sustainability of the friedman rule in an international monetary policy game this article develops a two country monetary economy model in order to analyze the international monetary policy game between governments and the domestic monetary policy game between each government and its private sector we prove that if governments can commit to their own private sectors the cooperative equilibrium of the game between governments is for them to follow the friedman rule when governments lack such ability to commit we find that the friedman rule is more likely to be sustained in our open economy model than in the closedeconomy model of ireland jel e31 e52 e61 one recurring theme in the analysis of policy making is that in many situations policymakers can benefit from the opportunity to make a binding commitment to restrict their activities one such situation is what is known as the time consistency problem in monetary policy making a government or its monetary authority out of good intention may find it beneficial to generate unexpected inflation to fix some nonmonetary distortion in the economy for example goods market inefficiency due to monopoly power that is characterized by higher than efficient product prices this first best monetary policy however is not time consistent in the sense that firms foresee the government s incentive to impose monetary surprises and set their nominal prices at a higher level as a result the government s attempts to remedy the

the bond old bond spread abstract i document the profits on a trade that is long the old 30 year treasury bond and short the new 30 year treasury bond and is rolled over every auction cycle from june 1995 to november 1999 despite the systematic convergence of the spread over the auction cycle the average profits are close to zero the difference in repo market financing rates between the two bonds is a significant cost of carry in this trade i show that variation in the bond old bond spread is driven by the treasury supply of 30 year bonds as well as aggregate factors affecting investors preference for liquid assets

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

idiosyncratic variation of treasury bill yields i document a dramatic increase in the importance of two types of variation in treasury bill yields beginning in the early 1980s the first is idiosyncratic variation in individual short maturity less than three months bill yields the second is a common component in treasury bill yields that is not shared by yields on other instruments such as short maturity privately issued instruments or longer maturity treasury notes and bonds some evidence suggests the first type reflects increased market segmentation these results have important implications for the calibration and testing of no arbitrage term structure models and interpreting tests of the expectations hypothesis united states treasury bill yields play a central role in economists efforts to understand the behavior of financial markets the focus on treasury bills is driven by the belief that bill yields can be viewed as benchmarks from which yields on other debt instruments are derived for example in no arbitrage models of the default free term structure the stochastic properties of the hypothetical instantaneous interest rate determine bond prices researchers often construct and evaluate these models using short maturity bill yields as proxies for instantaneous interest rates similarly bill yields are frequently used to test the expectations hypothesis of the term structure 2 economists standard pricing models for default risky securities also view treasury yields as building blocks in such models yields on default risky securities depend at least in part on the yields of default free securities and the underlying stochastic default process therefore yields on treasury bills have been used in studies of the effects of monetary policy on the business cycle not because bills are intrinsically critical to the economy but because

sustainable monetary policies abstract this paper uses a model with utility maximizing households monopolistically competitive firms and sticky goods prices to derive a version of barro and gordon s time consistency problem for monetary policy where the government s objectives are consistent with a representative household s preferences the paper applies the methods of chari and kehoe to characterize the entire set of time consistent or sustainable outcomes it goes on to find conditions under which the friedman rule the optimal policy under commitment can be supported when the government lacks a commitment technology

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

raising awareness and signaling quality to uninformed consumers a price advertising model the objective of this paper is to investigate the firm s optimal advertising and pricing strategies when introducing a new product we extend the existing signaling literature on advertising spending and price by constructing a model in which advertising is used both to raise awareness about the product and to signal its quality by comparing the complete information game and the incomplete information game we find that the high quality firm will reduce advertising spending and increase price from their respective complete information levels in the separating equilibrium the high quality firm will actually spend less on advertising than the low quality firm resulting in a negative correlation between product quality and advertising spending what sets our analysis apart from previous studies is that we consider advertising spending not only as a signaling device but also as an informational device when advertising spending is just a signaling device it is purely a dissipative expense it can be an effective signal of quality because only the high quality firm can afford it thus consumers can infer the product s quality by its advertising spending in this case advertising spending and product quality are positively correlated however when advertising also serves the purpose of raising awareness it endogenizes the size of the market for the firm so it is not just a dissipative expense any more consider the low quality firm s mimicking strategy in this case when the low quality firm is believed to be a highquality one it can charge a much higher price than if its true quality were known given that its marginal cost is lower than the high quality firm s its profit margin will be much larger in mimicry than in revealing its true quality indeed its profit margin will be even greater than the high quality firm s therefore the low quality firm in mimicry has a strong incentive to increase its advertising spending from its optimal level when its true quality is known to deter the low quality firm s mimicking tendency the high quality firm should decrease its advertising spending so that mimicry is not as appealing to the low quality firm as revealing its true quality indeed the high quality firm should reduce its advertising spending so much that it advertises less than the low quality firm in equilibriummany have interpreted signaling as burning money or throwing money down the drain in the case of advertising the claim is that its purpose is simply to show consumers that the firm can afford to squander money on advertising to signal its quality hence the advertising content need not be informative however our results show that simply burning money is not enough to signal quality how the money is burned is also important when advertising raises awareness as well as signals quality saving money rather than burning money is the correct signaling approach although ultimately the high quality firm will sacrifice some profit by reducing its market size the intuition behind this result is that when information is incomplete the high quality firm cannot fully exploit its advantages whenever its advantages in quality and or marginal costs are lessened a firm will want to spend less on advertising

a quantitative analysis of optimal sustainable monetary policies abstract this study examines the quantitative properties of optimal sustainable monetary policies using a monetary model with a stabilization bias as in kurozumi 2008 the optimal sustainable policy is a strategy considered in the absence of commitment technologies however it is implemented following an optimal quasi sustainable policy derived by assuming that the commitment technologies are present this study finds that solving for the policy function of the optimal quasi sustainable policy yields a result basically identical to the ramsey optimal commitment policy under a set of parameters commonly used in the literature the simulation shows two further results policymakers have incentive to deviate from the ramsey optimal commitment policy when the lagged output gap is large and the optimal quasi sustainable policy endogenously diminishes the steadfastness of policymakers commitment

self fulfilling fire sales fragility of collateralised short term debt markets this paper shows that collateralised short term debt although privately optimal for reducing borrowers moral hazard can cause fragility multiple equilibria when the collateral market is illiquid a new form of coordination failure between borrowers ex ante margin and risk taking decisions engenders a systemic run in the collateralised debt market large changes in credit rationing margins repo spreads etc the model also captures the large small crosssectional differences between safe and risky collateral in bad good times finally i show that asset price guarantees could improve welfare and promote stability but repealing repo contracts automatic stay exemption might do the opposite

openness and inflation a general equilibrium model of a small open economy is developed to analyse the optimal rate of inflation under discretion once agents welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship a greater degree of openness may lead the policy maker to want to exploit the short run phillips curve more aggressively even if involves a smaller short run benefit because changes in export demand affect the terms of trade inflation can then be higher in a more open economy

money is an experience good competition and trust in the private provision of money the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money is studied with commitment trust is automatically achieved and competition ensures efficiency without commitment competition plays no role trust does play a role but requires a bound on efficiency stationary inflation must be non negative and therefore the friedman rule cannot be achieved the quality of money can be observed only after its purchasing capacity is realized in this sense money is an experience good

the making of a hot product a signaling explanation of marketers scarcity strategy every marketer s dream is to create a hot product that customers would absolutely want to have thus generating considerable profit to the marketer according to one school of thought marketers should make products hard to get in order to create really hot products in this paper using a game theoretic model we investigate if such scarcity strategies can indeed be optimal while a scarcity strategy may appear to be a viable approach for making a firm s product successful further analysis raises some puzzling issues in particular it is not clear why a firm would not increase its price to get demand and supply in sync and increase its profit in the process we therefore offer a signaling explanation for the optimality of such strategies and show that a high quality seller may optimally choose to make the product scarce in order to credibly signal the quality of its product to uninformed customers our analysis indicates that a high quality seller optimally employs scarcity as a signaling device in product markets that are characterized ceteris paribus by a small difference in marginal cost between high and low quality products a low reservation price for a low quality product a greater heterogeneity in reservation prices for a high quality product and a moderate number of informed consumers our results provide a rationale for the fact that scarcity strategies are usually observed for discretionary or specialty products but not for commodity products staple products or new to the world products

sustainable plans and debt abstract this paper presents a simple general equilibrium model of optimal fiscal policy similar to that of lucas and stokey j monet econ 12 1983 55 93 except that we let the government default on its debt we consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we concentrate on trigger mechanisms which specify reversion to the markov equilibrium after deviations by the government and show that such mechanisms cannot support equilibria with positive debt we go on to show by way of examples that there can be more complicated trigger mechanisms which support positive debt journal of economic literature classification numbers e61 e62

high and declining prices signal product quality high and declining prices signal a high quality product high prices are the efficient means of signaling because the consequent loss of sales volume is most damaging for lower cost lower quality products as time passes and the number of informed consumers increases the signaling distortion lessens resulting in a declining price profile the prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings copyright 1991 by american economic association

sustainability flexibility and inflation targeting abstract this paper examines sustainability of an inflation targeting policy regime in terms of sustainable equilibrium using a canonical model in the recent literature overly flexible inflation targeting is not sustainable strict inflation targeting is sustainable only when shock persistence is high enough

recursive monetary policy games with incomplete information abstract this paper provides recursive methods for analyzing the credible equilibria of an incomplete information monetary policy game the policy game is one in which a discretionary government has a short run temptation to engage in a surprise monetary expansion it also has the opportunity to imitate a government that always implements the ex ante optimal monetary policy actions we derive an algorithm for computing the set of credible equilibrium payoffs we use this algorithm to explore the idea that incomplete information monetary policy games of this kind have fewer equilibria and less indeterminacy than their complete information counterparts

on the efficiency effects of private dis trust in the government abstract we consider a version of the seminal kydland prescott model where in each period some private agents believe the policy announcements made by the government the other agents follow a standard optimizing strategy the fraction of agents who believe the government changes over time according to a word of mouth learning process we show that the initial number of believers and the speed of learning can have drastic consequences for the policy followed and the losses experienced by the different agents in particular the utility of the private sector may jump upwards if the initial number of believers exceeds a given threshold

a framework for the analysis of moderate inflations abstract optimal monetary policy is studied in a model with no contractual restrictions or physical costs of changing prices nevertheless the price level is sticky in a range of mark up indeterminacy and inflation occurs only when employment presses against capacity under full information the monetary authority can exploit price level stickiness to minimize the mark up and keep employment at a constrained optimum without inflation under uncertainty negative aggregate demand shocks produce real contractions and positive shocks raise the price level the monetary authority can raise the likelihood that aggregate demand will maximize employment but at the cost of higher expected inflation

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

credible monetary policy in an infinite horizon model recursive approaches abstract this paper develops recursive methods to study optimal and time consistent policy in dynamic models we analyze a version of calvo s 1978 monetary model and show that its time consistent outcomes can be completely characterized as the largest fixed point of either of two operators recursive application of these operators provides a computing algorithm which always converges to the set of time consistent outcomes finally we obtain valuable information about the nature of time consistent outcomes it is discovered in particular that all such outcomes are markovian the methods obtained are intuitive and should be useful for many applications journal of economic literatureclassification numbers e61 e52 c61

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

delegation time inconsistency and sustainable equilibrium this paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government s strategy the method of chari and kehoe 1990 sustainable plans journal of political economy 98 4 783 802 is applied to characterize the entire set of sustainable outcomes countering mccallum s 1995 two fallacies concerning central bank independence american economic review 85 2 207 211 second fallacy delegation is able to eliminate the time inconsistency problem with the commitment policy being sustained under discretion for any intertemporal discount rate

optimal sustainable monetary policy in recent monetary policy literature optimal commitment policy or its variant from a timeless perspective has been studied with emphasis on welfare gains from policy commitment regardless of its time consistency problem called a stabilization bias with an optimizing model used in the literature we examine sustainable equilibrium of chari and kehoe 1990 and study optimal sustainable policy the policymaker s strategy in the best sustainable equilibrium in the absence of commitment technologies calibrated versions of the model show that the ramsey equilibrium generated by optimal commitment policy is not achievable suggesting that optimal sustainable policy is the desirable policy benchmark from the viewpoint of policy operationality the latter policy involves some issues due to its dependence on the entire history of lagrange multipliers on a sustainability constraint as a guidepost for actual policy conduct that contains no such issues and attains higher social welfare than discretionary policy does we propose a sustainable policy conducted by following a policy rule that achieves the best markov equilibrium

inflation and reputation with generic policy preferences this paper analyzes a reputational equilibrium for inflation under the generic assumption that monetary policy reflects proximate preferences for low expected inflation and positive unexpected inflation the paper stresses the qualitative implication that in a reputational equilibrium the policymaker behaves as if he is concerned about controlling inflation even though he does not have a direct preference for a low actual inflation rate the analysis also shows how the equilibrium inflation rate depends on a decision interval that reflects the underlying real objectives of monetary policy and that determines how fast private agents would react to opportunistic behavior by the policymaker copyright 1990 by ohio state university press

discretionary monetary policy with costly inflation this paper considers how an output cost of inflation affects the discretionary inflation bias we show that conditions exist under which costly inflation actually increases this inflation bias

y2k options and the liquidity premium in treasury markets financial institutions around the world expected the millennium date change y2k to cause an aggregate liquidity shortage responding to the concern the federal reserve bank of new york auctioned y2k options to primary dealers the options gave the dealers the right to borrow from the fed at a predetermined interest rate using the implied volatilities of y2k options and the on off the run spread we demonstrate that the fed s action eased the fears of bond dealers contributing to a drop in the liquidity premium of treasury securities our analysis shows the link between the microstructure of government debt markets and the central bank s provision of liquidity we argue that y2k options and their effects on liquidity premium broadly conform to the economic theory on public provision of private liquidity

on credible monetary policy and private government information credible and optimal monetary policies are considered in environments in which the government observes a signal that is correlated with the state of the economy when the signal is public information it is optimal for monetary policy to be conditioned upon it the extent to which such conditioning should occur when the signal is the private information of the government depends upon the government s incentives to misrepresent information it is shown that in some cases the ramsey policy is incentive compatible in others it is not in the latter cases policy must be constrained to be incentive compatible this may result in penalty phases along the equilibrium path following apparent mistakes by the policy maker it may result in the optimal monetary policy making no use of the signal journal of economic literature classification numbers c73 e52 e58

the suspension of the gold standard as sustainable monetary policy abstract this paper models the gold standard as a state contingent commitment technology that is only feasible during peace monetary policy during war when the gold convertibility rule is suspended can still be credible if the policymaker s plan is to resume the gold standard in the future the dsge model developed in this paper suggests that the resumption of the gold standard was a sustainable plan which replaced the gold standard as a commitment technology and made monetary policy time consistent trigger strategies support the equilibrium private agents retaliate if a policymaker defaults on its plan to resume the gold standard

design innovation and fashion cycles a model of fashion cycles is developed in which designs are used as a signaling device in a dating game a monopolist periodically creates a new design over time the price of the design falls as it spreads across the population once sufficiently many consumers own the design it is profitable to create a new design and thereby render the old design obsolete this paper gives conditions under which all consumers would be better off by banning the use of fashion competition among designers may lead to less frequent changes in fashion and to higher prices than monopoly copyright 1995 by american economic association

the cost of short selling liquid securities standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive we show that short sellers can also pay a net liquidity premium if their cost to borrow the security is higher than the price premium they collect from selling it we provide a model free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short sellers empirically we find that short sellers were responsible for a substantial fraction of the liquidity premium for on the run treasuries from november 1995 through july 2009

ruling out pareto dominated monetary equilibria abstract it is well known that under nominal money supply rules accomplished through lump sum transfers non uniqueness and non optimality of the resource allocation often obtains in monetary models we show that uniqueness and optimality of the resource allocation obtains if the monetary authority conducts friedman s rule through open market operations our result necessitates and we provide a clarification of existing irrelevance theorems for open market operations our result also provides a partial resolution of the uniqueness efficiency conflict of nominal money supply rules raised by woodford economic theory 4 1994 345 380

central bank design in general equilibrium we study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital theoretic general equilibrium economy we consider three institutional arrangements for determining monetary policy the first unconditional majority voting always leads to a substantial inflation bias the second a simple form of bargaining which we interpret as a policy board generally improves on the unconditional majority voting outcome finally we consider a constitutional rule which always achieves the social optimum

optimal random monetary policy with nominal rigidity abstract this paper studies a money in the utility function model with imperfect competition and one period ahead nominal price setting under standard assumptions on preferences friedman s rule setting the money growth rate equal to the household time discount factor generates an equilibrium that is optimal within the class of deterministic policies we then provide conditions under which a random monetary policy increases ex ante expected welfare relative to friedman s rule the result obtains because random policy can reduce the distortion associated with imperfect competition our result exhibits original features relative to existing cases of welfare improving random monetary policy such as polemarchakis and weiss j econom theory 15 1977 345

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

monetary policy and policy credibility theories and evidence within the past decade there has been a significant shift in attitude by many western industrialized countries toward the objectives and conduct of national economic policy the events of the 1970s accelerating inflation and stagnant economic growth motivated the view that inflation had created its own stubborn self sustaining momentum that either was not amendable to the influences of conventional macroeconomic policy or else would yield to such influences only at unacceptable costs this led to the development of a program aimed at reestablishing control over prices while minimizing any adverse consequences of anti inflationary policies on output and employment seen as a new monetary experiment the essential ingredients included prudent financial management abstinence from discretionary intervention commitment to intermediate targets and above all prior announcement of these policies evidence of this program and its effects can be found oni the continents of europe north america and latin america and provide further important lessons in anti inflationary management this paper is a survey of recent theoretical developments in monetary policy which among other issues attempt to explain one rationale for this program and the likely consequences thereof to the extent that the new program of monetary and fiscal reform was deliberately made public and impressed upon citizens as an overriding commitment of governments in advance of its execution reflects a prevailing opinion that economic policies are more effective if they are credible to private economic agents this view emphasized forcefully by william fellner 1976 1979 may be seen as being mainly due to the assimilation of the rational expectations hypothesis

repo runs evidence from the tri party repo market the repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis based in part on findings that margins increased sharply in a segment of this market this paper provides evidence suggesting that there was no system wide run on repo using confidential data on tri party repo a major segment of this market we show that the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis however we also document a sharp decline in the tri party repo funding of lehman in september 2008

strategic monetary policy with non atomistic wage setters monetary policy analyses usually assume an atomistic private sector thereby ignoring potential interactions between policy and wage setting decisions yet non atomistic wage setters are a key feature of several industrialized economies we study the economic consequence of non atomistic agents and show that this qualifies previous results on the effects and desirability of a conservative central banker in particular the central bank aversion to inflation may have a permanent effect on structural employment while no such effect emerges with atomistic agents

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

further evidence on segmentation in the treasury bill market abstract this paper shows that differences in supplies of 13 and 12 week treasury bills have statistically significant and economically meaningful effects on their yield differentials from january 1985 through october 1991 controlling for the general slope of the treasury bill yield curve the tendency of bills maturing at month ends to have lower yields and the tendency of bills whose supply is augmented by cash management bills to have higher yields the finding that market participants do not arbitrage away yield differentials that owe to differences in supplies indicates that demand curves for individual bills are downward sloping and that segmentation in the treasury bill market is more pervasive than previously documented

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

umbrella branding as a signal of new product quality an example of signalling by posting a bond i present a signalling model in which a multiproduct firm can use its reputation as a bond for quality by using a brand name for an established product when it introduces a new experience good as out of equilibrium beliefs are specified a false signal may be taken to imply that both the established and the new product are of low quality in contrast the absence of a signal leaves open the possibility that one of the two products is of high quality hence the signal can be credible without excessive sunk costs as long as the bond posted is sufficiently large

repo market effects of the term securities lending facility the term securities lending facility tslf was recently introduced by the federal reserve to promote liquidity in the financing markets for treasury and other collateral we evaluate one aspect of the program the extent to which it has narrowed repo spreads between treasury collateral and lower quality collateral we find that tslf operations have precipitated a significant narrowing of repo spreads more refined tests indicate the market conditions and types of operations associated with the program s effectiveness various additional tests including a split sample test suggest that our findings are robust

central bank reputation in a forward looking model this paper examines whether reputation concerns can induce the central bank to implement the time inconsistent optimal monetary policy in the standard new keynesian model interestingly the forward looking nature of this model enables us to account for the coordination of the private agents on the punishment length of their trigger strategy our results suggest that both the inflation bias and the stabilization bias can be overcome by a reputation concerned central bank for the calibrations used in the literature these results enable us to endogenize woodford s timeless perspective and tend to weaken the case for recent monetary policy delegation proposals

a simple approach to international monetary policy coordination this paper analyzes the strategic interaction between the monetary policies of two countries in an intertemporal general equilibrium model with nominal rigidities and imperfect competition it offers an excursus on non cooperative towards cooperative solutions all the results can be read by comparing the strength of the two biases the monopolistic distortions and the terms of trade externalities in the best feasible allocation the larger country retains some monopolistic distortions while the smaller country reaches the competitive level

warranties as a signal of quality in this paper we demonstrate through an example that in oligopolistic markets it is only in special cases that warranties can serve as signals of quality warranties are perfect signals only in cases in which the intrinsic attributes of products are neither too clustered nor too widely spaced otherwise multiple separating equilibria arise and the informational content of warranties is limited

time consistent monetary policy with endogenous price rigidity abstract i characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion firms have the option to increase their frequency of price change at a cost in response to higher inflation previous studies which assume a constant degree of price rigidity across inflation regimes find two time consistent equilibria one with low inflation the other with high inflation in contrast when price rigidity is endogenous the high inflation equilibrium ceases to exist hence time consistent equilibrium is unique this result depends on two features of the analysis 1 a plausible quantitative specification of the fixed cost of price change and 2 the presence of an arbitrarily small cost of inflation that is independent of price rigidity