Banking - Yojana

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Generated by PDFKit.NET Evaluation work had "unquestionably inspired substantial research during the 1970s on the effect of monetary policy, the implications of government budget deficits, and stabilization policyin general". The award was viewed as the highest recognition in the profession, being accorded to an improbable champion of Keynesian, interventionist, redistributive, and egalitarian economics in its darkest hour due to the ascendancy of the monetarists and other conservatives and the Reagan presidency in the second half of the 1970s. Tobin regarded his Nobel Prize as a vote of confidence to the Keynesian theory. Tobin's Keynesian-type macro economic models have become more eclectic. The Nobel Prize is an example of an award for theoretical contributions concerning specific aspects or sectors of an economy-viz., "portfolio models of financial mark~ts and their relations to expenditure decisions,employment, production and prices". James Tobin wasborn on March 5, 1918, in Champaign, Illinois as, the son of Louis M. Tobin, a journalist, and Margaret Edgerton Tobin, a social worker. He had a brilliant academic career at Harvard in 1930s. Joseph A. Schumpeter, Edward Chamberlin, WassilyLeontief, Seymour Harris, AlvinHansen, Ed Mason and other members of the faculty that has become legendary taught him economics. His men tor Schumpeter washis teacher and his Ph. D thesis advisor.A whole battery of veterans like Paul Samuelson, LloydMetzler, Richard Goodwin, Paul Sweezyand Bob Solow as graduate students at Harvard was around Tobin. He graduated from Harvard in 1939 an~ interrupted his postgraduate studies to serve in the U.S navyfrom 1942-46, completing his Harvard 36 Click here to unlock PDFKit.NET Ph.D in 1947.In 1950hejoined the YaleEconomics department, where he became Sterlingprofessorin 1957 and served two stints (1955-61and 1964-65) as director of the Cowles Foundation for Research in Economics. Revival Tobin's type of macroeconomic models heralded a genuine Keynesian revival, leading to a great variety of economicmodels. Tobin's scholarly output has been substantial and so wide-ranging in its reach and perception that it is impossible to summarise adequately. He is best known, however, for his important researches in macroeconomic and monetary theory. The Nobel Prize awarded to him in 1981wasfor his pioneer contributions to portfolio selection theory (where he laid the foundations for the modern theory of finance) and for his analyses of general monetary framework, i.e., of the interactions between real and financial markets, involving a path-breaking application of general equilibrium ~heory. Don Patinkin pioneered thISapproach. He introduced stock markets into his models. M. Mussa also introduced stock markets in to his model. His analyses of the determinants of consumption and investment behaviour, or of the real/financial transmission mechanisms involved in aggregative models of economic growth and fluctuations and his contributioI,).s to current controversy on stabilization theory and policy have urgent immediate conC;:,ernto theorists and policy makers. In addition, he has developed a new st~tistical and econometric technique and made significant contributions to social policy debates on poverty and unemployment. Tobin as a Keynesian economist has been in the forefront of developing a general-equilibrium portfolio approach to financial analysis incorporating a comprehensive monetary transmission mechanism. Tobin's portfolio model of asset choice shows that wealth-owners willhold a diversified portfolio of assets,one of which is money. Holding a number of different assets reduces the overall risk of a portfolio by the well-known prin.ciple of note putting all one's eggs in to the same basket. An asset is generally thought to be riskier, the greater the likelihood of its actual return diverging from its expected return. Harry M. Markowitz (1959) and William Sharpe (1970) also brought out modern portfolio theory. The theory of diversification was based on the work of Markowitz. In the simplified version of Tobin's model of asset holding (1958), there are just two assets: money, which is risk less because it has a certain return-of zero; and perpetual bonds, which are risky. Tobin's analysiscan be extended to the selection of a large number of riskyassets.Each investorisassumed to be risk-averse. This means that the expected return from a portfolio of assets yields positive utility but the risk gives negative utility.The individual can make ulA . an asset portfolio, which consists 0'" various combinations of the riskless asset, money, and the risky asset, bonds. The greater the proportion of wealth held in bonds, the higher the expected return from the portfolio, but the higher also is its risky ness. The individual chooses that combination 'of money and bonds, which maximizes his utility given his preferences regarding return and risk. Thus Tobin has YOJANAJuly2002
) .r Generated by PDFKit.NET Evaluation applied what has become known as "portfolio theory" to the analysisof the asset demand for money. The portfolio-balanced model gives a more satisfactory theory of the speculative demand ~ormoney. No reference ismade in the model to a transaction demand for money. W.JBaumol (1952) andlTobin .(1956) developed separately the inventory-of-money approach to • transactions demand. In this inventory theoretic approach, money held by firms is analogous to working capital. The inventory model shows that the demand for money balances by firms is inversely related to the rate f in terest and positively to the income. The transactions demand for. money should respond to a change in the interest rate through a change in the number of bondsto-Il;loney transactions. On the revenue side, an increase in interest rate willincrease marginal revenue for any given number of transactions. On the cost side, ea(:h transaction has a given cost-a broker's fee or the implicit cost of time spent in transacting business. Each asset transaction has a fixed cost equal to marginal cost. Combined with marginal revenue, marginal ~ost gives a profit maximising (optimum), number of transactions. The interest elasticity of the. transactions demand' is .xposed in this model. A rational household or firm will hold the average money balance that makes tht; marginal assetstransactions cost equal to the interest received from the marginal bond holding. The major theme of the "new view~'pioneered byJ G: Gurley and E S Shaw and subsequently adopted and developed by James Tobin, LE. Gramley and SamuelB. Chase,Jr., are that "the distinction YOJANAJuly2002 Click here to unlock PDFKit.NET between commercial banks and .other financial intermediaries has been too sharply drawn," and that " the differences which do exist have little intrinsically to do with the monetary nature of bank liabilities" (Tobin). The suggested revision of the "new view"involves replacement of the concepts of money and the monetary system with the concept of 'in termediation' .In support of this position, it is pointed out that the use of its obligations as a medium of exchange is only one among many dime.nsions in which ,financial institutions differ from one another. Implications The implications of the old view and the "new view" may be summarized as follows: The Old View: The traditional view would hold that commercial banks as a group can expand their liabilities as a multiple of their reserves to a degre'e not even remotely approximated by the other financial intermediaries. This is due largely to the fact that the demand deposits of banks serve as the principal medium of exchange. The uniqueness of commercial banks resides in their ability to create the'means of payment. The ability of the commercial banking systemto retain the reserves lent to a far greater degree than ispossible for nonbank intermediaries has been likened by Tobin to the widow's cruse. Two characteristics of commercial banks ~ifferentiate them sharply from other financial intermediaries: (1) the liabilities of commercial banks, at least their demand deposit liabi)ities, serve as widely acceptable means of payment, along with coin and currency in publi(: circulation as money; (2) the preferences of the public normally play no role in determining the total volume of deposits or the total quantity of money. Financial int~rmediaries other than banks do not create money and they cannot count on receiving deposits to match every extension of their lending. The commercial and only the commercial banks, in other words possess the widow's cruse-the multiple creation of bank credit and bank deposits. And because they possess this key to unlimited expansion, they have to be restrained by reserve requirements. The "New View": In the late 1950's and early 1960's,a great deal of workon the money supplytheory was 'directed from two differen t quarters, as represented by (1) Cagan, Friedman and Schwartz, Brunner and Meltzer and the Federal Reserve Bank of St. Louis, and (2) Radcliffeand Sayers,Gurley and Shaw, Roosa and Tobin. The new viewon money opposite to the traditional view was developed largely byJames Tobin. Tobin gave the name "newview"to ~hegroup. Those adhering to the SO called "new view" hold that commercial banks are not unique but produce only one of a spectrum of differentiated products which are substitutes for each other in the portfoliosofwealthowners.The "new view" asserts that the commercial ban~ are like all other non-bank financialintermediaries,each merely. prpvidersofa differentiatedproduct. Considerations such as maximising profits, which limit the sizeof other intermediaries are shownin the "new view"to effectivelylimit the size of commercial banks. The "new view" treats a, commercial bank as traditional micro theory treats the firm. The modern banking institutional framework, the desired 37
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