money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

market size trade and productivity doi 10 111 j 1467 937x 2007 00463 x in the review of economic studies 75 1 the co author s name was incorrectly listed as giancarlo i p ottaviano the correct name is as listed above copyright 2008 wiley blackwell

crime and poverty a search theoretic approach numerous studies document that criminal activity is positively related to unemployment and negatively related to educational attainment levels within given communities we study this phenomenon in the context of a search equilibrium model in which agents choose between formal employment and pursuing crimerelated activities theft prior to their occupational choices agents undertake costly schooling raising their productivity crime acts in essence as a tax on human capital by affecting the probability that a worker s earnings possessions are subsequently appropriated there are multiple equilibria high crime low levels of educational attainment long spells of unemployment and poverty are correlated across them

the nonlinear time series properties of unemployment rates some further evidence the time series properties of unemployment rates for germany japan the uk and the us are re examined evidence of nonlinear structure in the residuals of the most parsimonious linear arma models is reported for all countries except japan modelling this nonlinearity using setar models suggests strong asymmetry in unemployment dynamics and the presence of a possible limit cycle for the uk however residual diagnostics for these models indicate remaining structure alternative tar models conditioned on past growth rates of industrial production yield substantial reductions in residual variance over both linear and setar counterparts iid residuals in all cases other than the us and threshold values at or very near zero clearly identifying the asymmetric behaviour of unemployment during expansionary and contractionary phases of the business cycle

nonlinear dynamics in deviations from the law of one price a broad based empirical study abstract in this paper we test empirically the validity of the law of one price using data for five major bilateral us dollar exchange rates and nine goods sectors during the recent floating exchange rate regime since the early 1970s using threshold autoregressive models we find strong evidence of nonlinear mean reversion in deviations from the law of one price with plausible convergence speeds consistent with theoretical arguments on international goods markets arbitrage under transactions costs and with an emerging strand of empirical literature these results contribute towards forming a consensus view in favor of discrete regime switching in deviations from the law of one price and the presence of differing nonzero transactions costs across a broad range of goods and countries

choosing sides in matching games nash equilibria and comparative statics this paper characterizes equilibria in matching games where the institutional setting allows players to choose whether to become buyers sellers or not to participate in economic activity nash equilibrium consists of a partition of agents into buyers sellers and non participants such that agents in each group do not have an incentive to change their activity given the behaviour of other agents comparative static analysis demonstrates that when participation costs are so high that some agents choose not to participate a further increase in participation costs may increase the number of agents who participate in the matching process

anonymous markets and monetary trading abstract we study infinite horizon monetary economies characterized by trading frictions that originate from random pairwise meetings and commitment and enforcement limitations we prove that introducing occasional trade in centralized markets opens the door to an informal enforcement scheme that sustains a non monetary efficient allocation all is required is that trading partners be patient and their actions be observable we then present a matching environment in which trade may occur in large markets and yet agents trading paths cross at most once this allows the construction of models in which infinitely lived agents trade in competitive markets where money plays an essential role

credibility and seigniorage in a common currency area in the paper we show that common currency areas tend to amplify the inefficiencies associated with lack of credibility of monetary policy lack of commitment in redistribution of seigniorage leads to excessive inflation and suboptimal taxation in the monetary union lack of commitment to inflation creates multiple inefficient equilibria that do not exist in a regime of national monetary independence

general equilibrium with nonconvexities and money in a general equilibrium economy with nonconvexities there are sunspot equilibria with good welfare properties sunspots can ameliorate the effects of the nonconvexities for these economies we show that agents act as if they have quasi linear utility functions we use this result to construct a new model of monetary exchange along the lines of lagos and wright where trade occurs in both centralized and decentralized markets but instead of quasi linear preferences we assume general preferences but with indivisible labor this suggests that modern monetary theory is more robust than one might have thought it also constitutes progress on the classic problem of integrating monetary economics and general equilibrium theory

money and loans agents expect to trade with each other infinitely often but face a temporal absence of a coincidence of wants when they meet only loans and or money can facilitate exchange in small close knit economies enduring trade relationships are valued and loans are optimal in larger economies with limited communication information concerning repayment of loans diffuses too slowly to deter agents from reneging unless loans are severely restricted in magnitude money has no such redeemability problems but if clower constraints bind loans help supplement money purchases so that both become essential roles of various institutions and the historical evolution of media of exchange are explained

reemployment probabilities and returns to matching the assumption of constant returns in the matching function embodied in most bilateral search models is crucial to ensure the uniqueness of the unemployment rate along a steady state growth path this article explores the empirical viability of this assumption by estimating individual reemployment probabilities on a sample of unemployment entrants i apply hazard models to survey data on both completed and uncompleted unemployment durations the hypothesis of constant returns to matching is not rejected on the basis of the evidence that the job finding hazard depends only on local labor market tightness and is independent of its size

threshold nonlinearities in unemployment rates further evidence for the uk and g3 economies the paper appraises the in sample and out of sample adequacy of linear ar and nonlinear setar models of unemployment rates for germany japan the uk and the us tests are reported for the presence and specification of threshold nonlinearities setar model estimates limiting dynamic properties and residual diagnostics and out of sample forecasting performance in sample threshold non linearities are confirmed to be strongly present for the uk us and germany and more marginally so for japan out of sample excepting japan setar models provide superior onestep ahead forecast on rmse grounds most notably for the us final tests indicate that these models exhibit predictive accuracy in the sense of parameter and residual variance stability implying the potential for exploitation of such nonlinearity in official forecasting

the effects of firm optimizing behaviour in matching models this paper considers a matching model of which the search behaviour of jovanovic 1979 and albrecht and jovanovic 1984 are special cases the nature of the generality is that each unemployed worker has more information than firms about his average productivity this results in wage offers falling over the length of an unemployment spell because a long spell is a signal of lower than average productivity the results of the paper are similar to the scarring effect of heckman and borjas 1980 and greenwald 1986 and the discouraged worker effect of schweitzer and smith 1974

money credit and banking in monetary models where agents are subject to trading shocks there is typically an ex post inefficiency since some agents are holding idle balances while others are cash constrained this problem creates a role for financial intermediaries such as banks who accept nominal deposits and make nominal loans in general financial intermediation improves the allocation the gains in welfare come from the payment of interest on deposits and not from relaxing borrowers liquidity constraints we also demonstrate that when credit rationing occurs increasing the rate of inflation can be welfare improving

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

segmentation of consumer markets in the us what do intercity price differences tell us we quantify the magnitude of market segmentation in us consumer market and explore the underlying factors behind this segmentation using a quarterly panel of retail prices for 45 products in 48 us cities from 1985 to 2009 the extent of market segmentation is estimated using city pair price differences within the framework of both linear autoregressive ar and nonlinear threshold autoregressive tar models we find that the magnitude of market segmentation varies from one product to another but even more across city pairs in each product contrary to a widespread perception market segmentation within the us is not necessarily larger for non tradable services compared to tradable goods we identify potential drivers of market segmentation by relating the cross city and cross product variations of market segmentation to location specific and product specific characteristics distance relative city sizes differences in wage and rent type of product and proximity to marketplace distance which captures more than transport costs turns out to be the most salient factor even after controlling for a range of other potential factors the effect of distance however varies substantially across products with perishable products and locally produced products showing larger distance effect on market segmentation we find that the magnitude of market segmentation has been somewhat stable during the sample period but intercity price differences have become more sensitive to distance over time in many products under study

asymmetric information and monetary policy in common currency areas in a common currency area cca the common central bank sets a uniform rate of inflation across countries taking into account the area s economic conditions suppose that countries in recession favor a more expansionary policy than countries in expansion a conflict of interest between members arises when national business cycles are not fully syncronized if governments of member countries have an informational advantage over the state of their domestic economy such conflict may create an adverse selection problem national authorities overemphasize their shocks in order to shape the common policy towards their needs this creates an inefficiency over and above the one policy fits all cost discussed in the optimal currency area literature in order to minimize this extra burden of asymmetric information monetary policy must over react to large symmetric shocks and under react to small asymmetric ones the result is sub optimal volatility of inflation

optimal monetary policy in a model of money and credit we investigate the extent to which monetary policy can enhance the functioning of the private credit system specifically we characterize the optimal return on money in the presence of credit arrangements there is a dual role for credit it allows buyers to trade without fiat money and also permits them to borrow against future income however not all traders have access to credit as a result there is a social role for fiat money because it allows agents to self insure against the risk of not being able to use credit in some transactions we consider a nonlinear monetary mechanism that is designed to enhance the credit system an active monetary policy is sufficient for relaxing credit constraints finally we characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate

informal insurance arrangements with limited commitment theory and evidence from village economies recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income thus rejecting the hypothesis of full risk pooling we attempt to explain these observations by adding limited commitment as an impediment to risk pooling we provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment and test the model using data from three indian villages we find that the model can fully explain the dynamic response of consumption to income but that it fails to explain the distribution of consumption across households

the structure of simple general equilibrium models with frictional unemployment we develop a two sector general equilibrium model in which equilibrium unemployment arises endogenously because of trading frictions in the labor market of one sector externalities inherent in the search process lead to inefficient equilibria and this has important implication for the basic structure of the economy in particular the relationship between factor rewards and commodity prices is fundamentally different from the analogous relationship in a frictionless economy one implication is that the economy s relative supply curve may be downward sloping especially when the search sector is small we also present several applications of the analysis

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

optimal regional redistribution under asymmetric information this paper studies optimal redistribution among two different regions in a federal state regional governments supply local public goods financed with distorting local taxes they have better information on their tax bases than the federal government we model this both as an adverse selection problem on the size of local tax bases and or as moral hazard problem on local tax enforcement moral hazard alone does not affect the first best redistribution rule which is a lump sum transfer from the rich to the poor region in all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions with the transfer falling short of the first best level in the equilibrium with moral hazard and adverse selection tax evasion occurs only in the poor region even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution this abstract was borrowed from another version of this item

when demand creates its own supply saving traps the mechanism by which aggregate supply creates the income that generates its matching demand called say s law may not work in a general equilibrium with decentralized markets and savings in bonds or money full employment is an equilibrium but convergence to that state is slow a self fullling precautionary motive

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

james tobin an appreciation of his contribution to economics jim tobin who died on march 11 2002 at the age of 84 was one of giants of economics of the second half of the twentieth century and the greatest macroeconomist of his generation tobin s influence on macroeconomic theory is so pervasive so much part of our professional acquis that many younger economists often are not even aware that it is his ideas they are elaborating testing criticising refuting or re inventing in this appreciation i consider tobin s scholarly contributions made over a period of more than 50 years tobin received the 1981 nobel memorial prize for his analysis of financial markets and their relations to expenditure decisions employment production and prices i consider his contributions to mean variance portfolio demand and asset pricing theory especially the portfolio separation theorem pitfalls in financial model building portfolio balance and flow of funds models and the credit channel the life cycle model and social security econometric methodology including the tobit estimator and his pioneering work using both time series and cross sectional data to estimate food demand functions economic growth tobin s q the tobin tax the monetary and fiscal policy effectiveness debate first with milton friedman and then with the new classical macroeconomics and real business cycle schools and tobin s approach to methodological questions including microfoundations and aggregation

search evolution and money abstract this paper describes a search theoretic model that can be used to determine which objects serve as media of exchange or money existing versions of the model are generalized to allow arbitrary distributions of agents who specialize in different consumption production activities i characterize the way the numbers of consumers and producers of the various goods help determine which goods serve as money the distribution is then endogenized so that agents can choose their type this generates a unique equilibrium outcome ideas from evolutionary dynamics are employed as a way to interpret the model and to compute equilibria

the law of one price intranational evidence for canada this study investigates the behaviour of intranational prices for 45 specific consumer goods across 25 canadian cities it finds positive roles for distance and provincial borders in intercity price disparities while sizable the provincial border effect is an order of magnitude smaller than the estimates for the canada u s border a majority of the intercity relative price series are stationary around small mean values indicating that long run price differences are close to zero the intercity prices converge at rates considerably faster than the consensus estimates for international prices in fact half lives for intercity price deviations average well under a year jel classification f15 f31 la loi d un seul prix resultats intra nationaux pour le canada ce memoire examine le comportement des prix intra nationaux de 45 biens de consommation specifiques dans 25 villes canadiennes il semble que la distance et les frontieres inter provinciales ont un impact sur les differentiels de prix entre villes meme si l impact des frontieres inter provinciales est important il est beaucoupplus petit que l impact de la frontiere canada u s une majorite des series de prix relatifs entre villes sont stationnaires autour de petites valeurs moyennes ce qui suggere que les differences de prix a long terme s approchent de zero il est clair que les prix entre villes convergent a des taux considerablement plus rapides que ce qu on observe au niveau international en fait les deviations de prix entre villes ont une esperance de vie qui en moyenne est de moins d un an

inflation indexed bonds and nominal bonds financial innovation and precautionary motives this paper introduces a two period monetary general equilibrium model with proportional transaction costs on nominal and inflation indexed bonds this paper demonstrates that financial innovation on indexed bonds causes equilibrium interest rates of the nominal bond to increase when agents have precautionary saving motives this result implies that ignoring precautionary motives would underestimate savers welfare gain and overestimate borrowers welfare gain from innovation on indexed bonds

money and credit redux do we need both money and credit in models with explicit roles for payment instruments we show the answer is no if credit is easy money is useless if credit is tight money can be essential but then credit is irrelevant and changes in debt limits are neutral real balances respond endogenously to leave total liquidity constant this is true for exogenous or endogenous policy and debt limits secured or unsecured credit and fairly general preferences and pricing mechanisms while we also show how to overturn some results the benchmark model suggests credit conditions matter less than some people think

turnover externalities with marketplace trading this article considers equilibrium decentralized trade when there is a marketplace where buyers and sellers meet costlessly since buyers have idiosyncratic match payoffs for each seller s good some buyers rather than trade with the current stock of sellers wait for new sellers to enter the marketplace to obtain a good they like a turnover externality exists where all traders are better off with higher entry rates of new traders furthermore this turnover externality supports multiple pareto rankable equilibria this provides new insights into similar results obtained in the random matching literature

short run and long run effects of changes in money in a random matching model a random matching model of money is used to deduce the effects of a once for all change in the quantity of money it is shown that the change has short run effects that are predominantly real and long run effects that are in the direction of being predominantly nominal provided that the change is random and people learn its realization only with a lag the change in the quantity of money comes about through a random process of discovery that does not permit anyone to deduce the aggregate amount discovered when the change actually occurs

learning matching and growth we examine an endogenous growth model in which market frictions are an integral part of the economic environment workers invest in education when young which raises their productivity onice employed the level of schooling also acts as a key determinant of the rate of economic growth by influencing workers ability to accumulate additional human capital on the job once schooling is completed workers search for employment the division of the surplus between vacancies and searching workers is characterized as is the optimal level of education the economy may display multiple steady state growth paths

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

inflation and unemployment in general equilibrium when labor is indivisible there exist ecient outcomes with some agents randomly unemployed rogerson 1988 we integrate this idea into the modern theory of monetary exchange where some trade occurs in centralized markets and some in decentralized markets as in lagos and wright 2006 this delivers a general equilibrium model of unemployment and money with explicit microeconomic foundations we show the implied relation between inflation and unemployment can be positive or negative depending on simple preference conditions our phillips curve provides a long run exploitable trade o for monetary policy it turns out however that the optimal policy is the friedman rule

a dynamic model of trade frictions and disequilibrium in the housing market a dynamic stock flow model is developed to analyze and simulate housing markets with partial rent control trade frictions and spillovers a notion of equilibrium is suggested and related to walrasian equilibrium existence uniqueness and comparative statics properties of equilibria are analyzed in some examples of housing markets with and without price control stability properties and dynamic responses to demand and supply shocks are studied by means of computer simulations in a final simulation experiment a black market for rent controlled dwelling units is introduced

a model of money and credit with application to the credit card debt puzzle many individuals simultaneously have significant credit card debt and money in the bank the credit card debt puzzle is given high interest rates on credit cards and low rates on bank accounts why not pay down the debt while economists have gone to elaborate lengths to explain this observation we argue it is a special case of the rate of return dominance puzzle from monetary economics we analyze the issue by extending standard monetary theory to incorporate consumer debt this seems interesting in its own right since developing models where money and credit coexist is a long standing challenge and it helps put into context recent discussions of consumer debt

collateral secured loans in a monetary economy abstract this paper presents a microfounded model of money where durable assets serve as a guarantee to repay consumption loans we study a steady state equilibrium where money and credit coexist in such an equilibrium a larger investment in durable capital relaxes the borrowing constraint faced by consumers we show that the occurrence of over investment and the behavior of capital accumulation depend on the rate of inflation the relative risk aversion of agents and the marginal productivity of the capital goods

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

how to reduce unemployment a new policy proposal this paper uses a model with a continuum of equilibrium steady state unemployment rates to explore the effectiveness of fiscal policy the existence of multiple steady state equilibria is explained by the presence of search and recruiting costs i use the model to explain the current financial crisis as a shift to a high unemployment equilibrium induced by the self fulfilling beliefs of market participants about asset prices i ask two questions 1 can fiscal policy help us out of the crisis 2 is there an alternative to fiscal policy that is less costly and more effective the answer to both questions is yes

bidding for money we analyze monetary exchange in a model that allows for directed search and multilateral matches we consider environments with divisible goods and indivisible money and compare the results with those in models that use random matching and bilateral bargaining two different pricing mechanisms are used ex ante price posting and ex post bidding auctions also we consider settings both with and without lotteries we find that the model generates very simple and intuitive equilibrium allocations that are similar to those with random matching and bargaining but with different comparative static and welfare properties

efficiency and equality in a simple model of efficient unemployment insurance abstract this paper describes the efficient allocation of consumption and work effort in an economy in which workers face idiosyncratic employment risk and considerations of moral hazard prevent full insurance we impose a lower bound on the expected discounted utility that can be assigned to any agent from any date onward and show with this feature added that the efficient unemployment insurance scheme induces an invariant cross sectional distribution of individual entitlements to utility the paper thus provides a simple prototype model suited to the study of the normative question what is the trade off between equality and efficiency in resource allocation journal of economic literature classification numbers d31 d63 d82 j65

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

trading uncertainty and market form this paper examines purely random multilateral matching among a large number of informationally isolated individuals who desire to trade the structure of links among traders is characterized by means of random graphs defined by a parameter that is chosen by prospective traders trading groups of all sizes including pairs as a special case result but the size distribution may contain a mass point at infinity that is within a certain subset of the entire economy trading uncertainty is entirely eliminated the equilibrium price distribution consists of a mass point and of a mixture of densities copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

payments systems design in deterministic and private information environments abstract the first setup we study is a deterministic model with spatial separation where we consider alternative payments systems institutions and their implications for allocation and welfare a payments system with period by period settlement in outside money improves on decentralized exchange an efficient allocation is supported by a payments system where settlement is not imposed in the second model there is random matching and unobserved productivity shocks and preference shocks we explore how risk should be shared optimally in this economy and interpret the results in terms of how actual payments systems should operate journal of economic literature classification numbers e4 e5

endogenous market formation and monetary trade an experiment the theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange however endogenizing the exchange process is critical for understanding the conditions that support the use of money we develop a traveling game to study the emergence of decentralized and centralized exchange theoretically and experimentally players located on separate islands can either trade locally or pay a cost to trade elsewhere so decentralized and centralized markets can both emerge in equilibrium the former minimize trade costs through monetary exchange the latter maximizes overall surplus through nonmonetary exchange monetary trade emerges when coordination is problematic whereas centralized trade emerges otherwise this shows that to understand the emergence of money it is important to amend standard theory such that the market structure is endogenized

a dynamic model of unsecured credit abstract we study the terms of credit in a competitive market in which sellers lenders are willing to repeatedly finance the purchases of buyers borrowers by engaging in a credit relationship the key frictions are i the lender cannot observe the borrower s ability to repay a loan ii the borrower cannot commit to any long term contract iii it is costly for the lender to contact a borrower and to walk away from a contract and iv transactions within each credit relationship are not publicly observable the lender s optimal contract has two key properties delayed settlement and debt forgiveness finally we study the impact of changes in the initial cost of lending on the contract terms

barriers to price convergence this paper investigates the existence of convergence clubs in the cross country price mechanism for 96 individual goods retail price levels across 40 countries available semi annually for 1990 2010 using a nonlinear factor model and threshold regression tools to our knowledge this is the first paper to find strong evidence for club convergence of retail prices these clubs emerge due to the interaction of traded and non traded factors for example countries that are physically closer to potential trade partners converge faster than countries in the high distance regime as long as they have low initial labor productivity or low initial income moreover being behind the technology frontier appears to be more conducive to price convergence for countries with relatively small physical distance from potential trade partners we interpret our findings as evidence of a local law of one price due to barriers to price convergence that influence the duration of the effect of price shocks

a repeated game model of monetary union given a policy rule of the common central bank of a monetary union member countries with different preferences about inflation and facing asymmetric shocks have different incentives to secure political intervention in the bank s operation and achieve the temporary benefit of surprise inflation this is modelled as a repeated game and the most cooperative outcome subject to the countries incentive compatibility constraints is found the optimal rule responds flexibly to asymmetric shocks adjusting policy away from the full commitment level toward the discretionary level so as to maintain the worse hit country s incentive to abide by the rule

money and dynamic credit arrangements with private information abstract we construct a model with private information in which consumers write dynamic contracts with financial intermediaries a role for money arises due to random limited participation of consumers in the financial market without defection constraints a friedman rule is optimal the mean and variability of wealth tend to fall with inflation in the steady state and the welfare effects of inflation are very small with defection constraints the effects of inflation on the distribution of welfare and consumption are large but the effect on average welfare is still small the relaxation of defection constraints resulting from higher inflation can cause a substantial increase in the real interest rate journal of economic literature classification numbers d8 e4 g2

liquidity monetary policy and the financial crisis a new monetarist approach a model of public and private liquidity integrates financial intermediation theory with a new monetarist monetary framework nonpassive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the friedman rule a liquidity trap can exist in equilibrium away from the friedman rule and there exists a permanent nonneutrality of money driven by an illiquidity effect financial frictions can produce a financial crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income jel e13 e44 e52 e62 g01 liquidity is a class of assets that is useful in exchange some of these liquid assets are government liabilities federal reserve notes treasury bills and treasury notes some are private liabilities the deposit liabilities of banks and some asset backed securities for example conventional wisdom holds that the main role of a central bank is to manage public liquidity in a manner that controls inflation and enhances the provision of private liquidity and credit however the mechanism by which central bank actions work to perform this role still appears to be poorly understood as has been highlighted by the financial crisis and the ensuing policy responses the purpose of this paper is to build a model of public and private liquidity that captures the features of modern economies essential to the analysis of monetary policy and that can be used to shed light on some current monetary policy problems and questions what is a liquid asset and what roles do privately provided and publicly provided liquid assets play in exchange in a model where we capture these roles for liquid assets what are the implications for monetary policy under what circumstances can a liquidity trap occur how does monetary policy work when there is a positive quantity of excess reserves held by banks what does a financial crisis do to the supply of private liquidity and what should monetary policy do in response

search for a theory of organized crimes abstract casual empirical observations reveal no systematic relationship between the overall crime rate and organized criminal activity we develop a search theoretic framework to study the interactions not only between formal labor and crime sectors but also between individual and organized crimes in equilibrium individual and organized criminals face different arrest risks success rates reward structures and outside options we characterize agents occupational choices the gang s hierarchical structure and the responses of unemployment crime rates and crime composition to changes in labor market conditions and crime deterrence policies we further assess the effectiveness of arrest versus punishment policies in deterring individual and organized crimes

asset liquidity and indivisibility abstract we study asset liquidity in a search theoretic framework where divisible assets can facilitate exchange for an indivisible consumption good the distinctive characteristics of our theory are that the asset dividend can be either positive or negative and buyers can choose whether or not to carry the asset and trade for the indivisible good buyers participation determines the demand for asset liquidity thus the asset price carries a liquidity premium component which reflects the function of the asset in facilitating trade the economy features multiple equilibria when the asset dividend is negative due to the trade off between the probability of trade and the endogenous cost of holding assets

commitment advertising and efficiency of two sided investment in competitive search equilibrium abstract competitive search entails both commitment to and advertising of pay off relevant aspects of market participants this paper considers incrementally the implications of each in a labor market where both workers and firms invest prior to market entry a wide range of institutional arrangements are addressed within the same general framework when the characteristics of jobs or workers are advertised the efficient outcome pertains commitment without advertising typically leads to market unravelling the diamond paradox but whenever wages and human capital are advertised firms become residual claimants the private and social returns to investment coincide absent wage commitment the hosios condition implies efficiency when investments are advertised

bargaining and the value of money abstract search models of monetary exchange have typically relied on nash 1950 the bargaining problem econometrica 18 155 162 bargaining or strategic games that yield an equivalent outcome to determine the terms of trade by considering alternative axiomatic bargaining solutions in a search model with divisible money we show that the properties of the bargaining solutions do matter both qualitatively and quantitatively for questions of first degree importance in monetary economics such as i the efficiency of monetary equilibrium ii the optimality of the friedman rule and iii the welfare cost of inflation

inventory accumulation in a search based monetary economy abstract this paper explores the implications of a search based model of money for the linkage between steady state inventory accumulation inflation and welfare because individual traders in the search economy do not internalize the positive effects inventory accumulation and search effort have on the aggregate economy they are too low relative to social efficiency it is established that a tax on money balances can alleviate these externalities and improve aggregate welfare it does so by i directly increasing the optimal search intensity choices of the individual trader and ii stimulating the accumulation of inventories through a mundeil tobin type effect an increase in the equilibrium level of inventory accumulation also positively affects search effort the implications for optimal monetary policy are discussed

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

price setting in online markets basic facts international comparisons and cross border integration we document basic facts about prices in online markets in the united states and canada which is a rapidly growing segment of the retail sector relative to prices in regular stores prices in online markets are more flexible and exhibit stronger pass through 60 75 percent and faster convergence half life less than two months in response to movements of the nominal exchange rate multiple margins of adjustment are active in the process of responding to nominal exchange rate shocks properties of goods sellers and markets are systematically related to pass through and the speed of price adjustment for international price differentials

confidence crashes and animal spirits this article is an attempt to reformulate what i take to be two key insights from keyness general theory keynes 1936 the first is that there is something profoundly different about the labour market from most other markets in the economy the second is that the beliefs of participants in the asset markets have an independent influence on economic activity in the language of modern dynamic general equilibrium theory we would say that there is a continuum of labour market equilibria and that beliefs about the value of the stock market select an equilibrium the general theory contains many ideas some of which are internally inconsistent and keynes did not try to reconcile his theory with walrasian economics that task was carried out by a group of interpreters including hansen 1936 and hicks 1937 the current dominant paradigm new keynesian economics originated with the third edition of samuelson s 1955 undergraduate textbook in which he introduced the idea of the neoclassical synthesis according to this doctrine the economy is keynesian in the short run but classical in the long run the short run is defined as the period over which not all prices have had time to adjust to their walrasian levels this article introduces a different interpretation of the key ideas from the general theory 1 although my work is inspired by keynesian economics this article is not about the history of thought i offer a way of formulating the idea that market economies are not inherently self stabilising without assuming that prices or wages are prevented from adjusting to their equilibrium levels by some kind of friction instead i claim that high persistent unemployment is a potentially permanent feature of a market economy in a steady state equilibrium

a contribution to the pure theory of money abstract this article analyzes a general equilibrium model with search frictions and differentiated commodities because of the many differentiated commodities barter is difficult in that it requires a double coincidence of wants and this provides a medium of exchange role for fiat currency we prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment rate of return dominance liquidity and the welfare implications of fiat money are discussed

credit and money in a search model with divisible commodities this paper examines the competition between money and credit in a search model with divisible commodities it is shown that fiat money can be valuable even though it yields a lower rate of return than the coexisting credit the competition between money and credit increases efficiency the monetary equilibrium with credit pareto dominates the monetary equilibrium without credit whenever the two coexist when a credit is repaid with money the competition also bounds the purchasing power of money from below by that of credit and so eliminates the weak inefficient monetary equilibrium found in previous search models with numerical examples three different monetary equilibria are ranked and the properties of the interest rate are examined

repeated moral hazard and one sided commitment abstract this paper considers a repeated unobserved endowment economy with a restriction that agents can walk away from insurance contracts at the beginning of any period and contract with another insurer one sided commitment an equilibrium is derived characterized by a unique market determined insurance contract with the property that agents never want to walk away from it the paper shows that trade or insurance still occurs and that a non degenerate long run distribution of consumption exists a numerical example shows that this distribution is nearly log normal journal of economic literature classification numbers d30 d31 d80 d82

on the welfare properties of fractional reserve banking monetary economists have long recognized a tension between the benefits of fractional reserve banking such as the ability to undertake more profitable long term investment opportunities and the difficulties associated with it such as the risk of insolvency for each bank and the associated losses to bank liability holders i show that a specific banking arrangement a joint liability scheme provides an effective mechanism for ensuring the ex post transfer of reserves from liquid banks to illiquid banks so it is possible to select a socially efficient reserve ratio in the banking system that preserves the safety of bank liabilities as a store of value and maximizes the rate of return paid to bank liability holders

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

the transition from barter to fiat money how did it become possible to exchange apparently valueless pieces of paper for goods this paper provides an equilibrium account of the transition between barter and fiat money regimes the explanation relies on the intervention of a self interested government that must be able to promise credibly to limit the issue of money to achieve credibility the government must offset the benefits of seigniorage by internalizing some of the macroeconomic externalities generated by the issue of fiat money the government s patience and the extent of its involvement in the economy are key determinants of whether the transition can be accomplished copyright 1995 by american economic association

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

private money and banking regulation we show that the regulation of lending practices is desirable for the optimal provision of private money in an environment in which bankers cannot commit to repay their creditors neither an unregulated banking system nor a form of narrow banking in which banks hold 100 in reserves can provide the socially efficient amount of money if bankers provided such an amount then they would prefer to default on their liabilities we show that a regulation that increases the value of the banking sector s assets e g by limiting competition in credit markets will mitigate the commitment problem if the return on the banking sector s assets is made sufficiently large then it is possible to implement an efficient allocation

competitive risk sharing contracts with one sided commitment this paper analyzes dynamic equilibrium risk sharing contracts between profit maximizing intermediaries and a large pool of ex ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex post in any given period after having observed her income the agent can walk away from the contract while the intermediary cannot i e there is one sided commitment we consider the extreme scenario that the agents face no costs to walking away and can sign up with any competing intermediary without any reputational losses we demonstrate that not only autarky but also partial and full insurance can obtain depending on the relative patience of agents and financial intermediaries insurance can be provided because in an equilibrium contract an up front payment effectively locks in the agent with an intermediary we then show that our contract economy is equivalent to a consumption savings economy with one period arrow securities and a short sale constraint similar to bulow and rogoff 1989 from this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable even though a risk allocation superior to autarky can be achieved

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

essential interest bearing money i examine optimal monetary policy in a lagos and wright a unified framework for monetary theory and policy analysis j polit econ 113 2005 463 484 model where trade is centralized and all exchange is voluntary i identify a class of incentivefeasible policies that improve welfare beyond what is achievable with zero intervention any policy in this class necessarily entails a non negative inflation rate and a strictly positive nominal interest rate despite the absence of a lump sum tax instrument there exists an incentive feasible policy that implements the first best allocation

does distance reflect more than transport costs we decompose the effect of distance on intercity retail price dispersion in us into transport and non transport cost components we find that distance contains more information than transport costs care should be taken in interpreting distance effect as transport costs only

a dynamic equilibrium model of search production and exchange we study a general equilibrium model where agents search for production and trading opportunities that generalizes the existing literature by considering a large number of differentiated commodities and agents with idiosyncratic tastes thus agents must choose nontrivial exchange as well as production strategies we consider decreasing constant and increasing returns to scale in the matching technology and characterize the circumstances under which there exist multiple steady state equilibria or multiple dynamic equilibria for given initial conditions we also characterize the existence of dynamic equilibria that are limit cycles equilibria are not generally optimal and when multiple equilibria coexist they may be ranked we analyze comparative statics and find that certain intuitive results do not necessarily hold without restrictions on the stochastic structure

the role of two frictions in geographic price dispersion when market friction meets nominal rigidity this paper empirically investigates and theoretically derives the implications of two frictions market friction and nominal rigidity on the dynamic properties of intra national relative prices with an emphasis on the interaction of the two frictions by analyzing a panel of retail prices of 45 products for 48 u s cities over the period 1985 2009 we make two major arguments first the effect of each type of friction on the dynamics of intercity price gaps is quite different while market frictions arising from physical distance and transportation costs have a positive impact on volatility and persistence of intercity price dispersion nominal rigidities have a positive impact on persistence but a negative impact on volatility this empirical evidence is different from what is predicted by standard theoretical cross country models based on price stickiness second complementarities exist between market frictions and nominal rigidities such that the marginal effect of a market friction dwindles as nominal rigidities increase we provide an alternative theoretical explanation for this finding by extending the state dependent pricing sdp model of dotsey et al 1999 and show that our two city model with nominal rigidity and market frictions can successfully explain the salient features of the dynamic behavior of intercity price differences that have not been captured in previous analysis