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Accurate regional estimates of output are desired as an indicator of level of development and as a variable used to explain internal migration, demand patterns, fertility and other aspects of behaviour. Explores one often-neglected aspect of regional income differences, namely, that due to price differences or regional purchasing power parities. When nominal regional income measures are adjusted for these price level differences they are termed real regional incomes. The preferred method of estimating regional purchasing power parities by detailed price comparisons is discussed for Brazil, the United States and the European Union. The empirical thrust of the chapter is an investigation of different methods for estimating regional real incomes based on PPP data for 167 countries and nominal regional incomes and other data for about 870 administrative areas at the sub-national level. Even in their present form the authors believe the real income estimates provided for the geographical units present opportunities for understanding the world economic structure.

This chapter looks at characteristics of informal finance across China, based on a national survey of firms and banks. During the new turn of macroeconomic regulation and control that started in 2003, the Chinese economy, under a process of deregulation, found that repeated government efforts were unable to dampen the climb in investment and consumption prices. Survey analysis was conducted from the perspective of informal finance, underground finance, and illegal finance, which provide foundational references for structural and economic influence in terms of macroeconomic regulation and control, as well as economic decision making. These three types of unobserved finance prevented monetary policy from working effectively during these years of heightened economic growth.

This chapter presents a simple continuous-time model with microeconomic foundations and uses it to analyze some of the questions related to the fiscal theory of the price level (FTPL) and to a policy of pegging the nominal interest rate. The chapter is organized as follows. Section 1 presents the model and elaborates on some basic points to be addressed. Section 2 considers the case of a “monetary rule,” in which the government sets the path of the money supply, and Section 3 compares the model’s conclusions to some of the propositions in the literature. Section 4 discusses the case of a central bank pegging the nominal interest rate, and Section 5 concludes. It is shown that the hyperinflationary solution as an alternative rational expectations path does not exist (in the context of an exogenous monetary rule) for the general case of a positive rate of monetary expansion. Indeed, there is no reason for the usual statement that such a path is the FTPL alternative to the monetary explanation resulting in a steady-state, noninflationary path of prices and real variables.

This chapter reports a long comprehensive survey of Japanese monetary policy over the last two decades: the period of bubble and burst (1985–1997) and the issue under the new law of the Bank of Japan (BOJ) (1998-). It explores the monetary policy actions to prevent deflation. Given that a bubble is created, the effects from the bursting of the bubble could be moderated by monetary policy. The recent history of Japanese monetary policy has created problems for the Japanese monetary authorities today. These problems present the bank with particular challenges in getting the economy out of deflation quickly. Monetary policy becomes more difficult during deflationary episodes when interest rates hit a floor of zero. Management of expectations through adoption of a price-level target, and nonconventional policies that employ central bank purchases of other assets besides short-term bonds are the key elements of strategies to cure deflation.

In the eyes of some, the great financial crisis has raised questions about whether price-stability oriented monetary policy frameworks – that, until only a few years ago, were credited with supporting a long period of global economic stability – remain appropriate. This chapter evaluates these claims on the basis of the ECB's experience. It argues that: (a) nonstandard policy measures targeted at repairing malfunctioning markets are potentially more efficient instruments to address financial crisis than reducing policy rates to their lower bound. By tackling malfunctioning financial markets directly and re-establishing monetary policy transmission, such measures enhance the effectiveness of the standard interest rate policy instrument and thus serve to achieve macro-stabilisation without inducing greater interest rate volatility; (b) a solid anchoring of inflation expectations stemming from the establishment of credible price stability-oriented policy frameworks has played a crucial role during the crisis, both as an automatic stabiliser and in preventing the emergence of a debt-deflation spiral; (c) analysis of monetary developments helps identify the excessive credit expansion underlying the creation of financial imbalances. All in all, the chapter concludes that the conduct of monetary policy should neither be changed fundamentally nor overburdened with additional objectives.

The economic growth and development of a country depend on a solid infrastructure and the robustness of systems that have been put in place. Together, these constitute a nation’s “engine of growth” and include housing, water, electricity, transportation, communication, and construction. It is postulated that the cost of doing business in Africa is much higher than in other regions, largely because of the poor quality of its infrastructure and to accessibility constraints. The distribution of price levels of these economic drivers, which contribute to the cost of doing business in Africa. Price level indices (PLIs) have been calculated to provide a comparison of the cost of selected infrastructure components across African countries. The data were collected from the 2005 round of the International Comparison Program (ICP) in Africa, covering 48 out of a total of 52 countries and 22 major aggregates of the national accounts.

The chapter explores two significant challenges faced by central banks in LFDCs: fiscal dominance and external shocks. Monetary policy can be dominated by governments that rely on seigniorage generated by the central bank or impose other constraints to facilitate the financing of persistent deficits. The chapter discusses and illustrates for several countries the concept of seigniorage, examines the mechanisms of fiscal dominance, and assesses its consequences. External oil and food price shocks also raise several monetary policy challenges. Using a theoretical approach, the chapter explores the trade-off between price and output stabilization that the central bank faces after a commodity price hike. The analysis takes into account whether the country is a net exporter or a net importer and whether it is on fixed or on flexible exchange rates. It also discusses coordination issues between monetary and fiscal policies, in particular when windfall gains accrue to the government.

This chapter and Andrew Newman note that while GH’s paradigm has permeated the field of industrial organization, it is used in a very parsimonious way—the dominant view of the firm being that of a profit maximizing entity. It argues that much is lost by such a restrictive view of the firm, and that an organizational industrial organization (OIO) is feasible and will provide new insights, in particular on the interplay between price levels and integration decisions.

This chapter discusses Milton Friedman’s research on the effects of changes in the money supply and government deficit spending on price levels, stock prices and private income. Robert Auerbach’s 1969 dissertation, under the supervision of Friedman and Henri Theil, found that borrowed US government deficits had no significant effect on nominal private income during the 1930s depression and the post-Second World War period until 1967 in the USA. The wealth effect on the US economy from government deficits borrowed from foreign sources is described as negative after the September 2008 financial crisis. Auerbach’s research, some with Jack Rutner, using prewhitened data for causality tests, contradicts Friedman’s findings of causality from money to price levels, and stock prices. The increased instability of the demand for money, as it is currently defined, is shown to be made substantially more unstable from the introduction of the public Internet in the 1980s.

This chapter discusses the power algorithm central to the proposed method for solving the Index Number Problem. It explains the construction of a fitting constant returns utility as provided by the Conical Utility Construction Theorem (CUCT), comparable with the ordinary UCT (or ‘Afriat's Theorem’) except that the utility has to be constant returns; and what a price index should have to do with such a utility. It shows that with the New Formula, price levels enter into the construction of a hypothetical underlying utility which fits the given demand data and represents all these indices together as true.

This chapter examines the theoretical foundations of monetarism and the nature of the relationship between the general price level and quantity of money. It focuses on interrelated sources of confusion in contemporary monetary debates, such as the belief of some economists that they are advancing different theories that are fundamentally the same and the use by economists of different conceptions of equilibrium, which lead to different interpretations of the role of imperfections in short-run and long-run analyses.

The price index, a pervasive and old institution of economics, is a number issued by the Statistical Office that should tell anyone the ratio of costs for maintaining a given standard of living in two periods where prices differ. This picturesque indication amounts to a definition that is the basis for our approach. An immediate consequence by simple argument is the ‘New Formula’, where price indices are determined as ratios of numbers with the role of price levels that are solutions of a system of inequalities. Work on the approach continues and the system of inequalities is a reminder of a half century of experience including the present chapter.

Milton Friedman was one of the greatest economists of the twentieth century. He also was a leading economic historian. His book with Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960, has remained one of the most influential in economics since its publication in 1963. A Monetary History is a study of the quantity of money and its influence on economic activity and the price level in the US economy over nearly a century, marked by drastic changes in monetary arrangements and the structure of the economy. A key finding is that the money–income relationship is invariant to changes in economic arrangements. Friedman and Schwartz pioneered the narrative approach to identify the independent influences of monetary forces on the economy. This approach is the most enduring legacy of A Monetary History.

The proposal that demand is governed by utility leads to the question of how to arrive at the utility, from evidence provided by the demand. For while demand is, in principle, directly observable, utility is not; it is just discussed, usually for its part in an explanation of demand. The question became a basis for mathematical questions making an enlargement of ‘mathematical economics’ where a host have contributed a variety of fragments. This chapter has to deal specifically with two construction topics, involving a demand function, or a finite demand correspondence. Pareto (1901) touched the utility construction question, dealing with a demand function, and remarked it could be done by solving certain partial differential equations. These referred to the inverse of the function. Volterra (1906) pointed out, in a review of Pareto, that the existence of a solution was not always assured but required certain ‘integrability conditions’, such as had been provided by a theorem of Frobenius. Thereafter the question became known as the ‘integrability problem’. Antonelli (1886) provided equivalent conditions, stated in the form of a symmetry. Slutsky (1915) did the same, by differentiation of first order Lagrange conditions, and brought into view the further necessary (in fact, more than necessary) second-order conditions. The approach gained a currency after rediscovery by Hicks and Allen (1934). Besides symmetry, the Slutsky matrix was required to have a negativity condition, intermediate between its being non-positive and negative definite and different from both. That this negativity requirement found by these discoverers had to be spurious is demonstrated by ‘The Case of the Vanishing Slutsky Matrix’ found by Afriat (1972), where there is a continuously differentiable demand function that has a utility but the Slutsky coefficients all vanish identically, as would be impossible under the negativity condition of Slutsky and the others. Lionel McKenzie (1957) made an elegant departure when he identified the Slutsky coefficient matrix with the matrix of second derivatives of a utility-cost function, so necessarily both symmetric and non-positive definite. The issue of sufficiency that had always remained completely without mention was taken up and settled by Afriat (1980). Afriat (1977, 1980) dealt with the same question when the demand function is replaced by a finite demand correspondence (1956, 1960), with the result now usually referred to as ‘Afriat's Theorem’.

Relations by which demand and utility are connected have variants and alternative expressions; and parts generally independent become interdependent under assumptions about the utility. This investigation serves to elaborate and systemize principal phases in the development of such connections. A review about binary relations and orders, which includes Szpilrajn's theorem on order refinement, is followed by an account of efficiency concepts relevant to the demand-utility relationship. Then follows a study of properties of the utility-cost function, basic to McKenzie's approach to necessity of Slutsky conditions, to be consolidated and joined with a treatment of the much more complex sufficiency side. Introduction of the normal demand function, and normalization of the standard demand function, is preliminary to elaborations on the revealed preference principle of Samuelson, extended by Houthakker. Remaining topics concern general demand correspondences, direct and indirect utility, duality, and the canonical order.

A first step in the examination of an act is to view it as a choice. With a choice there is the problem of accounting for the singularity of what is done which differentiates it in the variety of what might have been done. The account should involve a principle that applies uniformly to the possibilities, yet singles out the particular act, in terms of its cause, the motive, or objective. Value is a term serving that principle, with preference as a concept for its expression. Whatever the scope of the concept of choice and systematization of choice by preference, here to have attention, it remains just a model, a form of representation, a scheme that can always be applied to behaviour in some fashion, even without assured significance. The model of a choice system based on a preference order is a habit in particular for economics; even in a more general perspective, order appears as an almost invariable component in measurement, though there may be some puzzle about that. Principles concerning choice and preference are to be considered and illustrated, in particular in regard to the analysis of consumption. An approach to the theory of consumption is developed by considering a scheme of consumption data, and then questions that might be asked of that data.