.9 1722.0 2088.0 9.24 197908 383,2 1492,2 1738.6 2106.0 9.52 197909 385.3- 1501.8 "^1755,8 2126.8 10.26 197910 386.5 1506.3 1766.5 2130.5 11.70 197911 386.9 1511.6 1770.8 2145.5 11.79 197912 389.0 1518.9' 1779.3 2153.9 12.04 198001 391.9 1528.8 1792.1 2172.7 12.00

208

YEAR SAMl SAM2 SAM3 SAL INTEREST

198002 395.1 1542.0 1810.2 2194.4 12.86 198003 395.1 1550.0 1820.3 2210.9 15.20 198004 389.4 1545.6 1819.8 2220.6 13.20 198005 389.0 1558.1 1837.5 2239.1 8.58 198006 393,7 1577,3 1855.9 2250.4 7.07 198007 398,0 1598.3 1877.6 2269.1 8.06 198008 405,1 1618.2 1901.8 2296.7 9.13 198009 410.7 1629.2 1914.3 2309.8 ...10.27 198010 415.5 1640.1 1930.7 2325.8 11.62 198011 417.5 1656.0 1952.6 2352.6 13.73 198012 414.5 1656.1 1963.1 2370.4 15.49 198101 416.0 1681.7 1978.6 2398.2 15.02 198102 419.0 1695.4 1996.4 2421.5 14.79 198103 422.9 1717.4 2012.3 2443.7 13.36 198104 433,7 1738,1 2046.0 2457.7 13.69 198105 431,5 1743,4 2060,8 2480.1 16.30 198106 428,8 1749.3 2079.0 2502.7 14.73 198107 430.1 1760.1 2094.0 2519.4 14.95 198108 431,1 1772.2 2125.8 2559.3 15.51 198109 431.2 1778.1 2138.0 2577.7 14.70 198110 432.9 1789.3 2151.0 2599.4 13.54 198111 436,4 1809.6 2174.4 2628.3 10.86 198112 440.8 1822.2 2187.5 2640.9 10.85 198201 448.6 1840.9 2204.0 2658.6 12.28 198202 447.3 1847.5 2214.6 2689.9 13.48 198203 448.2 1864.8 2235.5 2716.8 12.68 198204 452.3 1879.7 2256.6 2743.5 12.70 198205 451.4 1897.5 2279.3 2773.2 12.09 198206 451.4 1907.9 2296.0 2797.8 12.47 198207 451.3 1923.4 2320.0 2832.3 11.35 198208 455.2 1946.2 2355.7 2858.9 8.68 198209 460.5 1954.4 2363.5 2837.7 7.92 198210 468.3 1629.9 2352.7 2870.0 7.71 198211 474.0 1945.0 2370.1 2883.1 8.07 198212 478.2 1959.5 2377.7 2896.8 7.94 198301 482.1 2008.1 2401.4 . 7.86 198302 491.0 2048.3 2428.2 . 8.11 198303 497.6 2070.0 2447.1 . 8.35 198304 496.5 2074.9 2454.0 3606.5 8.21 198305 507.4 2096.2 2476.5 3032.1 8.19 198306 511.7 2114.3 2499.2 3059.9 8.79 198307 515.5 2126.0 2510.3 . 9.08 198308 516,7 2136.9 2528.3 3115.6 9.34 198309 517.1 2145.4 2543.8 3137.9 9.00 198310 517.9 2161.7 2561.4 3155.2 8.64 198311 518.2 2175.7 2587.1 . 8.76 198312 521.1 2184.6 2602.9 . 9.00

NONSEASONALLY ADJUSTED.

209

YEAR UAMl UAM2 UAM3 UAL

195901 195903 195904 195905 195906 195907 195908 195909 195910 195911 195912 196001 196002 196003 196004 196005 196006 196007 196008 196009 196010 196011 196012 196101 196102 196103 196104 196105 196106 196107 196108 196109 196110 196111 196112 196201 196202 196203 196204 196205 196206 196207 196208 196209 196210 196211 196212 196301 196302

143.1 139.4 140.7 139.6 140.1 141.2 140.9 141.3 141.7 142.8 144.6 144.4 140.9 139.5 140.8 138.7 139.0 140.0 140.4 141.6 142.3 143.4 145.6 145.7 142.8 141.8 143.5 141.8 142.4 142.8 142.7 144.3 145.7 147.6 150.5 150,2 146.9 146.0 148.0 145.9 146.7 146.2 145.8 146,9 148.4 150.2 153.3 153.6 150.1

289.8 287.9 290.2 290.2 292.5 294.5 294.8 296.1 296.9 297.9 300.6 301.6 298.5 298.2 300.3 298.9 300.9 303.5 305.3 307.8 309.9 311.7 315.3 317.5 316.7 317.2 320.3 320.1 322.8 324.9 325.9 328.8 331.6 334.1 338.5 341.2 340.3 342.1 346.0 345.1 347.7 350.2 351.0 354.0 357.6 360.6 365.8 369.2 368.1

291.3 289.2 291.8 291.8 294.1 296.1 296.3 297.5 298.2 299.1 301.8 302.7 299.8 299.4 301.6 300.3 302.3 305.1 306.9 309.5 311.6 313.4 317.2 319.6 319.1 319.7 323.0 323.2 326.0 328.4 329.5 332.5 335.3 337.8 342.3 345.1 344.7 346.9 351.2 350.6 353.5 356.0 356.8 360.0 363.8 366.7 372.5 376.3 375.6

377.5 375.7 375.6 379.3 381.5 384.7 386.4 386.8 387.8 389.0 390.7 393.0 391.9 391.3 393.2 391.5 392.8 395.4 396.9 398.9 400.9 404.5 405.6 409.1 409.4 409.5 413.0 413.4 415.1 417.7 419.2 420.9 424.4 428.0 432.8 436.8 437.7 440.2 444.8 444.7 446.9 449.0 451.5 453.9 456.6 461.9 468.0 472.2 473.9

1 u

YEAR UAMl UAM2 UAM3 UAL

196303 196304 196305 196306 196307 196308 196309 196310 196311 196312 196401 196402 196403 196404 196405 196406 196407 196408 196409 196410 196411 196412 196501 196502 196503 196504 196505 196506 196507 196508 196509 196510 196511 196512 196601 196602 196603 196604 196605 196606 196607 196608 196609 196610 196611 196612 196701 196702 196703 196704 196705

149.3 151.5 149.3 150.1 151.3 150.9 152.5 154.3 156.7 156.7 159.4 155.4 154.6 156.8 154.2 155.5 157.1 157.0 159.4 161.3 163.2 166.4 166.9 161.9 161.5 164.2 160.3 162.2 163.5 162.8 165.6 168.2 169.9 174.3 175.6 170.3 170.4 174.1 169.6 171.7 171.0 171.0 172.7 173.4 174.6 178.6 178.4 173.4 174.6 176.6 174.1

369,9 373.9 373.5 376.9 380.4 381.6 385,0 388,9 392,4 392,4 399.7 397.8 399,1 402.6 401.5 405.5 409.5 411,3 416.0 420.1 423.2 428.5 432.6 430.3 432,4 436.5 433.9 438.6 442.3 443.5 448.7 453.9 456.9 463,3 467.5 464.0 466.3 470.6 466.7 470.2 470,9 470.8 475,3 477,7 478,9 484.5 487,3 484,5 489.1 494,0 494.4

377.8 382.2 392.2 385.7 389.2 390.8 394.4 398.5 402.3 402.3 410.9 409.5 411.0 414.9 414.5 418.8 422.9 425,0 429.7 434.1 437.5 443.2 448.4 446.8 449.3 453.8 451.9 456.8 460.9 462.9 468.2 473.9 477.2 484.0 488.7 485.7 488.5 494.1 491.1 494.6 496.2 490.6 500.3 501.2 501.6 507.8 513.0 425.4 518.0 523.3 524.1

475.9 479.7 480.6 482.6 485.1 488.9 492.6 496.0 501.5 501.5 510.0 510.2 511.6 515.6 516.2 519.4 521.9 524,2 528.8 533.7 537.8 542.8 548.0 547.9 550.9 555.8 555.3 559.2 563.0 566.3 570.4 576.0 580.9 587.1 593.1 592.4 595.2 601.1 599.2 600.8 601.0 602.6 606.2 608.9 612.6 618.6 623.5 624.1 629.6 634.0 634.0

211

YEAR UAMl UAM2 UAM3 UAL

196706 196707 196708 196709 196710 196711 196712 196801 196802 196803 196804 196805 196806 196807 196808 196809 196810 196811 196812 196901 196902 196903 196904 196905 196906 196907 196908 196909 196910 196911 196912 197001 197002 197003 197004 197005 197006 197007 197008 197009 197010 197011 197012 197101 197102 197103 197104 197105 197106 197107 197108

177.4 179.1 179.0 181.7 183.9 185.7 190.3 191.0 184.9 185.4 189.3 186.6 190.2 191.8 191.4 193.9 196.3 199.6 204.8 205.9 199.3 199.8 203.5 199.3 202.3 203.3 201.4 203.3 205.0 207.0 211.4 213.0 204.0 205.5 210.1 206.2 208.9 210.1 210.0 212.8 214.4 216.7 222.2 222.7 216.6 218.6 223.8 221.1 225.2 227.5 225.9

502.1 507.5 509.9 515.5 520.7 523.1 529.4 533.2 529.7 533.2 538.6 537.2 544.0 547.9 549.5 555.2 560,5 564.6 571.8 575.7 571.3 575.1 579.7 575.8 581.1 583.0 580.9 583.9 586.3 587.5 593.1 594.6 586.3 590.2 595.6 593.8 600.2 603.4 605.0 610.7 615.9 620.4 629.9 637.5 640.1 652.2 666.2 669.1 678.7 685.0 686.4

531.7 537.2 540.9 546.3 551.1 554.4 561.2 564.9 561.8 565.8 570.8 569.5 575.5 580.6 584.4 590.3 596.6 602.3 610.8 613.0 607.2 609.9 614.2 609.9 613.4 612.1 608.1 609.7 610.7 611.0 616.0 616.1 607.7 612.9 621.7 621.4 626.7 634.8 641.4 650.5 658.4 664.5 676.6 686.9 690.9 704.3 716,9 720.7 730,4 737.8 741.2

639.0 643.1 648.7 654.2 659.5 664.6 671.9 678.3 678.5 683.8 690.0 690.4 696.0 701.7 708.1 714.4 721.3 727.6 735.5 740.6 759.9 745.4 750.9 747.3 749.5 749.0 749.3 753.2 755.8 759.4 766.3 768.9 764.9 771.3 778.1 776.9 780.7 787.0 793.1 798.3 804.1 809.0 817.4 826.5 829.5 840.3 850.7 852.1 860.5 869.4 874.1

212

YEAR UAMl UAM2 UAM3 UAL

197109 197110 197111 197112 197201 197202 197203 197204 197205 197206 197207 197208 197209 197210 197211 197212 197301 197302 197303 197304 197305 197306 197307 197308 197309 197310 197311 197312 197401 197402 197403 197404 197405 197406 197407 197408 197409 197410 197411 197412 197501 197502 197503 197504 197505 197506 197507 197508 197509 197510 197511

2 2 7 . 7 2 2 9 . 1 2 3 1 . 2 2 3 6 . 9 2 3 7 . 6 2 3 1 . 4 2 3 4 . 2 2 3 9 . 6 2 3 4 . 8 2 3 8 . 8 2 4 1 . 9 2 4 1 . 4 2 4 4 . 6 2 4 7 . 1 2 5 0 , 5 2 5 8 . 9 2 5 9 . 3 2 5 1 . 2 2 5 1 . 7 2 5 7 . 0 2 5 3 . 6 2 5 9 . 3 2 6 2 . 1 2 5 8 . 7 2 5 9 . 5 2 6 1 . 4 2 6 5 . 6 2 7 3 . 2 2 8 9 . 9 2 7 3 . 3 2 7 6 . 3 2 8 1 . 3 2 7 8 . 0 2 8 5 . 8 2 8 8 . 0 2 8 6 . 2 2 8 7 . 7 2 8 8 . 4 2 9 3 . 5 2 9 8 . 9 2 8 1 . 9 2 7 3 . 3 2 7 6 . 3 2 8 1 . 3 2 7 8 . 0 2 8 5 . 8 2 8 8 . 0 2 8 6 . 2 2 8 7 . 7 2 8 8 . 4 2 9 3 . 5

6 9 2 . 5 6 9 8 . 6 7 0 4 , 6 7 1 4 , 3 7 2 2 . 8 7 2 5 . 4 7 3 7 , 1 7 4 7 . 4 7 4 6 . 2 7 5 7 . 1 7 6 7 . 1 7 7 1 . 2 7 7 8 . 8 7 8 7 . 3 7 9 4 . 4 8 0 7 . 0 8 1 6 . 4 8 1 5 . 2 8 2 0 . 9 8 3 0 . 5 8 3 1 . 0 8 4 3 . 1 8 4 7 . 3 8 4 4 . 5 8 4 3 . 6 8 4 7 . 5 8 5 3 . 8 8 6 4 . 1 9 1 6 . 7 9 1 8 . 3 9 3 4 . 1 9 5 1 . 0 9 5 6 . 6 9 7 7 . 0 9 9 0 . 1 9 9 2 . 9 9 9 9 . 8

1 0 0 6 . 6 1 0 1 6 . 2 1 0 2 8 . 3

9 1 6 . 7 9 1 8 . 3 9 3 4 . 1 9 5 1 . 0 9 5 6 . 6 9 7 7 . 0 9 9 0 . 1 9 9 2 . 9 9 9 9 . 8

1 0 0 6 . 6 1 0 1 6 . 2

7 4 8 . 1 7 5 6 . 4 7 6 2 . 7 7 7 4 . 4 7 8 4 . 0 7 8 6 . 9 7 9 8 . 1 8 1 0 . 6 8 1 2 . 9 8 2 4 . 4 8 3 5 . 0 8 4 3 . 1 8 5 1 , 7 8 6 0 . 7 8 6 9 . 0 8 8 3 . 5 8 9 4 . 8 8 9 8 . 4 9 1 1 . 7 9 2 4 . 6 9 2 8 . 1 9 4 0 . 2 9 4 9 . 7 9 5 6 . 4 9 6 2 . 0 9 6 7 . 3 9 7 0 . 9 9 8 2 . 4

1 0 7 2 . 5 1 0 7 2 . 0 1 0 8 4 . 3 1 0 9 6 . 7 1 1 0 1 . 0 1 1 1 7 . 2 1 1 2 8 . 2 1 1 3 1 . 5 1 1 4 0 . 3 1 1 4 7 . 7 1 1 5 7 . 5 1 1 6 8 . 8 1 0 7 2 . 5 1 0 7 2 . 0 1 0 8 4 . 3 1 0 9 6 . 6 1 1 0 1 . 0 1 1 1 7 . 2 1 1 2 8 . 2 1 1 3 1 . 5 1 1 4 0 . 3 1 1 4 7 . 7 1 1 5 7 . 5

8 7 9 . 4 8 8 6 . 6 8 9 2 , 9 9 0 3 . 9 9 1 4 . 1 9 1 8 . 9 9 3 1 . 6 9 4 3 . 8 9 4 5 . 9 9 5 6 . 9 9 6 7 . 0 9 7 6 . 3 9 8 5 . 4 9 9 6 . 3

1 0 0 8 . 5 1 0 2 4 . 3 1 0 3 7 . 1 1 0 4 3 . 5 1 0 5 7 . 8 1 0 7 1 . 3 1 0 7 6 . 8 1 0 9 0 , 2 1 1 0 0 . 3 1 1 1 0 . 1 1 1 1 8 . 2 1 1 2 6 . 1 1 1 3 3 . 3 1 1 4 5 . 1 1 2 6 0 . 1 1 2 6 2 . 4 1 2 7 5 . 2 1 2 8 8 . 2 1 2 9 4 . 1 1 3 0 9 . 5 1 3 2 1 . 0 1 3 2 8 . 3 1 3 3 9 . 1 1 3 5 1 . 2 1 3 6 6 . 7 1 3 7 9 . 2 1 2 6 0 , 1 1 2 6 2 . 4 1 2 7 5 . 2 1 2 8 8 . 2 1 2 9 4 . 0 1 3 0 9 . 5 1 3 2 1 . 0 1 3 2 8 . 3 1 3 3 9 . 1 1 3 5 1 . 2 1 3 6 6 . 7

213

YEAR UAMl UAM2 UAM3 UAL

197512 197601 197602 197603 197604 197605 197606 197607 197608 197609 197610 197611 197612 197701 197702 197703 197704 197705 197706 197707 197708 197709 197710 197711 197712 197801 197802 197803 197804 197805 197806 197807 197808 197809 197810 197811 197812 197901 197902 197903 197904 197905 197906 197907 197908 197909 197910 197911 197912 198001 198002

298.9 296.9 289.0 291.4 300.0 295.2 299.5 302.4 301.1 302.6 307.1 309,8 318.7 317.7 309.0 312.3 322.7 315.7 321.7 326.3 324.3 327.9 332.2 335.7 344.3 343.7 332.2 335.0 347.6 342.5 349.6 354.1 351.9 357.1 359.6 363.1 372.5 367.9 356,4 360.9 376.2 367.1 376.7 383.4 381,8 385,7 388.0 389.7 398.8 395.9 386.2

1028.3 1039.3 1046.1 1060.0 1079.9 1085.9 1095.7 1106.8 1115.1 1125.8 1142.1 1153.4 1173.1 1186.1 1189.3 1205.8 1227.3 1229.0 1242.7 1256.3 1260.0 1270.2 1281.5 1287.7 1300.8 1309.8 1305.3 1318.2 1337.5 1336.2 1349.2 1361.8 1365.1 1378.0 1389.7 1394.2 1408.5 1413.7 1408.7 1425.0 1450.6 1447.5 1468.3 1484.9 1490.4 1502.5 1511.2 1511.4 1524.6 1534.0 1534.7

1168.8 1177.5 1180.9 1196.0 1215.5 1220.4 1231.6 1243.9 1253.0 1261.4 1275.0 1286.2 1308.6 1319.8 1323.1 1340.8 1361.2 1366.3 1382.6 1399.6 1408.8 1422.0 1437.7 1450.8 1470.5 1482.1 1481.5 1501.5 1524.6 1530.4 1544.3 1561.5 1571.7 1587.6 1601.2 1616.3 1637.5 1643.7 1642.5 1660.4 1683.8 1683.8 1703.5 1722.7 1734.1 1754.5 1769.6 1771.8 1789.2 1800.7 1806.7

1379.2 1389.9 1396.3 1412.7 1432.9 1438.7 1450.2 1464.6 1476.1 1484.0 1500.1 1513.8 1534.7 1547.3 1555.2 1574.8 1597.3 1604.7 1622.3 1641.6 1654.8 1670.5 1691.0 1708.8 1729.5 1746.0 1751.7 1774.5 1801.0 1810.9 1827.2 1846.9 1860.8 1879.3 1896.7 1919.1 1946.6 1959.4 1966.3 1993.1 2024.0 2034.4 2065.2 2085.6 2098.6 2123.4 2140.9 2145.4 2162.8 2181.8 2195.8

214

YEAR UAMl UAM2 UAM3 UAL

198003 198004 198005 198006 198007 198008 198009 198010 198011 198012 198101 198102 198103 198104 198105 198106 198107 198108 198109 198110 198111 198112 198201

387.8 392.6 383.3 392.9 400.4 404.1 411.0 417.1 420.6 422.6 420.6 409.4 417.8 436.7 424.4 428.4 432.9 430.4 431.5 434.5 439.7 451.1 453.4

1544.5 1551.1 1550.3 1575.6 1601.9 1614.9 1628.8 1645.1 1656.1 1662.4 1684.7 1685.0 1708.8 1745.7 1737.5 1751.5 1765.0 1766.7 1775.6 1793.1 1809.1 1829.1 1848.8

1818.2 1825.5 1828.7 1851.0 1876.3 1895.1 1911.7 1933.8 1953.9 1973.8 1984.3 1988.3 2009.3 2052.5 2054.0 2075.6 2094.6 2115.3 2132.2 2152.4 2175.3 2199.6 2216.8

2211.7 2228.5 2233.1 2158.6 2264.2 2286.0 2304.5 2326.5 2352.3 2380.2 2401.2 2414.7 2444.5 2467.4 2478.0 2501.4 2544.1 2568.4 2596.7 2597.8 2627.5 2561.9 2673.1

APPENDIX C

^tlt ?^ MONETARY STOCK MEASURES AND THE 3 MONTH TREASURY BILL RATE FOR

THE UNITED KINGDOM

215

SEASONALLY ADJUSTED

216

YEAR SAMl SAM2 SAM3

197106 197107 197108 197109 197110 197111 197112 197102 197202 197203 197204 197205 197206 197207 197208 197209 197210 197211 197212 197301 197302 197303 197304 197305 197306 197307 197308 197309 197310 197311 197312 197401 197402 197403 197404 197405 197406 197407 197408 197409 197410 197411 197412 197501 197502 197503 197504 197505 197506

*

•

•

•

10040 10140 10310 10320 10420 10750 10720 11010 11460 11290 11330 11530 11580 11660 11820 11790 12000 12080 12070 12250 12570 12580 12390 12210 12220 12400 12250 12310 12440 12390 12390 12400 12470 12630 12880 12820 13060 13270 13380 13710 13800 13920 13960 15000 15290

•

18030 18190 18260 18380 18700 18990 19540 19570 20050 20960 21370 22270 22360 22590 23070 23250 23630 24370 24640 25590 25920 26140 26270 27050 27630 28110 28820 29490 29890 30810 31110 31780 31850 31770 31880 31920 32240 32920 32780 32970 33600 33610 34040 34470 34440 34720 35060 35240

18350 18480 18640 18820 19080 19360 19560 20020 19980 20930 21460 21790 22600 23090 23220 23750 24050 24380 25070 25580 26430 26840 27170 27330 27870 28890 29580 30280 30990 31370 32200 32500 33280 33450 33510 33850 33860 34730 35200 35180 35350 35760 35720 36060 36470 36760 36850 37350 37450

217

YEAR SAMl SAM2 SAM3

197507 197508 197509 197510 197511 197512 197601 197602 197603 197604 197605 197606 197607 197608 197609 197610 197611 197612 197701 197702 197703 197704 197705 197706 197707 197708 197709 197710 197711 197712 197801 197802 197803 197804 197805 197806 197807 197808 197809 197810 197811 197812 197901 197902 197903 197904 197905 197906 197907 197908 197909

15550 16070 16150 16170 16120 16460 16430 16990 17310 17310 17330 17540 17860 18220 18680 18020 18390 18580 18290 18640 18820 18930 19320 19960 19940 20350 20990 21400 22000 22070 22550 23010 23330 23270 23800 23830 24090 24500 24650 24820 25050 25350 25660 26010 26180 26700 26900 26690 27000 27470 27410

35460 36240 36130 36290 36290 36260 36260 37290 37510 37340 37920 38090 38480 39250 39600 39570 40240 39920 39690 39740 39950 40240 40740 41140 41300 41560 42030 42530 43040 43700 44460 45360 45720 46700 47340 47520 48230 47970 48210 48530 48840 49600 50570 51020 50710 51670 52380 53010 53410 53980 54090

37720 38330 38540 39010 38780 38750 39020 39460 39910 40450 40580 40950 41490 42230 43190 43640 44120 43860 43310 43370 43400 44380 44840 45290 45630 45780 46460 46640 46710 47400 48160 49160 49740 50960 51850 52300 52790 52170 52690 53410 53870 54280 55320 55770 55080 56220 57200 57770 57830 58470 58770

218

YEAR SAMl SAM2 SAM3

197910 197911 197912 198001 198002 198003 198004 198005 198006 198007 198008 198009 198010 198011 198012 198101 198102 198103 198104 198105 198106 198107 198108 198109 198110 198111 198112 198201 198202 198203 198204 198205 198206 198207 198208 198209 198210 198211 198212 198301 198302 198303 198304 198305 198306 198307 198308 198309 198310 198311

28310 27760 27600 27580 27190 27450 27580 27640 27660 28420 28400 28480 28810 28710 29490 29200 29730 29820 30990 31190 31210 32040 31260 31890 31650 31770 34505 34540 34400 34360 34270 35310 35310 35460 36000 36370 37310 37260 37660 37970 38200 39210 39660 40210 41140 40960 41290 41200 41810 42040

54970 55210 55590 56180 56640 57340 57610 58580 59520 62180 63650 63930 64960 66180 66870 66870 67910 68730 69840 70910 71390 72450 73180 74440 75020 75830 83220 84190 84660 85510 85790 87680 87680 87610 88690 89750 90930 91250 91670 92420 92940 93880 95450 95950 97520 98300 98420 98020 99440 100060

60270 61100 60620 61150 61490 62280 63360 64840 65200 67910 69330 69280 70850 72030 72720 73830 74720 75690 79510 79510 80470 82480 83630 85690 87770 87530 94230 94760 94920 95770 97440 98350 98880 100310 101430 101880 104060 104480 105690 105160 106420 107670 108980 109280 111040 112030 112140 111770 113740 114750

219

YEAR

197106 197107 197108 197109 197110 197111 197112 197102 197202 197203 197204 197205 197206 197207 197208 197209 197210 197211 197212 197301 197302 197303 197304 197305 197306 197307 197308 197309 197310 197311 197312 197401 197402 197403 197404 197405 197406 197407 197408 197409 197410 197411 197412 197501 197502 197503 197504 197505

NONSEASONALLY ADJUSTED

UAMl UAM2 UAM3 INTEREST RATE

10079 10230 10588 10382 10218 10523 10987 11051 11347 11425 11358 11403 11665 11671 12107 11850 11669 11798 12304 12240 12437 12789 12656 12392 12311 12469 12642 12435 12129 12123 12629 12468 12520 12768 12778 12798 13148 13318 13714 13736 13471 13763 14294 15041

18107 18141 18209 18646 18914 19301 19688 19339 19719 20909 21160 22032 22609 22638 23072 23434 23652 24530 24852 25295 25920 25911 25933 26677 27894 28391 29068 29611 30046 30947 31320 31419 31403 31557 31553 31645 32453 32783 32788 33023 33622 33704 34185 34062 34104 34630 34829

18304 18605 18663 18753 19148 19427 19770 20155 19822 20679 21440 21697 22578 23235 23260 23698 24114 24384 25233 25742 26161 26490 27013 27027 27778 29083 29673 30373 30927 31427 32358 32851 33095 33097 33233 33303 33538 34827 35094 35105 35341 35868 36249 36324 36215 36502 36671 36983

5 5 5 4 4 4 4 4, 4 4, 4. 4, 5, 5, 5, 6, 6, 6, 8, 8, 8, 7, 7, 7, 6, 10 10 10, 10 12 12 12 11 11 11 11 11 11 11 10 10 10 10 10 9 9 9 9

59 56 81 75 56 28 41 35 36 31 27 30 64 76 83 63 89 93 31 13 06 94 67 20 96 89 97 94 67 45 42 03 82 98 48 21 24 19 ,25 ,98 ,89 ,98 .99 .26 .77 .37 .24 .45

220

YEAR UAMl UAM2 UAM3 INTEREST

^Q^^n^ 15292 34942 37161 9.48 ]lll?.l ^^^^^ ^5^^8 37824 10.44 ^allnl ^^^^^ ^6005 38259 10.38 ^o^c?^ ^^^^2 36048 38464 10.48 197510 16204 36338 38893 11.41 197511 16140 36373 38854 10.99 197512 16680 36317 39216 10.64 197601 16059 36244 38898 9.30 197602 16555 36546 39223 8.60 197603 16906 36782 39664 8.42 197604 17468 37456 40437 9.94 197605 17397 37537 40467 11.00 197606 17468 37739 40806 10.99 197607 17905 38691 41952 10.87 197608 18218 39127 42506 10.94 197609 18560 39731 43398 12.35 197610 18159 39961 43820 14,43 197611 18452 40501 44253 14.03 197612 18897 40423 44483 13.51 197701 18116 39468 43136 11.74 197702 18144 38853 42669 10.77 197703 18392 39091 42863 9.35 197704 19213 40152 44289 7.50 197705 19381 40340 44357 7.43 197706 19825 40805 44976 7.46 197707 20001 41458 45563 7.30 197708 20274 41400 45514 6.42 197709 20796 42209 46376 5.30 197710 21547 42881 46807 4.48 197711 22030 43321 46991 6.43 197712 22695 44150 48221 6.29 197801 22432 44227 47870 5.77 197802 22542 44610 48340 5.98 197803 22886 44969 49015 5.99 197804 23700 46723 51332 6.99 197805 23908 47135 52112 8.48 197806 23594 47347 52300 9.27 197807 24354 48277 53152 9.11 197808 24487 47785 52251 8.83 197809 24621 48273 52755 9.17 197810 25105 48814 53451 10.28 197811 25149 49070 54016 11.56 197812 26137 50021 54973 11.56 197901 25585 50349 55029 12.09 197902 25357 50317 55167 12.23 197903 25659 49974 54547 11.44 197904 27173 51581 56129 11.29 197905 26999 52015 56851 11.45 197906 26590 52621 57686 13.33 197907 27350 53387 58027 13.36 197908 27344 53678 58255 13.34

221

YEAR UAMl UAM2 UAM3 INTEREST

197909 27376 53996 58625 13.36 197910 28490 55215 60130 13.47 }llî}l 2^^°^ 55423 60994 16.10 197912 28318 55880 61159 15.84 198001 27536 56082 60956 15.79 198002 26695 55940 61030 16.14 198003 27188 55950 61277 16.18 198004 27933 56948 62779 16.17 198005 27612 57887 64127 16.09 198006 27595 58723 64713 15.80 198007 28709 62155 67754 14.55 198008 28414 63453 69181 14.86 198009 28388 63239 98720 14.40 198010 28901 64714 70098 14.29 198011 28855 65814 71583 13.95 198012 30161 66810 72625 13.07 198101 28699 67122 73640 12.82 198102 29217 67239 74420 12.09 198103 29398 67040 74719 11.33 198104 31236 69216 77280 11.33 198105 31259 70213 79023 11.35 198106 31077 70673 80285 12.09 198107 32319 72684 82790 13.28 198108 31313 73293 83821 13.42 198109 31727 73743 84498 13.96 198110 31563 75003 86694 15.55 198111 31905 75508 86798 14.08 198112 34594 83105 94050 14.51 198201 34002 84068 94150 14.06 198202 33850 83758 94142 13.56 198203 33897 83668 94168 12.49 198204 34535 85319 97065 12.87 198205 34601 85875 97556 13.62 198206 35176 86671 98210 13.19 198207 35669 87901 100174 11.80 198208 36010 88573 100787 10.50 198209 36181 88918 100553 10.40 198210 37468 90749 103047 9.50 198211 37323 91050 103736 10.50 198212 38274 91774 105147 10.50 198301 37908 92197 104936 11.50 198302 37603 91986 105471 11.40 198303 38733 92390 106184 10.90 198304 40122 95219 108754 10.30 198305 40334 95584 108913 10.30 198306 40994 97260 110778 9.90 198307 41293 99088 112818 9.90

222 YEAR UAMl rîAx/T

^^^ UAM2 UAM3 INTEREST

""ol llllt 3IS- llllll 3.80 IQR^in /10AT/, j ^ j y j / x 112018 9.40

1983}? í^?!^ ^°"^2 114616 9.20 198311 42147 100449 115137 9.20

APPENDIX D

DATA OF MONETARY STOCK MEASURES AND THE 3 MONTH TREASURY BILL RATE FOR THE FEDERAL REPUBLIC OF GERMANY

223

224

SEASONALLY ADJUSTED

YEAR SAMl SAM2 SAM3

196901 196902 196903 196904 196905 196906 196907 196908 196909 196910 196911 196912 197001 197002 197003 197004 197005 197006 197007 197008 197009 197010 197011 197012 197101 197102 197103 197104 197105 197106 197107 197108 197109 197110 197111 197112 197201 197202 197203 197204 197205 197206 197207 197208 197209 197210 197211 197212 197301

89238 89825 89847 90507 91500 91691 92050 93634 94319 95184 95637 94789 95503 95937 95975 96254 97156 97545 98258 98656 99637 99987 100808 103089 103654 104730 104809 106874 109654 109279 111059 112492 113245 114485 114138 115088 116883 117897 120270 121853 121281 124792 126460 128198 129035 130046 131694 131408 132076

138720 139673 140644 141676 145985 144671 145139 146578 151826 152641 150888 151042 151310 152265 152461 154212 155634 158326 162321 162558 162241 162487 164632 166794 168983 170691 173513 177356 181420 179279 180732 181722 184816 186674 187861 190164 192740 194356 196398 197939 199028 204730 209171 211587 213322 214839 217840 221613 225346

240388 242024 243852 245738 251022 250618 251786 254238 260348 261888 260645 260432 261183 262086 262600 264616 266672 269986 274773 275828 276394 277412 280478 283770 287539 290524 294760 299596 304478 303297 306298 308321 311971 315036 317246 320809 324982 327646 330402 333448 335830 343272 349725 353094 356103 358787 362655 366010 368295

225

YEAR SAMl SAM2 SAM3

197302 132886 229619 372732 197303 136429 235781 379690 197304 135607 237539 381622 197305 131916 241297 385204 197306 131796 242776 386287 197307 130854 245151 387134 197308 129221 248130 389804 197309 130054 251049 393387 197310 130610 253288 396577 197311 131316 254105 398588 197312 134174 252532 401514 197401 133741 256906 406227 197402 135468 258553 409132 197403 135833 260235 412320 197404 136711 265256 418676 197405 137657 264208 419351 197406 139170 264495 421227 197407 140991 264253 422583 197408 141751 262318 422282 197409 142281 262094 424177 197410 143004 260755 424746 197411 146061 263017 429372 197412 148969 263880 434892 197501 148891 266206 438033 197502 149465 265272 439444 197503 152264 264579 442710 197504 154602 260337 444148 197505 156634 256174 443751 197506 158454 256290 446483 197507 159450 255898 449224 197508 162392 258360 455261 197509 165899 258220 458517 197510 166881 260933 464212 197511 168628 262027 467955 197512 169768 263880 472641 197601 170017 263464 475152 197602 170094 264779 478792 197603 171153 266441 482296 197604 172875 269901 487262 197605 175556 270181 489324 197606 179046 277297 498371 197607 177626 274879 478769 197608 179282 279445 504944 197609 179500 281390 508196 197610 180920 285527 513970 197611 180337 284537 514387 197612 176467 281247 511925 197701 181796 284695 519682 197702 183446 286809 522811 197703 184693 290036 527285 197704 185891 291540 530625

226

YEAR SAMl SAM2 SAM3

197705 187397 294231 534374 197706 189958 296297 537912 197707 192550 299593 548169 197708 193510 300456 550468 197709 195737 303973 555538 197710 197045 307060 560912 197711 199363 311611 567465 197712 196471 312645 568527 197801 206085 317713 576461 197802 207303 317815 576962 197803 209511 318461 578661 197804 211819 322137 585155 197805 213553 324321 589012 197806 214687 327632 594168 197807 217098 332373 602238 197808 219807 337868 609815 197809 220471 341646 615099 197810 223731 349999 625443 197811 224297 355886 633061 197812 224591 353911 630541 197901 228867 354352 634963 197902 230215 358307 640560 197903 230976 358376 642890 197904 232132 361999 648719 197905 232411 . 365830 653215 197906 232174 370177 658098 197907 232990 371529 659275 197908 233394 373864 661565 197909 233663 375958 663914 197910 234336 376603 663951 197911 233632 379764 666060 197912 233259 383207 667643 198001 231576 386447 670987 198002 233374 392574 675880 198003 233586 397291 680348 198004 235257 398981 681232 198005 236138 401066 683532 198006 235365 410959 685702 198007 237103 405181 689553 198008 238014 408075 694008 198009 241049 408291 695524 198010 242148 409435 697672 198011 246794 418106 707594 198012 243085 417097 709557 198101 244918 423822 718061 198102 244182 428216 721513 198103 238150 430167 720020 198104 239510 440779 729476 198105 239133 443034 731025 198106 241130 447218 734397 198107 240583 452278 738150

22

YEAR

198108 198109 198110 198111 198112

YEAR

195901 195902 195903 195904 195905 195906 195907 195908 195909 195910 195911 195912 196001 196002 196003 196004 196005 196006 196007 196008 196009 196010 196011 196012 196101 196102 196103 196104 196105 196106 196107 196108 196109 196110 196111 196112 196201 196202 196203 196204 196205

SAMl

241318 328266 237557 240757 241242

SAM2

457826 460148 456248 457351 453754

NONSEASONALLY ADJUSTED

UAMl

40202 40943 42061 42817 43399 43769 44418 44981 45080 45631 46405 47655 45593 46091 46409 46972 47670 47770 48059 48305 48387 48783 49805 51072 48300 49076 49465 49988 50974 51960 52752 53399 53902 54098 55954 58707 54557 54990 55273 56588 57532

UAM2

58884 59401 59869 60994 61891 61722 62899 63795 63864 64898 65989 67629 66480 67392 67078 68024 69041 68570 69269 69835 69617 70262 71379 72692 70429 72007 72186 73316 74934 75437 76280 77233 77194 77546 79225 82172 79028 80381 79900 81555 83370

UAM3

SAM3

743296 744688 740775 311611 383207

INTERES' RATE 2.25 2, 2. 2. 2. 2. 2. 2. 2, 3. 3. 3. 3. 3, 4. 4. 4. 4. 4, 4, 4, 4, 4, 3, 3, 3, 2 2, 2 2 2 2 2 2 2 2 1

25 25 00 00 00 00 00 75 63 63 75 79 91 04 04 04 94 94 94 94 94 04 79 28 01 52 39 26 26 26 26 26 10 01 01 88

1.88 2.01 2.14 2.14

228

YEAR

196206 196207 196208 196209 196210 196211 196212 196301 196302 196303 196304 196305 196306 196407 196408 196309 196310 196311 196312 196401 196402 196403 196404 196405 196406 196407 196408 196409 196410 196411 196412 196501 196502 196503 196504 196505 196506 196507 196508 196509 196510 196511 196512 196601 196602 196603 196604 196605 196606 196607 196608

UAMl

57858 58247 58828 59251 59488 61591 63351 58899 59799 59116 59932 61447 62160 62477 63445 63553 63623 66012 67760 63638 64347 64439 65457 66828 67860 67946 68806 68536 69110 71586 73037 69537 70478 71495 71276 73409 74196 74318 74333 74353 75226 77633 78520 74123 74679 74316 76103 77084 77908 77936 77457

UAM2

82976 83494 84048 83851 84378 86732 88544 84773 85832 84543 85697 87745 87730 88304 89980 89275 89616 92083 94508 91137 91955 91025 92438 94417 94694 95248 96219 95113 95743 98524 100813 98164 99300 97819 99178 101934 101413 101353 101785 100991 102197 104949 106916 103587 104310 103279 105558 107558 107615 108224 108975

UAM3 INTEREST

2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 2. 3. 3. 3. 3. 3. 3. 3. 3. 3. 3. 3, 3, 4, 4, 4 4 5 5 5 5

26 39 52 52 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 64 15 15 15 15 15 15 15 91 91 91 91 91 04 ,04 ,04 ,04 .06 .06 .06 .06

229

YEAR

196609 196610 196611 196612 196701 196702 196703 196704 196705 196706 196707 196708 196709 196710 196711 196712 196801 196802 196803 196804 196805 196806 196807 196808 196809 196810 196811 196812 196901 196902 196903 196904 196905 196906 196907 196908 196909 196910 196911 196912 197001 197002 197003 197004 197005 197006 197007 197008 197009 197010 197011

UAMl

76933 76649 79486 79614 74591 76468 75821 77201 77855 78950 79494 79921 80406 80638 84357 87921 81630 81444 81128 82036 84025 85487 85070 85885 86963 87022 91378 93466 86556 87160 87551 88345 91461 92759 93148 94320 94281 94368 99682 99429 92779 93242 93452 94029 97040 98550 99668 99513 99142 99160 105421

UAM2

108483 108832 111891 113384 109763 112193 110561 112529 114085 114191 114523 116431 116322 117754 122239 127574 122849 124126 123030 125237 129091 129414 129315 131314 133033 135712 140953 142327 136998 138020 137282 139231 147068 145455 145565 147426 150538 151553 154017 156875 149760 150869 148834 151662 156646 158950 162884 163493 160293 161361 168167

UAM3 INTEREST

240377 242151 241427 243644 251744 250394 252010 254625 257957 259550 261867 267305 261523 262636 260011 262517 267392 269619 275082 276227 273195 274899 284974

5, 5, 5, 4, 4. 3, 3. 3. 3. 2. 2, 2, 2. 2, 2, 2, 2, 2, 2, 2, 2 2 2 2 2 2 2 2 2 2 2 3 3 4 4 4 5 5 5 5 5 5 7 7 7 7

06 06 06 81 17 79 79 40 01 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 77 79 79 81 81 81 83 83 83 83 83 ,83 ,12 ,12 .12 .12

6.87 6.87 6.87 6.87 6.35

230

YEAR UAMl UAM2 UAM3 INTEREST

197012 108219 173383 291517 5.83 197101 100642 167479 288082 5.83 197102 101769 168488 291482 5.83 197103 101879 169345 291757 5.83 197104 104775 174903 297720 4.81 197105 109674 182656 305506 4.81 197106 110146 179487 302509 4.30 197107 112849 181513 306736 4.30 197108 112963 182136 308042 4.30 197109 112389 181813 307839 4.30 197110 113299 185153 311859 3.79 197111 119390 191932 319029 3.79 197112 121522 198595 330735 3.28 197201 113713 191497 326251 3.25 197202 114554 193309 328930 2,75 197203 117175 192068 327289 2,75 197204 119810 195456 331619 2.75 197205 120466 199415 336085 2.77 197206 125996 204661 342190 2.77 197207 128795 209956 349996 2.77 197208 127713 210953 351532 2.77 197209 128264 210432 351264 2.77 197210 128475 212943 354779 3.28 197211 137375 222177 364294 3.79 197212 139298 232330 378449 4.30 197301 127889 223787 369662 4.81 197302 128629 228682 374479 4.81 197303 133354 231316 376588 4.81 197304 133944 235265 380085 4.81 197305 130782 241593 385462 5.83 197306 133359 241730 384284 7.12 197307 132916 244518 385926 7.12 197308 128773 247244 387881 7.12 197309 129098 246920 387168 7.12 197310 128278 250876 391924 7.12 197311 137613 258536 400560 7.12 197312 142862 279603 416749 7.12 197401 129487 256270 408834 7.12 197402 130971 258522 412026 7.12 197403 132873 255762 409292 7.12 197404 134815 262404 416538 5.71 197405 136792 264618 419753 5.71 197406 140795 262227 417989 5.71 197407 142486 262184 419875 5.71 197408 141202 261007 419751 5.71 197409 141477 258004 417655 5.71 197410 140197 258567 419954 5.71 197411 153804 269901 433151 5.71 197412 158432 279603 452205 3.19 197501 144642 265288 440489 5.19 197502 144917 267778 442474 3,91

YEAR UAMl UAM2 UAM3 INTEREST

197503 149341 260153 440014 3.40 197504 151777 256608 441061 3.40 197505 155953 256220 443668 3.40 197506 160641 254890 443729 3.40 197507 160712 254046 446495 3.40 197508 161592 256877 452307 3.40 197509 164425 254176 451557 3.15 197510 163883 258972 459115 3.15 197511 178100 271393 473604 3.15 197512 179898 279318 490890 3.15 197601 165721 261581 477873 3.15 197602 165434 263051 481467 3.15 197603 166800 260571 478583 3.15 197604 169675 265648 483558 3.15 197605 175490 270650 489441 3.15 197606 180171 274580 493865 3.15 197607 179269 273320 496167 3,18 197608 178548 278004 501857 3.18 197609 176915 276006 499687 3.18 197610 178208 284356 509451 3.18 197611 191047 295667 521575 3.18 197612 186852 298180 523027 3.18 197701 178050 283245 523165 3.18 197702 179394 285409 526367 3.18 197703 179738 283089 522861 3.18 197704 182623 287199 526405 3.18 197705 187021 294273 533744 3.18 197706 190483 292816 532225 3.18 197707 193894 297747 545131 3.18 197708 192014 298305 546446 3.18 197709 193081 298432 546637 3.18 197710 194977 306719 556981 3.18 197711 210826 323788 575400 3.18 197712 208076 331812 591473 2.67 197801 201877 315579 579687 2.67 197802 203054 315772 580429 2.67 197803 204242 310983 574157 2.67 197804 207899 316557 580819 2.67 197805 212231 323445 587274 2.67 197806 215359 324448 588447 2.67 197807 218712 331143 599421 2.67 197808 217708 335290 604919 2.67 197809 217498 335710 605001 2.67 197810 221114 349017 620492 2.67 197811 237466 369752 642429 2.67 197812 237909 375408 656595 2.67 197901 223857 351326 637734 2.67 197902 225457 355496 643930 2.67 197903 225460 350342 638413 3.68 197904 228203 356236 643559 3.68 197905 230550 364451 360872 3.68

232

YEAR UAMl UAM2 UAM3 INTEREST

197906 233116 367051 652205 3.68 197907 233656 369627 655345 4.70 197908 231292 371349 656153 4.70 197909 230226 369228 652846 4.70 197910 230659 374288 657116 4.70 197911 248191 394498 676003 5.70 197912 247869 406492 696213 5.70 198001 226938 384116 674604 6.76 198002 229482 390771 680608 6.76 198003 228689 389602 676516 6.76 198004 229718 391439 674578 6.76 198005 234900 400394 682056 7.28 198006 237063 399451 680576 7.28 198007 236179 402059 684080 7.28 198008 236001 405742 688355 7.28 198009 237761 401309 683932 7.28 198010 238650 407075 690563 7.28 198011 263568 434418 719136 7.28 198012 257555 440616 739431 7.28 198101 240998 422285 722905 7.28 198102 240547 426673 678718 7.28 198103 232375 421508 715287 7.28 198104 233254 432354 721969 7.28 198105 237727 442549 729672 7.28 198106 242478 443780 728310 7.28 198107 239810 449377 732638 7.28 198108 239636 456180 737978 7.28 198109 234283 451705 731327 7.28 198110 234497 454134 733626 7.28 198111 258239 473362 754609 7.28 198112 255277 478132 776033 7.28