Contents

Articles

*Schmidt, Klaus J. W.*

Tobins q? - Myrdals Q! - Ein Fallbeispiel für den Wert von Fremdsprachenkenntnissen

*Fountas, Stilianos and Wu, Jyh-lin*

Purchasing Power Parity and the Irish Experience: Unit Roots and Cointegration Tests for Two Industrial Countries

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Wesche, Katrin and Wierum, Susanne
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A Striking Result or just a Matter of Misinterpretation? Comment on "Inflation Rates and Money Growth During High-Inflations"

*Gersbach, Hans*

The Correct Economic Interpretation of Rational Expectations

*Gerke, Wolfgang and Bienert, Horst and Schroeder-Wildberg, Uwe*

Orderbuchtransparenz bei homogenem Informationsangebot - eine experimentelle Untersuchung

*Raaballe, Johannes*

On Black, Blue and Orange Bonds - A Tax Arbitrage Model with Asymmetric Taxation

*Cohrssen, Hans *

Geld- und steuerpolitische Ideen von Irving Fisher - Erinnerungen eines Mitarbeiters

* Frowen, Stephen D. and Kath, Dietmar*

Monetary Policy and Financial Innovations in Five Industrial Countries. The UK, the USA, West Germany, France and Japan (Hildegard Breig)

*Schmidt, Klaus J. W.*

"Tobin's q? - Myrdals Q! An Example of Why It Is Important to Know Foreign Languages"

In two articles published in the early-1930s, the Swedish economist Gunnar Myrdal critically reviews the interest spread theory of Knut Wicksell. He details and modifies certain of Wicksell's ideas by reformulating the natural rate of interest marginal efficiency of capital and the rate of interest on money as the discount rate. Furthermore, he shows that the unobservable relationship between these two rates corresponds to the ratio between the market value and the replacement cost of real capital, for which a statistical representation can be constructed. He thereby anticipates the q-theory of James Tobin by at least 30 years, moreover he calls his variable Q. Even on the level of details, Tobin's and Myrdal's analyses are remarkably similar. This is apparent from Myrdal's interpretation rate of interest on money as the theoretical representative of the conditions governing lending to firms, his distinction between average and marginal Q, his views on the relevance of Q for different levels of aggregation, as well as his presumption that the Q-variable will remain numerically unchanged when inflation rates are correctly anticipated. In view of the important role of the q-variable in Keynesian macroeconomic theory, as argued by Tobin, Myrdal's ideas represent a noteworthy contribution to economic thought. Unfortunately, language barriers apparently prevented these ideas from propagation into a broader academic community, as Myrdal published his articles in such ,exotic' languages as Swedish and German.

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*Fountas, Stilianos and Wu, Jyh-lin*

"Purchasing Power Parity and the Irish Experience: Unit Roots and Cointegration Tests for Two Industrial Countries"

This paper uses unit root/ stationarity and cointegration tests to test for chasing Power Parity between Ireland and two industrial countries. Using monthly data for the post-1981 period, we show that the PPP relationship provided the rejection of the symmetry and proportionality hypotheses can be attributed to measurement errors in price indexes. In particular, PPP against Germany and the associated link of Irish inflation to the German inflation rate, implies that Ireland's EMS membership has been justified. It is also shown that, in agreement with the small, open economy theory of PPP, the adjustment towards the PPP relationship takes place primarily through changes in the domestic price level.

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*Wesche, Katrin and Wierum, Susanne*

"Comment on "Inflation Rate and Money Growth During High-Inflations""

This comment refers to a paper by Gersbach (1993) on the relationship between money growth and inflation. Contrary to Gersbach's result is it shown that fully anticipated accelerating money growth leads to accelerating inflation. Starting from a money demand function of the Cagan-type, the forward looking rational expectations solution is derived and the relation between money growth and inflation is established.

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*Gersbach, Hans*

"The Correct Economical Interpretation of Rational Expectations - Reply"

In a comment on my article, Wesche and Wierum criticize the derived relationship between money growth and inflation during accelerating inflation for a model with exponential money demand. However, their analysis has several flaws and the authors seem not to be aware of the economic content of the rational expectations equilibria. A correct calculation and interpretation of their exercise fully supports the conclusions in my earlier paper.

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*Gerke, Wolfgang and Bienert, Horst and Schroeder-Wildberg, Uwe*

"Order Book Transparency under Homogeneous Information - An Experimental Study"

This paper reports the results of 20 computerized market experiments that examine the effect of three different degrees of order book visibility in a continuous auction-type market for fictitious stocks. Traders' knowledge of the order book is varied between complete ignorance, knowledge of the bid-ask spread without volume information and full knowledge of the first five steps of the order book.

With knowledge of the order book, traders can assess the probability of execution and the prospective transaction price of a given order more easily. At the same time, the visibility of the order book creates a competition for holding the market bid or ask.

Consequently, the observed price limits are closer to the opposite side of the book in the experiments with a transparent market. The proportion of non-transacting orders decreases. On the market level, these changes in the order flow result in a decrease in excess volatility. However, this does not improve the quality prices, as measured by the correlation between prices and intrinsic values. The average bid-ask spread narrows much faster in both versions with a visible order book.

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*Raaballe, Johannes*

"On Black, Blue and Orange Bonds: A Tax Arbitrage Model with Asymmetric Taxation"

This paper considers a one-period economy with both private and corporate investors. The market under consideration consists of three types of bonds (called black, blue and orange), which in one way or another differs with respect to taxation. It is shown that the absence of infinite tax arbitrage opportunities implies that all private investors will end up with the same marginal tax rate. This tax rate is no larger than the smallest corporate marginal tax rate. At the same all types of bonds except claims selling at par exhibit clienteles. In the literature on bond arbitrage the clienteles are created by means of transaction cost or a (partial) ban on issuing bonds. The exhibition of clienteles in this model hinges on asymmetric taxation. Concluding the paper is a discussion of the effect of introducing previously issued blue bonds into the analysis.

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"Certain Monetary and Tax Policy Ideas of Irving Fisher - Reminiscences of a Member of His Team -"

During the Great Depression, Cohrssen (1905), as a proponent of the ideas of Silvio Gesell, advocated that self-liquidating substitute money called stamp scrip be issued in the USA. He was able to win Irving Fisher, the leading economist at that time, for his idea and became his closet collaborator in the period from 1932 to 1942. Cohrssen describes Fisher's style of work and his productivity as a proponent of stable money and underlines in particular Fisher's demand for eliminating the private banking system's credit creation monopoly - a proposal that may sound upon still today. Not less utopian seemed his 1942 proposal for eliminating income taxation and for replacing it for consumption tax - a proposal that is attracting attention in the current tax policy discussion.

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