optimal pricing of intraday liquidity abstract this paper presents a general equilibrium model where intraday liquidity is needed because the timing of payments is uncertain a necessary and sufficient condition for an equilibrium to be efficient is that the nominal intraday interest rate be zero even when the overnight rate is strictly positive because a market for liquidity may not achieve efficiency this creates a role for the central bank i allow for the possibility of moral hazard and study policies commonly used by central banks to reduce their exposure to risk i show collateralized lending achieves the efficient allocation while for certain parameters caps cannot prevent moral hazard

rational household labor supply traditionally household behavior is derived from the maximization of a unique utility function in this paper we propose an alternative approach in which the household is modeled as a two member collectivity taking pareto efficient decisions the consequences of this assumption are analyzed in a three good model in which only total consumption and each member s labor supply are observable if the agents are assumed egoistic i e they are only concerned with their own leisure and consumption it is possible to derive falsifiable conditions upon household labor supplies from both a parametric and nonparametric viewpoint if alternatively agents are altruistic restrictions obtain in the nonparametric context useful interpretation stems from the comparison with the characterization of aggregate demand for a private good economy

marriage market divorce legislation and household labor supply this paper provides a theoretical framework for analyzing the impact of the marriage market and divorce legislation on household labor supply in our approach the sex ratio in the marriage market and the rules governing divorce are examples of distribution factors these factors are defined as variables that affect the household members bargaining position but not preferences or the joint budget set we extend the collective labor supply model developed by chiappori to allow for distribution factors we show that our model imposes new restrictions on the labor supply functions and eases the identification of individual preferences and the intrahousehold decision process the model is estimated using psid data for the year 1988 our results do not reject the restrictions imposed by the model also the sex ratio and divorce laws deemed favorable to women are found to affect labor supply behavior and the decision process in the directions predicted by the theory and to have sizable effects

social security pensions and retirement behavior within the family this paper estimates a structural model of family retirement using us data from the health and retirement study hrs it provides further insight into household retirement decision making and the reasons for interdependence in the retirement decisions of each spouse improvements in hrs data and matched employer provided pension histories allow more precise identification of key parameters governing interdependent behaviour within the household in an earlier study we found that interdependence was due to preferences rather than coordination of retirement incentives in the budget and in particular that it is not a correlation in preferences but the appearance of the spouse s retirement status in the husband s and wife s utility function that is largely responsible for coordination of retirement between spouses we now find that a measure of how much each spouse values being able to spend time in retirement with the other accounts for a good portion of that apparent interdependence for the wife the husband s retirement status influences her retirement decision only if she values spending time in retirement with her husband for husbands the effect of having the wife already retired on his retirement decision is roughly doubled if he enjoys spending time in retirement with his wife but there is some effect even if he does not this is consistent with our earlier findings that the husband is more influenced by having a retired spouse than the wife is the increase in the extent of the dependence of the wife s labour supply on the husband s retirement from our past work probably is traceable to better measurement of the opportunity set facing the husband in hrs data once estimated we use the model to investigate the labour supply effects of alternative social security policies examining the effect of dividing credit for earnings evenly between spouses or of basing social security benefits on the amounts accumulated in private accounts both policies change the relative importance of spouse and survivor social security benefits within the household and both raise the relative reward to work later in the life cycle the incentives created are modest and retirement responds accordingly nevertheless at some ages such as 65 there may be as much as a 6 increase in the old age work force under privatized accounts copyright 2004 john wiley sons ltd

optimal monetary policy in a cash in advance economy i introduction this paper addresses the issue of optimal monetary policy within a particular general equilibrium model of the monetary transmission mechanism the model analyzed is a member of the recent class of liquidity models of the monetary business cycle 1 these liquidity models are something of a growth industry partly because they are potentially consistent with a monetary equilibrium in which monetary injections drive down nominal rates of interest and stimulate real activity stylized facts supported by evidence presented in for example christiano and eichenbaum 1992 an unexplored question is the role of monetary policy in these models this paper makes an attempt at remedying this deficiency by analyzing optimal monetary policy in a model with liquidity effects as in the liquidity models mentioned above the model analyzed here is constructed by imposing two trading frictions on an otherwise frictionless arrow debreu environment 2 the first is a requirement that all transactions be carried out in a decentralized fashion with the use of cash this friction is the well known cash in advance constraint first suggested by clower 1967 but now quite commonplace in models of monetary equilibrium as in lucas and stokey 1987 and cooley and hansen 1989 i impose this constraint because it is a tractable way of introducing a transactions demand for cash the qualitative results would be unaffected if a more general transactions technology was employed the second friction is unique to the liquidity models i assume that private agents cannot quickly move cash across markets this assumption of sluggish cash flow presumably motivated by transactions costs that are not explicitly modeled implies that cash may not be equally valued across markets with its value in a particular market determined by the amount of cash or liquidity contained in the market this friction introduces the so called liquidity effects on asset prices and real activity the paper proceeds as follows the next section develops the basic model and discusses the effects created by the assumed trading frictions section iii explores optimal monetary policy the nature of the trading frictions introduces a role for activist monetary policy in particular to the extent that the central bank can adjust liquidity more rapidly than the private sector there is a welfare improving role for monetary policy in some cases interest rate smoothing is a good idea while in others optimal policy will increase interest rate variability section iv links the results to the optimum quantity of money literature and offers up a few conclusions ii a model of monetary non neutrality the economy is populated with three types of agents households firms and financial intermediaries there are numerous identical agents of each type so that all behave as atomistic competitors given this assumption i will confine my discussion to a representative agent of each type the representative household is made up of two members a shopper and a worker the shopper s role is to use the household s assets to acquire consumption goods during each period while the worker supplies some portion of the household s time endowment equal to 1 each period to firms in exchange for payment the household s preferences over uncertain consumption and leisure streams are given by e summation of beta sup t u c sub t v 1 l sub t where t 0 to infinity where beta is an element of 0 1 c sub t and l sub t are time t consumption and work effort respectively v is increasing and concave and mathematical expression omitted the expectation is over realizations of the economy wide shocks the expression s sub t is an element of s subset r denotes the state of the world at time t where s is a compact set these states are i i d across time with a distribution function given by

retirement in dual career families a structural model a structural econometric model of retirement of dual career couples is specified and estimated with panel data from the national longitudinal survey of mature women a coincidence of spouses retiring together despite the younger ages of wives suggests explicit efforts at coordination the estimates suggest that one reason is a correlation of tastes for leisure more important each spouse and perhaps husbands in particular values retirement more once their spouse has retired the opportunity set accounts for peaks in the retirement hazards of each spouse individually but not for peaks in the simultaneous retirement of both spouses

value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards abstract we present an algorithm for approximating the solution to discrete time stochastic dynamic programs with inequality constraints the algorithm exploits the state preference approach to choice under uncertainty to reduce the dimensionality of the state space and polynomial approximation to improve computational efficiency it is particularly useful in financial applications involving liquidity and credit constraints and more than one asset the algorithm provides information about the derivatives of the value function and therefore risk aversion along with asset demands

growth dynamics and education spending the role of inherited tastes and abilities we present an overlapping generations model with endogenous growth in which children inherit human capital and standard of living aspirations from the previous generation adults evaluate their own consumption with respect to a baseline requirement which depends on their parents past consumption the interaction between these two intergenerational externalities leads to rich dynamics first starting with too high aspirations or with too low human capital will conduct the economy into a poverty trap second the growth rate and the savings rate are characterized by oscillations third a repelling cycle may delimit a basin of attraction around the balanced growth path this may lead countries starting with too high human capital to a boom followed by an irreversible decline c 2001 elsevier science b v all rights reserved

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

cash burns an inventory model with a cash credit choice abstract a dynamic cash management model is analysed where agents choose whether to pay with cash or credit at every point in time in the model credit usage depends on the current stock of cash a novel result that matches recent micro evidence on households payment choices the optimality of such a decision rule is novel and cannot be obtained by models where cash credit decisions are made at the beginning of each period we discuss how to use the model to account for cross country evidence on the intensity of credit usage and for several statistics on the size and frequency of cash withdrawals the model is used to assess the household s welfare cost of phasing out cash

labor force dynamics of older married couples this article analyzes the dynamics of joint labor force behavior of older couples in the united states using the retirement history survey rhs i analyze the determinants of joint retirement and the effect of one spouse s labor force status on the labor force transitions of the other spouse the results reveal strong associations between the labor force transition probabilities of one spouse and the labor force status of the other spouse these result from structural differences in exit and entry behavior by the spouse s status several lagged endogenous variables have substantial effects on behavior even after controlling for unobserved heterogeneity

the dynamics of bequeathed tastes with endogenous fertility abstract in contrast with the existing literature with overlapping generations aspirations and exogenous fertility this article shows that endogenous fertility prevents endogenous fluctuations in a general equilibrium economy

discretionary monetary and fiscal policy with endogenous sovereign risk abstract how does the presence of sovereign risk affect the conduct of public policy to answer this question this paper studies optimal monetary and fiscal policy without commitment for a model economy with nominal public debt and strategic sovereign default compared to an economy without the possibility of default economies with sovereign risk experience more volatile interest rates which impedes the government s ability to smooth tax rates across states risk of default also limits public debt accumulation reducing the government s incentive to use surprise inflation on average when calibrated to the united states the model predicts that a counterfactual increase in the average annual default probability from 0 to 1 lowers average inflation by 33 raises the standard deviation of inflation by 18 and increases the standard deviation of the labor income tax by 73 the transmission of exogenous shocks to real aggregate quantities is however almost unaffected by the possibility of default for example the presence of sovereign risk would increase the standard deviation of log real gdp by less than 1 in the experiment above similarly the welfare consequences of sovereign risk are found to be of negligible size as well

opening the black box of intra household decision making theory and non parametric empirical tests of general collective consumption models we provide revealed preference tests of general collective consumption models that account for public consumption and externalities within the household we further propose a novel approach to model special cases of this model which imply alternative assumptions regarding the sharing rule our application uses the panel data from the russia longitudinal monitoring survey we find that the general model together with a large class of special cases cannot be rejected by contrast we do reject the standard unitary model since our tests are entirely nonparametric this provides strong evidence in favor of models focusing on intrahousehold decision making

household labor supply what kind of data can tell us how many decision makers there are although in empirical work the neoclassical assumption of the household as a homogeneous decision making unit is still predominant there appears to be an increasing interest in models of household labor supply based on game theoretic notions examples are ashworth and ulph 1981 bjorn and vuong 1984 1985 brown and chuang 1981 brown and manser 1978 horney and mcelroy 1988 mcelroy and horney 1981 mcelroy 1990 schultz 1990 thomas 1990 quite a few of these papers also attempt to test the assumption of one decision maker against the more general bargaining framework typically these take the form of tests for certain restrictions on the data that should hold if the neoclassical model were valid and which need not hold in the game theoretic framework chiappori 1988b argues that a truly valid test of a bargaining model should leave from the notion that observed data are the result from some cooperative game being played by the household members without specifying the solution concept he then goes on to argue that the restrictions placed on the data by such an assumption are quite mild indeed in a separate paper chiappori 1988a derives restrictions on observed labor supply functions based on this notion however his main result is based on rather special assumptions in this note we put the various results in perspective our basic obser

optimal growth when tastes are inherited we address the issue of optimal growth when standard of living aspirations are transmitted from one generation to the next we derive the condition for the optimal solution to be stable in the saddle point sense and show that this optimal solution may display damped oscillations even when the planner does not discount the utility of future generations golden rule case the decentralization of the optimal solution aims at correcting the inter generational externality by use of an investment subsidy and allows to avoid socially damaging rushes on consumption in expansion periods it also allows to stabilize output in the case of competitive economies displaying endogenous fluctuations

interest rates and inflation a consensus has emerged among practitioners that the instrument of monetary policy ought to be the short term interest rate that policy should be focused on the control of inflation and that inflation can be reduced by increasing short term interest rates at the center of this consensus is a rejection of the quantity theory such a rejection is a difficult step to take given the mass of evidence linking money growth inflation and interest rates increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates these observations need not rule out a constructive role for the use of short term interest rates as a monetary instrument one possibility is that increasing short term rates in the face of increases in inflation is just an indirect way of reducing money growth sell bonds and take money out of the system another possibility is that while control of monetary aggregates is the key to low long run average inflation rates an interest rate policy can improve the short run behavior of interest rates and prices the shortrun connections among money growth inflation and interest rates are very unreliable so there is much room for improvement these possibilities are surely worth exploring but doing so requires new theory the analysis needed to reconcile interest rate policies with the evidence on which the quantity theory of money is grounded cannot be found in old textbook diagrams

the dynamics of bequeathed tastes if children inherit life standard aspirations from their parents then their savings are affected and cycles may appear in overlapping generations olg models with production at some point of an expansion aspirations grow faster than wages savings decrease and a contraction begins

effects of aspirations and habits on the distribution of wealth we analyze how the introduction of habits and aspirations affects the distribution of wealth when the labor productivity of individuals is subject to idiosyncratic shocks and when bequests arise from a joy of giving motive in the presence of either bequests or aspirations labor income shocks are transmitted intergenerationally and this transmission together with contemporaneous shocks determines the distribution of wealth we show that the introduction of aspirations habits decreases increases the average wealth and increases decreases both its intragenerational variability and the degree of intergenerational mobility therefore a distinction between aspirations and habits is relevant because they involve different implications for the distribution of wealth

estate taxes consumption externalities and altruism we study how the introduction of consumption externalities affects the efficiency of the dynamic equilibrium in an economy displaying dynastic altruism when the bequest motive is inoperative consumption externalities affect the intertemporal margin between young and old consumption and thus modify the intertemporal path of consumption and capital the optimal tax policy that solves this intertemporal inefficiency consists of a tax on capital income and a pay as yougo social security system the later solves the overaccumulation of capital due to the inoperativeness of the bequest motive and the former solves the inefficient allocation of consumption due to consumption externalities when the bequest motive is operative consumption externalities only cause an intratemporal inefficiency that affects the allocation of consumption between the generations living in the same period but do not affect the optimality of the capital stock level this suboptimal allocation of consumption implies in turn that the path of bequest is also suboptimal the optimal tax policy in this case consists of an estate tax and a capital income tax the estate tax corrects the intratemporal inefficiency but generates an intertemporal inefficiency which is corrected by means of an appropriate capital income tax

interpreting a stochastic monetary growth model as a modified social planner s problem abstract using a stochastic cash in advance growth model similar to that studied by cooley and hansen 1989 it is demonstrated that the competitive monetary equilibrium can be expressed as the solution to a modified social planner s problem hence by employing standard dynamic optimization techniques and the second welfare theorem to the modified social planner s problem the equilibrium of the monetary economy can be studied

equilibrium models displaying endogenous fluctuations and chaos abstract this paper surveys current developments in dynamic general equilibrium theory concerned with conditions under which endogenous fluctuations are possible existing contributions are divided into two classes the larger one consists of models with a unique perfect foresight equilibrium while the second includes models where equilibrium is indeterminate and the set of equilibria involving endogenous fluctuations includes sunspots equilibria while the two classes of models involve oscillations of different natures and with different policy implications we show that both are consistent with optimizing behavior and competitive equilibrium

forward and backward dynamics in implicitly defined overlapping generations models in dynamic economic models derived from optimization principles the forward equilibrium dynamics may not be uniquely defined while the backward dynamics is well defined we derive properties of the global forward equilibrium paths based on properties of the backward dynamics we propose the framework of iterated function systems ifs to describe the set of forward equilibria and apply the ifs framework to a one and a two dimensional version of the overlapping generations olg model we show that if the backward dynamics is chaotic and has a homoclinic orbit a snap back repeller the set of forward equilibrium paths converges to a fractal attractor forward equilibria may be interpreted as sunspot equilibria where a random sunspot sequence determines equilibrium selection at each date

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

heterogeneity in risky choice behaviour in a broad population we analyse risk preferences using an experiment with real incentives in a representative sample of 1 422 dutch respondents our econometric model incorporates four structural parameters that vary with observed and unobserved characteristics utility curvature loss aversion preferences towards the timing of uncertainty resolution and the propensity to choose randomly rather than on the basis of preferences we find that all four parameters contribute to explaining choice behaviour the structural parameters are significantly associated with socio economic variables but it is essential to incorporate unobserved heterogeneity in each of them to match the rich variety of choice patterns in the data

monetary policy under a fiscal theory of sovereign default abstract this paper examines equilibrium determination under different monetary policy regimes when the government might default on its debt we apply a cash in advance model where the government does not have access to non distortionary taxation and does not account for initial outstanding debt when it sets the income tax rate solvency is then not guaranteed and sovereign default can affect the return on public debt if the central bank sets the interest rate in a conventional way the equilibrium allocation cannot be determined if instead money supply is controlled the equilibrium allocation can uniquely be determined

existence and local uniqueness of functional rational expectations equilibria in dynamic economic models abstract this paper established the existence and local uniqueness of stationary functional rational expectations equilibria for an open set of multi good multi agent pure exchange overlapping generations models in which agents endowments are random such equilibria are given by prices which are functions of one period lagged prices and endowments and of current endowments

optimal monetary policy what we know and what we don t know in this article i examine the current state of knowledge about optimal monetary policy i distinguish between two literatures basic and applied the basic literature is explicit about the frictions that generate a positive value for money and make it socially beneficial the applied literature is not i describe the recent lessons about monetary policy that we have learned from each literature and discuss how the two distinct approaches may be usefully combined

the optimum quantity of money in a stochastic economy individuals in a monetary economy face both economy wide and individualspecific risks friedman s 1969 assertion that the price level should fall at the rate of time preference must be modified when such risks are present bewley s 1983 conjecture that the modified deflation should proceed at a rate greater than the rate of time preference is demonstrated to be true in special cases but false in general moreover the indeterminacy of equilibrium bewley found is eliminated by the inclusion of a transactions demand for money

gradual retirement financial incentives and labour supply of older workers evidence from a stated preference analysis abstract using data from a stated preferences experiment in the netherlands we find that replacing full time pension schemes with schemes that offer gradual retirement opportunities induce workers to retire one year later on average total lifetime labour supply however decreases by 3 4 months because the positive effect of delayed retirement on labour supply is cancelled out by a reduction in working hours in the years before full retirement the impact of gradual retirement schemes is however heterogeneous across groups of workers workers in bad health who gain access to gradual retirement postpone their retirement by 1 7 months more than workers in good health this suggests that introduction of gradual retirement alleviates to a certain extent the health related burden that employees in poor health may experience in carrying out their work nevertheless introduction of gradual retirement reduces the total labour supply of both groups of workers financial incentives either in terms of changing pension income or the price of leisure also affect expected retirement age but the impact of these financial incentives does not differ with the possibility of gradual retirement finally we find that gradual retirement is not a preferred option among workers as the large majority prefers full retirement

oil and revolutionary governments fuel for international conflict oil exporting states or petrostates engage in militarized interstate disputes mids at a much higher rate on average than nonpetrostates why is this so further what explains the variation among the petrostates in adopting aggressive foreign policies and engaging in mids on that basis this article develops a theory that proposes that revolutionary petrostates have a higher propensity to launch mids than comparable nonpetrostates this theory is tested with statistical analysis using a new quantitative data set that identifies revolutionary governments in the period 1945 2001 the results show that petro revolutionary governments constitute a special threat to international peace and security this evidence of resource backed aggression challenges the conventional view of petrostates as the targets of international competition for resources

credit and the natural rate of interest we analyze the properties of the natural rate of interest in an economy with asymmetric information between borrowers and lenders and nominal debt contracts in our model monetary policy has real effects in the flexible price equilibrium because it affects the cost of external finance as a consequence under the standard definition the natural rate of interest is not a useful policy indicator because it is itself affected by monetary policy we propose a generalized definition and demonstrate that the resulting natural rate i is not policy dependent and ii delivers price stability if used as the intercept of a monetary policy rule from a qualitative perspective the dynamics of the natural rate in response to shocks can be very different in economies with or without financial frictions quantitatively the policy implications of these differences tend to be minor for real shocks but sizable for financial shocks of the magnitude observed during the financial crisis of 2007 09

aid effectiveness and the politics of personalism this article examines how political institutions that provide an incentive to cultivate a personal vote condition the relationship between foreign aid and economic growth in developing country democracies politicians in aid recipient countries with high levels of personalism are more likely to pursue corruption and target government spending to narrow constituencies because personalism affects these outcomes it provides incentives to use foreign aid for politically motivated spending at the expense of investing foreign aid in growth promoting public goods using panel data from 61 aid recipient democracies from 1961 to 2001 the author finds that aid increases growth in democracies with less personalist institutions but decreases growth in countries with high personalism the author also shows that personalism conditions the relationship between aid and the composition of government spending aid increases spending on public goods relative to narrow particularistic goods in countries with low person

chaos and sector specific externalities abstract benhabib and farmer 1996 indeterminacy and sector specific externalities journal of monetary economics 37 397 419 explore the possibility of local indeterminacy in a two sector model with sector specific externalities they find that very small sector specific externalities are sufficient for local indeterminacy in this case it is possible to construct sunspot equilibria where extrinsic uncertainty matters in this paper i provide a global analysis of their model revealing the existence of euler equation branching this branching allows for regime switching equilibria with cycles and chaotic behavior these equilibria occur whether the local dynamics are determinate or indeterminate

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

observational equivalence of the overlapping generations and the cash in advance economies abstract this paper demonstrates that any equilibrium in an overlapping generations economy a la grandmont 1985 can be supported as an equilibrium in a cash in advance economy a la lucas and stokey 1987 and vice versa thus business cycles could occur at real life frequencies

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

chaotic dynamics in a monetary economy with habit persistence abstract this paper develops a cash in advance model for persistent habits of consumption with a binding cash in advance constraint the economic transition can be represented by a one dimensional or two dimensional dynamical system depending on persistent habits of only cash goods consumption or both cash goods and credit goods consumption respectively we verify the existence of entropic chaos and ergodic chaos for the former case and identify the presence of entropic chaos for the latter

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

buying war not peace the influence of corruption on the risk of ethnic war this article presents robust findings for the positive effect of corruption on the risk of ethnic civil war using binary time series cross section data that cover 87 to 121 countries per year between 1984 and 2007 following a grievance based explanation of violent intrastate conflict we argue that corruption increases the risk of large scale ethnic violence as it creates distortions in the political decision making process which lead to a deepening of political and economic inequalities between different ethnic groups the positive effect of corruption on the risk of ethnic civil war is robust to various model specifications including the interaction between corruption and natural resource wealth

collective labor supply and welfare the paper develops a general collective model of household labor supply in which agents are characterized by their own possibly altruistic preferences and household decisions are only assumed to be pareto efficient an alternative interpretation is that there are two stages in the internal decision process agents first share nonlabor income according to some given sharing rule then each one optimally chooses his or her own labor supply and consumption this setting is shown to generate testable restrictions on labor supplies moreover the observation of labor supply behavior is sufficient for recovering individual preferences and the sharing rule up to a constant finally the traditional tools of welfare analysis can be adapted to the new setting

understanding joint retirement abstract evidence from different sources shows that spouses retirement decisions are correlated retirement policies affecting individuals in couples are therefore also likely to affect behavior of their spouses it is therefore important to account for joint features in modeling retirement this paper studies a structural collective model of labor supply and retirement of both partners in a couple with interdependent preferences imperfect knowledge of preferences of the spouse and subjective expectations about the future we propose a novel method to estimate preferences and the intra household bargaining process which relies on stated preferences data collected in the health and retirement study respondents were asked to choose between hypothetical retirement trajectories describing the retirement ages and replacement rates of both spouses from three perspectives considering their own preferences only the preferences of their spouse only or the most likely decision for the household with these data all model parameters are identified and potential sources of joint retirement can be disentangled our results suggest that males misperceive their wives preferences overestimating their disutility of work our estimates correct for this we find strong positive correlations between preferences for joint leisure leisure complementarity of the two partners counterfactual simulations with stylized retirement paths suggest that the leisure complementarities explain a substantial part of joint retirement much more than correlation in unobserved heterogeneity or potential wage rates

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

monetary growth innovations in a simple cash in advance asset pricing model abstract this paper contributes to the existing literature in the rational expectations cash in advance asset pricing general equilibrium model in two directions first we show that by allowing a variable velocity of circulation an increase in the conditional variance of the money growth process triggers an increase in the demand for money relative to stocks and bonds with a consequent reduction in stock and bond prices which is the opposite of the current result in the literature with constant unitary velocity second we explicitly show how the sequential markets and specific timing of information fits exactly into the notion of irreversibility in the sense that when faced with uncertainty agents might find optimal to delay decisions in order to wait for the arrival of new information

does money explain asset returns theory and empirical analysis a cash in advance model of a monetary economy is used to derive a money based capm m capm which allows us to implement tests of asset pricing restrictions without consumption data a test as in fama and macbeth of the model suggests that the money betas have some explanatory power for the cross sectional variation of expected returns however the model is rejected using conditional information consistent with our predictions estimates of the curvature parameter are lower than those of the consumption capm c capm and pricing errors of the m capm tend to be smaller than those of the c capm while the relation between asset prices and real macroeconomic variables such as aggregate consumption has been extensively investigated less attention has been devoted to the relation between monetary aggregates and asset prices that arises from models which incorporate a monetary sector it is often argued that one possible reason for the rejection of the consumption oriented capm c capm is the absence of monetary considerations this paper takes a step towards encompassing money into the c capm and proposes a moneybased capm m capm that can be tested without using consumption data this m capm is interesting in the way it captures the time series and crosssectional variation in stock returns and it provides insights in the possible misspecification of existing c capm models the setup is based on the cash in advance model of lucas and stokey 1987 in which some consumption goods are financed with outside money i e cash and some are financed with inside money e g bank deposits the pricing results of this paper differ from those of other monetary models such as those considered by finn hoffman and schlagenauf 1990 or singleton 1985 which focus on the role of outside money in affecting the marginal utility of consumption instead we concentrate on inside money in asset pricing the focus on inside money is appealing because inside money reflects conditions in

money and output a test of reverse causation this paper attempts to explain the correlation between money and output at various leads and lags with a model in which money is largely neutral and endogenously responds to output money is endogenous because both monetary policy and deposit creation are endogenous parameters are selected according to the simulated moments estimation technique while the estimated model succeeds along some dimensions in matching properties of postwar u s data its failure to match key patterns of lead lag correlations seems to cast doubt on the ability of endogenous money determination by itself to quantitatively account for the observed money output correlations copyright 1996 by american economic association

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

chaotic dynamics in a cash in advance economy abstract this paper introduces sufficient conditions for the existence of deterministic cycles and chaos in cash in advance models building on the earlier work of woodford 1994 chaotic equilibria are shown to be particularly likely in the cash in advance model because of a unique characteristic of such models a discontinuous derivative in the difference equation map at the satiation level of real balances the existence of a kink means that chaotic equilibria may exist without implausibly large curvatures in the utility function since a chaotic time series that makes use of the kink would sometimes exhibit zero nominal interest rates the paper also gives an example of chaos in which nominal interest rates remain strictly positive

equilibrium cycles in an overlapping generations economy with production abstract perfect foresight equilibrium trajectories of an overlapping generations model with production may include stable or unstable invariant closed curves these orbits are detected using the hopf bifurcation theorem where the parameter of bifurcation is purely technological the paper also proves that there is a stabilization policy that completely eliminates the cycle finally using a c e s production function it is shown that the range of values of the elasticity of substitution between capital and labor for which cycles may exist is bounded above

sunspot equilibria rational bubbles in a model of money in the utility function abstract sunspot equilibria are constructed in brock s 1975 model of money in the utility function serial correlations of real balances and the nominal interest rate in these equilibria can be either positive or negative the example here suggests that local sunspots are more likely to exist when the agent s discount rate is small and that serial correlations in local sunspots when they exist are inversely related to the rate of money growth it is also shown that stationary sunspots may exist even when equilibrium cycles do not

deficits and cycles abstract this paper shows that periodic equilibria may arise in a simple overlapping generations model with capital if the government follows a policy of fixing the value of the deficit rather than fixing the value of government debt then the difference equation that describes competitive equilibria may posses complex roots in the neighborhood of the golden rule stationary state one may show that if there exist parametric families of economies for which these roots change stability then locally there exists an invariant closed curve the paper provides two simple examples that generate such equilibria and it solves these examples numerically

the emergence of equilibrium cycles in a monetary economy with a separable utility function abstract this paper analyzes the dynamic properties of the monetary economy when money held during the period induces some utility it is shown that the price level and real money balances may have chaotic dynamic paths even if the utility function is separable in real money balances and consumption a crucial point is that a constraint on the utility of money yields the wealth effect that inflation will reduce the real value of assets hence as in the overlapping generations model the conflict between substitution and wealth effects may cause globally stable periodic orbits as well as the complicated dynamics

endogenous aspirations growth and the rise of environmental concerns abstract in this paper we analyze the implications of assuming that the intensity of aspirations is endogenous in accordance with empirical evidence consumption aspirations decrease with capital accumulation while environmental ones increase we show that such a change in the intensity of aspirations gives rise to a u shaped relationship between capital accumulation and environmental quality we also study the implications of our assumption concerning the optimal allocation and show that the steady state capital stock can be larger or smaller than the one corresponding to the modified golden rule in addition for realistic parameter values the decentralization of the optimal allocation requires the implementation of a maintenance investment subsidy and a lump sum transfer from the old to the young generation

a test of the unitary and collective models of household labour supply this paper tests the unitary and the collective household labour supply models within a structural framework a nonlinear unrestricted household labour supply system is postulated and the set of parametric restrictions imposed by each model is derived our results generally reject the income pooling restrictions embodied in the unitary model also the symmetry of cross wage effects is rejected however the collective model is not rejected for groups with no pre school children

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

legislative institutions and corruption in developing country democracies this article extends the research on institutional sources of corruption by investigating whether legislative institutions play a significant role in driving corruption in developing country democracies the author argues that when legislative rules a give parties control over agenda setting and b allow parties to strip legislators who vote against the party line of their legislative mandates parties can exercise valuable influence over the legislative policy process which allows them to engage in practices leading to higher corruption the author derives two testable hypotheses linking higher party influence over agenda setting and voting in the legislature to higher corruption and test them by using a new data set on legislative rules for 64 developing country democracies from 1984 to 2004 the empirical results corroborate the hypotheses and remain robust when controlling for alternative explanations employing different estimation techniques and using different measures of corruption

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

habit formation and intertemporal substitution in individual food consumption individual food consumption data are used to examine three issues first is food consumption linked intertemporally at the individual level second does the association between current and past consumption reflect habit or heterogeneity third what do the estimates imply about the intertemporal elasticity of substitution the authors find that habit matters that controlling for heterogeneity reduces estimated habit effects and that the product of the estimated intertemporal elasticity of substitution and the risk aversion parameter is less than one these results all lead to rejection of time separable specifications of intertemporal consumption behavior copyright 1996 by mit press

on the empirical implementation of some game theoretic models of household labor supply this paper discusses some issues in the empirical implementation of game theoretic models of household labor supply in particular we focus on the identification problems inherent in many of these models as an illustration we estimate a game theoretic model which uses data on preferred working hours as additional identifying information

self fulfilling deflations abstract what types of monetary and fiscal policy rules produce self fulfilling deflationary paths that are monotonic and empirically relevant this paper presents simple theoretical conditions that guarantee the existence of these paths in a general equilibrium model with sticky prices these sufficient conditions are weak enough to be satisfied by most monetary and fiscal policy rules a quantification of the model which combines a real shock a la hayashi and prescott 2002 with a simultaneous sunspot that deanchors inflation expectations matches the main empirical features of the japanese deflationary process during the lost decade the results also highlight the key role of the assumption about the anchoring of inflation expectations for the size of fiscal multipliers and in general for any policy analysis

money and external habit persistence a tale for chaos this paper studies the dynamic properties of a simple monetary economy model with external habit formation in which money is used for transaction motives we show that large enough though reasonable habit can generate deterministic cycles and chaotic equilibria

classifying monetary economics fields and methods from past to future we propose a simple yet sufficiently encompassing classification scheme of monetary economics it comprises three fundamental fields and six recent areas that expand within and across these fields the elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature neither is this an attempt to produce a relatively complete systematization our intention in taking stock is not finality or exhaustiveness we rather suggest a viewpoint and a possible ordering of the accumulating knowledge our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

the effects of bank lending in an open economy this article assesses the effects of bank lending in a small open economy with a floating exchange rate and sticky prices a theoretical model with costly financial intermediation is developed for new zealand the results show that the long run and business cycle effects of bank lending are small whether firms borrow from financial intermediaries or public debt markets is unlikely to affect economic activity in other words the financial structure or degree to which a country s financial system is intermediary based or market based does not matter

the dynamics of inflation with constant deficit under expected regime change a model that describes the dynamics of inflation with a fully anticipated stabilization program is developed it is shown that with a constant deficit an economy tends to stay at the neighborhood of the lower of the two state inflation rates that are compatible with the deficit further increasing inflation rates prior to the stabilization are compatible only with deficits that are lower than the maximal feasible staedy state deficits and with a stabilization program that reduces the demand for real balances if these conditions are not met inflation decreases towards the stabilization date it is argued that the data generated by actual inflationary episodes fit the conditions described above and corroborate the model this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

perils of unconventional monetary policy abstract unconventional monetary policy by relaxing restrictions on the composition of the balance sheet of the central bank compromises control over the stochastic path of inflation or in open economies over the stochastic path of exchange rates if the composition of the balance sheet is unrestricted then the path of inflation is indeterminate this is the case under pure quantitative easing where the target is the size of real money balances in contrast credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought and thus can implement a determinate path of inflation the composition of the portfolios traded by monetary fiscal authorities also determines premia in asset and currency markets

interest rate rules vs money growth rules a welfare comparison in a cash in advance economy abstract this paper considers the welfare consequences of two particularly simple rules for monetary policy an interest rate peg and a money growth peg the model economy consists of a real side that is the standard real business cycle model and a monetary side that amounts to imposing cash in advance constraints on certain market transactions the paper also considers the effect of assuming a rigidity in the typical household s cash savings choice the competitive equilibrium of the economy is not pareto efficient partly because of two distortions a distortion on the capital accumulation decision and a distortion on portfolio choice that arises from the assumed rigidity the principal result of the paper is that the interest rate rule but not the money growth rule entirely eliminates these two distortions and is thus the benevolent central banker s policy choice

aspirations habit formation and bequest motive we analyze how the presence of endogenous preferences affects the altruistic bequest motive from parents to children we will show that the existence of habits raises the threshold value of the intergenerational discount factor above which altruistic bequests are positive while aspiration formation could push this value down therefore the dynamic inefficiency of the economy with no altruism is not sufficient to prevent the bequest motive from being operative under aspiration formation we also discuss the implications of public debt when the bequest motive is inoperative and preferences exhibit habit and aspiration formation

how sensitive are retirement decisions to financial incentives a stated preference analysis we study the effects of financial incentives on retirement decisions using stated preference data dutch survey respondents were given hypothetical retirement scenarios describing age s of partial and full retirement and replacement rate s a stylized model is estimated in which utility is the discounted sum of within period utilities that depend on employment status and income parameters of the utility function vary with observed and unobserved characteristics simulations show that the income and substitution effects of pensions as a function of the retirement age are substantial and larger than according to studies using data on actual retirement decisions in the netherlands

legal restrictions sunspots and cycles abstract an economy in which legal restrictions prevent private agents from issuing close substitutes for money is examined specifically in a model with borrowing and lending agents are prevented from acquiring privately issued liabilities in amounts smaller than some minimum dollar denomination an economy is then constructed which has no sunspot equilibria absent such a restriction in the presence of the restriction however conditions sufficient to rule out equilibrium 2 cycles also imply the existence of stationary sunspot equilibria this is the case even though all agents have savings functions that are non decreasing in relevant rates of return

endogenous price fluctuations in an optimizing model of a monetary economy this paper demonstrates that an optimizing model of a monetary economy can produce perfect foresight equilibria in which the price level fluctuates forever cyclically or chaotically fluctuating equilibria are more likely to exist when the rate of money supply growth is high furthermore the set of equilibrium prices may have a complicated topological structure which poses a more serious problem concerning the validity of comparative statics method than any sort of indeterminacy previously discussed in the literature copyright 1991 by the econometric society

interest rates in a credit constrained economy when households face credit constraints in an economy with inside as well as outside money stationary equilibrium real interest rates are below the household rate of time preference they also depend significantly upon household risk aversion the demand for inside versus outside money bank costs bank reserves inflation and the marginal productivity of capital and capital depreciation rates in addition changes in financial variables affect per capita capital and output to a greater extent when households are credit constrained copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a positive theory of foreign currency debt abstract this paper makes a case for foreign currency debt as a hedging device in an open economy subject to stochastic shocks to output a government can reduce uncertainty in wealth and in consumption by issuing foreign or domestic currency debt if unexpected domestic and foreign inflation are negatively correlated with domestic output foreign currency debt is desirable in comparison to domestic currency debt if growth rates of output of both countries are closely related and if domestic inflation is relatively uncertain it has an additional advantage if domestic debt creates time consistency problems