Two essays on money supply growth, inflation, and interest rates

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1984
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Moghaddam, Masoud
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Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

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The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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1898–present

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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Abstract

Models recently developed under rational expectations reached a revolutionary conclusion that the anticipated money stock growth rate does not matter even in the short-run. Therefore, to affect real variables such as the real gross national product, unemployment, and the real interest rate the change in the rate of growth of the money supply must come as a surprise to the general public, i.e., the unanticipated portion of the money supply growth rate (UM(,t)) has real effects;Interest rates in the bonds markets are most sensitive to a change in the money supply growth rate. Furthermore, the efficiency of the bond markets implies that an increase in (UM(,t)) creates a liquidity effect, which is associated with a drop in interest rates. Correspondingly, an anticipated money supply growth (AM(,t)) has price expectational effects, without any real effects;The statistical results of part one are supportive of the two different directional effects associated with anticipated and unanticipated money supply growth rates. Accordingly, the answer to the question of whether anticipated monetary policies matter, depends mainly upon the choice of particular time series data;The Darby effect, which is an extension of the Fisherian hypothesis, implies that in the presence of income taxes, the nominal interest rate must increase more than the rate of increase in the expected rate of inflation. The reason for the Darby effect is that interest income received by a lender is subject to income taxes, and interest paid by a borrower is tax-exempted. The empirical tests of the Darby effect over the past decade concluded either the nonexistence, or a weak existence of the Darby effect over the sample period. However, Ayanian's study completed in 1983, reported a significant Darby effect for the sample period 1952-1979;The statistical results of part two imply that the finding of the Darby effect, in the context of Ayanian's model, is subject to impure autocorrelation. Therefore, Ayanian's model is misspecified and is not a good candidate for the empirical testing of the Darby effect. Also, when Ayanian's model is extended to August 1983, and corrected for pure auto-correlation, the nonexistence of the Darby effect is witnessed.

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Sun Jan 01 00:00:00 UTC 1984