Working Paper Series, Volume 1 Issue 5

The fifth issue of the AIER Sound Money Project Working Paper Series is available online. AIER is currently ranked 152nd on SSRN's Top 1,600 Entrepreneurship Research & Policy Network Organizations.

Issue 5

Interest Rates, Policy Uncertainty, and Investment
Joshua R. Hendrickson, University of Mississippi and American Institute for Economic Research

In this paper, I estimate a cointegrated VAR with three long run equilibrium conditions that are consistent with the New Keynesian model. The equilibrium conditions estimated in the VAR do not provide evidence of a negative relationship between the federal funds rate and investment, or output more generally. Economic policy uncertainty, however, does have a negative and statistically significant effect on investment in the estimated model. I argue that the results support an option theory view of investment rather than the standard New Keynesian model. Also, various specifications of the model demonstrate that the findings are robust to an alternative short term nominal interest rate, the use of real interest rates rather than nominal interest rates, different classifications of investment, different measures of economic uncertainty, and a different specification of the monetary policy process. In addition, I argue that the results have implications for the weak recovery in the aftermath of the Great Recession. In particular, the results suggest that the increase in economic policy uncertainty observed after 2007 can potentially explain the weak recovery whereas the results cast doubt on the significance of the zero lower bound on nominal interest rates.

A Theory of Self-Enforcing Monetary Constitutions With Reference to the Suffolk System, 1825–1858
Alexander William Salter, Texas Tech University and American Institute for Economic Research
Andrew T. Young, Texas Tech University

We develop a theory of self-enforcing monetary constitutions. A monetary constitution is the framework of rules within which money-providing and money-using agents interact. A self-enforcing monetary constitutions is upheld by the agents acting within the system; it thus does not require external enforcement. We describe how the institutional technology of polycentric sovereignty applies to monetary constitutions, and show how the 19th century Suffolk banking system was characterized by polycentric sovereignty, rendering its (de facto) monetary constitution self-enforcing. We conclude by briefly discussing the implications of our analysis for the role of the state in maintaining healthy money and banking systems.

Cryptoliquidity: The Blockchain and Monetary Stability
James Caton, North Dakota State University and American Institute for Economic Research

The development of blockchain and cryptocurrency may alleviate the economic strain associated with recession. Economic recessions tend to be aggregate demand driven, meaning that they are caused by fluctuations in the supply of or demand for money. Holding monetary policy as solution assumes that stability must arise from outside of the economic system. Under a policy regime that allows innovations in blockchain to develop, blockchain technology may promote a money supply that is responsive to changes in demand to hold money. This work suggests that cryptocurrencies present an opportunity to profitably implement rules that promote macroeconomic stability. In particular, cryptocurrency that is asset-backed may provide a means for cheaply attaining liquidity during a crisis.

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William J. Luther

William J. Luther is the Director of AIER's Sound Money Project and an Assistant Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular works have appeared in The Economist, Forbes, and U.S. News & World Report. He has been cited by major media outlets, including NPR, VICE News, Al Jazeera, The Christian Science Monitor, and New Scientist.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

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