utility functions for public outputs and majority voting abstract this paper studies the existence and stability of majority voting equilibria over sequences of one dimensional choice problems in the public sector voters public sector preferences are derived from their primitive preferences over public outputs and private consumption by maximizing the latter out if agents ignore the potential effects of public sector states on private sector prices we find that majority voting equilibria will exist under the usual assumptions but these equilibria are not stable unless the primitive utility functions are separable and admit no wealth effects on demand for public goods if agents do take account of the effects of public sector states on private sector prices voting cycles may arise even when the choice space is one dimensional

marginal loss modeling in lmp calculation this paper discusses the pricing of marginal transmission network losses in the locational marginal pricing approach recently deployed in the iso new england iso ne standard market design smd project implemented by alstom s t d energy automation and information eai business the traditional loss model is studied and a new model is proposed the new model achieves more defendable and predictable market clearing results by introducing loss distribution factors to explicitly balance the consumed losses in the lossless dc power system model the distributed market slack reference is also introduced and discussed the lmp components produced by the two models are studied and compared under changes in slack reference numerical examples are presented to further compare the two models

monetary and macroprudential policies in an estimated model with financial intermediation abstract we estimate the smets wouters model featuring the gertler karadi banking sector on us data using real and financial observables we investigate the gains from coordination between a flexible inflation targeting central bank and a macroprudential regulator charged with safeguarding financial stability the potential gains from coordination depend on how much importance is given to the output gap in the macroprudential mandate coordination conflicts can be avoided by assigning similar importance to this common objective in the respective mandates of both policies when we derive optimal mandates for monetary and macroprudential policy under no coordination we find that both policy makers should place a higher weight than society on the output gap

contingent transmission rights in the standard market design we define transmission rights that are compatible with the federal energy regulatory commission s proposed standard market design smd and that provide flexibility in the points of receipt or delivery of energy contracts the contingent transmission rights introduced here provide a viable flexible method for defining smd compatible rights for transmission customers having current pre smd transmission rights that cover multiple points these contingent rights can be bought and sold in the transmission rights auctions under smd

coordinating monetary and macroprudential policies this paper studies noncooperative games between a monetary authority and a macroprudential regulator whose objectives are a subset of those in the social loss function the analysis is based on a new keynesian model with a financial sector and a financial friction a la gertler and karadi 2011 when the friction affects the financing of all factors of production equally macroprudential policy is shown to be a powerful additional tool fully eliminating inefficiencies regardless of the source of the shock and no matter whether the central bank and the regulator cooperate but when trade offs are present and policy is discretionary the institutional arrangements become crucial while coordination leads to higher welfare than a setting in which each authority takes the decision rule of the other as given namely the nash equilibrium our analysis shows that a noncooperative setting in which the macroprudential authority acts as a leader within the period can be superior to cooperation finally our conclusions are unaffected by whether the macroprudential instrument affects funding costs or acts as a liquidity requirement

a comprehensive assessment of the evolution of financial transmission rights financial transmission rights ftrs are complementary to the locational marginal pricing of energy the basic aim of the ftr mechanism is to guard forward contracts from uncertain congestion charges ftrs are also useful to individual generators and loads for selling and buying power respectively at the prices of other locations the concept has evolved encompassing many features such as a simultaneous feasibility test various ways to conduct auctions and allocations and secondary trading ftrs also have a close relation to market power and transmission investment this paper reviews most of the landmark research papers on the evolution of the ftr concept it reports a comprehensive assessment of various facets of ftrs and allied issues financial transmission rights and flowgate rights fgrs are compared the concept of long term ftrs is discussed the paper also touches upon future proposals in this area

evolution toward standardized market design the evolution toward the standardized market design smd is presented in this paper with references to the market developments in new zealand australia pjm iso ne and ercot in the development of market designs two main objectives market liquidity facilitating bilateral trading and pricing efficiency facilitating congestion management have been pursued the efforts to balance the seemingly conflicting objectives led to most markets designed with a uniform or zonal pricing model introduction of locational marginal pricing and evolution of transmission rights from physical to financial form made it possible to harmonize the potentially conflicting goals in a market design the close coupling between energy and ancillary services requires that markets for these commodities be carefully coordinated different operational practices and reliability standard requirements have led to major differences in ancillary service market designs

a problem with euclidean preferences in spatial models of politics abstract euclidean public sector preferences can not be induced from a strictly quasiconcave primitive utility function and a linear constraint

introduction to multidimensional financial transmission rights this paper introduces the concept of multidimensional financial transmission right mdftr which is a generalized group financial transmission right ftr concept an mdftr allows its owner to hold a total ftr amount over a path group along with multiple choices to distribute this grouped amount among the individual grouping paths this added flexibility provides forward market participants with a useful support to overcome the congestion price risk that originates from the uncertainty in their transaction paths all the fundamental issues regarding the implementation of mdftrs are addressed in detail in this paper the practical utility of mdftrs is judged by analyzing their costs it is shown with illustration that an mdftr may be more cost effective than any given portfolio of individual ftrs that has the ability to give the same risk hedging benefit

locational marginal price sensitivities within an optimal power flow market clearing framework this paper provides expressions to compute the sensitivities of locational marginal prices with respect to power demands sensitivities with respect to other parameters can also be obtained an example and a case study are used to illustrate the expressions derived

financial in stability supervision and liquidity injections a dynamic general equilibrium approach we develop a dynamic stochastic general equilibrium model with an heterogeneous banking sector we introduce endogenous default probabilities for both firms and banks and allow for bank regulation and liquidity injection into the interbank market our aim is to understand the interactions between the banking sector and the rest of the economy as well as the importance of supervisory and monetary authorities to restore financial stability the model is calibrated against real us data and used for simulations we show that basel regulation reduces the steady state but improves the resilience of the economy to shocks and that moving from basel i to basel ii is procyclical we also show that liquidity injections relieve financial instability but have ambiguous effects on output fluctuations

optimal dynamic capital requirements we characterize welfare maximizing capital requirement policies in a macroeconomic model with household firm and bank defaults calibrated to euro area data we optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk we find that getting the level right so that bank failure risk remains small is of foremost importance while the optimal sensitivity to default risk is positive but typically smaller than under basel irb formulas when starting from low levels initially both savers and borrowers benefit from higher capital requirements at higher levels only savers are in favour of tighter and more time varying capital charges

components of nodal prices for electric power systems a method is presented to provide a detailed description of each nodal price for electric power systems by breaking down each nodal price into a variety of parts corresponding to the concerned factors such as generations transmission congestion voltage limitations and other constraints or elements this complete information for nodal prices can be used not only to improve the efficient usage of power grid and congestion management but also to design a reasonable pricing structure of power systems or to provide economic signals for generation or transmission investment several numerical examples demonstrate this approach

convexity of the set of feasible injections and revenue adequacy in ftr markets the feasible set of power injections for the constrained power flow equations is nonconvex when practical transmission capacity and bus voltage limits are imposed the projection onto the space of active power injections may be close to convex but this is not sufficient to guarantee revenue adequacy for the settlement of financial transmission rights

optimal fiscal and monetary policy some recent results this paper studies the quantitative properties of fiscal and monetary policy in business cycle models in terms of fiscal policy optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average in terms of monetary policy the friedman rule is optimal nominal interest rates are zero and optimal monetary policy is activist in the sense that it responds to shocks to the economy

leaning against boom bust cycles in credit and housing prices this paper studies the potential gains of monetary and macro prudential policies that lean against house price and credit cycles we rely on a model that features borrowers and savers and allows for over borrowing induced by news shock driven cycles we find that policy that responds to changes in financial variables is socially optimal considering the use of a single policy instrument both types of agents are better off when the interest rate optimally responds to credit growth when we allow for the implementation of both interest rate and ltv policies heterogeneity in the welfare implications is key in determining the optimal use of policy instruments the optimal policy for the borrowers is characterized by a ltv ratio that responds countercyclically to credit growth which most effectively stabilizes credit relative to gdp in contrast the optimal policy for the savers features a constant ltv ratio coupled with an interest rate response to credit growth news shock driven cycles account for most of the gains from a policy response to changes in financial variables

transmission rights and transmission expansions in this paper we propose a new method of defining rights that may be assigned to the developer of a transmission expansion project they include a right to collect the value of the capacity provided by the expansion project as well as the value arising from the admittance of the expansion project this approach not only ties the rights allocation to actual physical characteristics of the transmission project but also allows such allocation to remain independent both of the order in which the projects are treated and of any previously allocated transmission rights

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

risky bank lending and countercyclical capital buffers abstract we study the properties of a monetary economy with an essential role for risky bank lending banks issue deposits and lend to entrepreneurs because banks lending rate cannot be made contingent on aggregate shocks and because banks face capital adequacy regulations they require a capital buffer against loan losses capital adequacy regulations are modeled on the basel iii rules including a minimum capital adequacy ratio an endogenous capital conservation buffer and a countercyclical capital buffer we find that a countercyclical capital buffer leads to a significant increase in welfare it also reduces the need for countercyclical adjustments in policy interest rates

implementation of lmp ftr mechanism in an ac dc system this paper analyzes the implementability of locational marginal price lmp and financial transmission right ftr mechanisms in the presence of high voltage dc hvdc lines in the regulated i e under the control of system operator network the established framework of lmp ftr mechanism assumes that the system under regulation is fully ac unregulated or private hvdc lines are taken into account within this framework through proxy transaction bids from the line owners however as the flow over a regulated hvdc line has to be controlled by the system operator himself the existing lmp ftr framework becomes insufficient if the system contains or is expanded with regulated hvdc lines the augmentation that should be made to the existing framework to include regulated hvdc lines is explained in this paper it is shown that the flow over a regulated hvdc line can be modeled as a non chargeable bilateral transaction without causing any threat of negative congestion surplus for this power dispatch model revenue adequacy of ftrs can be still ensured by means of the conventional simultaneous feasibility test sft model by utilizing the capacities of dc lines a more general sft model is further developed the modified auction problem is discussed and tested for the non negativity of net auction collection the process of revenue adequate issuance of auction revenue rights is explained finally the relative merit of a regulated hvdc line over a private hvdc line is discussed through a case study

a joint energy and transmission rights auction proposal and properties an auction based process is proposed that allows power market participants to acquire and reconfigure financial transmission rights the process simultaneously accommodates flowgate and point to point options and obligations along with energy production and consumption futures a sequence of auctions is held during which participants can buy and sell rights which are then settled in a day ahead or real time auction at which time all rights are cashed out by allowing flowgate and point to point obligations and options to be reconfigured and exchanged the market can decide what combination of financial rights are most useful to power generators consumers and traders rights can be specified not only for capacity of individual flowgates but also for more complex transmission constraints such as nomograms under certain conditions we prove that the auction is revenue adequate for the market operator in that payments to rights holders cannot exceed congestion revenues we present a linearized dc auction along with a numerical illustration

a fiscal stimulus and jobless recovery we analyze the effects of a government spending expansion in a dynamic stochastic general equilibrium model with mortensen pissarides labor market frictions deep habits in private and public consumption investment adjustment costs a constant elasticity of substitution ces production function and adjustments in employment at both intensive and extensive margins the combination of deep habits and ces technology is crucial the presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus while an elasticity of substitution between capital and labor in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery

framework for the design and analysis of congestion revenue rights the capability to deal effectively with the uncertainty associated with locational marginal prices lmps in congestion management schemes requires the development of appropriate financial tools congestion revenue rights crr are hedging tools that provide the holder reimbursement of the congestion charges in the day ahead market and thereby provide transmission service customers with price certainty in this paper we construct a framework for the design and analysis of the crr by marrying finance theory notions with salient characteristics of electric power systems and electricity markets the framework consists of three interconnected layers with one layer each to represent the models of the transmission network the commodity markets and the crr financial markets the interaction between the layers is represented as information flows the framework has sufficient scope to allow the analysis of a broad range of problems associated with ensuring price certainty for transmission services the structural modularity of the framework provides the flexibility to analyze issues and design structures for the provision of transmission services in the competitive environment we introduce a new notion of crr payoff parity and a practical pricing scheme which are used as the basis for the design of more liquid crr markets the application of the framework is further illustrated by the analysis of the conditions that guarantee the revenue adequacy for the crr issuer

logical deficiencies in spatial models a constructive critique a fundamental property of any good theoryis logical consistency however two commonassumptions in the rational choice approach topolitical analysis that induced preferences overpolicy are separable and that such preferences areindependent of changes in exogenous factors are notconsistent with the archetypal assumptions ofindividual utility maximization these particularpathologies of spatial models of politics have notbeen well recognized in the political scienceliterature

capital regulation and monetary policy with fragile banks optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky a monetary expansion and a positive productivity shock increase bank leverage and risk risk based capital requirements amplify the cycle and are welfare detrimental within a class of simple policy rules the best combination includes mildly anticyclical capital ratios as in basel iii and a response of monetary policy to asset prices or bank leverage

interest rate rules under financial dominance abstract we study the equilibrium properties of a business cycle model with financial frictions and price adjustment costs capital constrained entrepreneurs finance risky projects by borrowing from banks banks in turn make loans using equity and deposits because financial contracts are not contingent on aggregate risk bank balance sheets are hit when entrepreneurial defaults are higher than expected macroprudential policy imposes a positive response of the bank capital ratio to lending our main result is that the taylor principle is violated when this response is too weak then macroprudential policy is ineffective in stabilizing debt and monetary policy is subject to financial dominance a too aggressive response of the interest rate to inflation can lead to debt disinflation dynamics that destabilize the financial sector

locational marginal price calculations using the distributed slack power flow formulation in practice locational marginal prices lmps are usually calculated by assembling their three components the reference price the congestion price and the loss price explicit formulas for calculating the three components based on the single slack power flow formulation can be found in the literature this letter presents the formulas for calculating the three components based on a distributed slack power flow formulation