Disequilibrium Buffer Stock Models: A Survey

Abstract

This paper surveys the growing literature on buffer stock models of the monetary transmission process. The first part indicates the basic issue of how (assumed) exogenous change6 ,in the money supply work their way through the economic system via disequilibrium in the money market. After a brief historical development, buffer stock models are divided into four types depending upon whether the disequilibrium arises in stocks and/or flows, and to whether changes in the money stock are purely exogenous. The empirical implications, including how buffer stock models explain the recent behaviour of money demand functions are given. Theoretical and empirical criticisms of the models are presented in terms of the classification system. The survey concludes that whilst the buffer stock notion is an interesting idea, the current models d o not lend themselves to empirical testing, and those models which d o have performed poorly.

Is currency seigniorage exogenous for inflation tax in Turkey?

“…This evidence is consistent with the arguments in the literature suggesting that the narrower the monetary aggregate, the less likely it is to be a candidate for bu er stock money (see Milbourne, 1988;Artis andLewis, 1990 andMilbourne andOtto, 1996). These results may further be interpreted as being consistent with a characterization of an economy in which the agents hold minimal quantities of currency basically for current transactions whilst the excess nominal currency is rapidly substituted by in¯ation hedges.…”

“…An example can be given by a Keynesian endogenous money case where government receives seigniorage revenue by accommodating nominal income growth, and it is the in¯ation tax base adjusting to a change in the money demand arguments including the tax rate. 1 In the literature there are many studies, the results of which suggest that in¯ation is weakly or super-exogenou s for the parameters of a money demand equation, implying that`money demand equations are not price equations on their heads' (MacKinnon and Milbourne, 1988). However, the implications of the results of testing for the validity of the conditioning hypothesis for the maintained money demand equation for an in¯ation tax analysis have yet to be considered in the literature.…”

Adjustment costs and nonlinear dynamics in the demand for money: Italy, 1861-1991

“…in the short-run agents may be willing to temporarily accept higher money balances as a means of payment, even if the long-run determinants of equilibrium money demand remain unchanged. Also, the implication that the speed of adjustment in money demand functions may depend on the size of the deviation from long-run equilibrium is provided by both classes of buffer stock models, either constructed by introducing expectations in the analysis so that unexpected events in the present or expected events in the future induce deviations from longrun equilibrium, or based on the assumption that adjustment costs are sufficiently large to make suboptimal for a maximizing agent to adjust continually his money balances towards the desired level (for an excellent discussion of these issues, see Milbourne, 1988;Mizen, 1994Mizen, , 1997.…”

Nonlinear Equilibrium Correction in U.S. Real Money Balances, 1869-1997

“…Gandolfi and Lothian, 1976;Cuthbertson and Taylor, 1987), which recognize non-zero costs of adjustment of money balances and imply that it may be optimal for agents to allow short-run deviations of money balances from long-run equilibrium and to adjust only for relatively large deviations. In general, these types of models imply that the speed of adjustment in money demand functions in response to exogenous shocks may depend nonlinearly at the aggregate level on the size of the deviation from long-run equilibrium (for a discussion of these issues, see, for example, Milbourne, 1987Milbourne, , 1988Thornton, 1990;Mizen, 1994Mizen, , 1997Sarno, 1999).…”