capital controls and monetary policy in sudden stop economies abstract the dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies this paper studies the benefits of capital controls and monetary policy in a small open economy with financial frictions nominal rigidities and sudden stops without commitment the optimal monetary policy should sharply diverge from price stability the policymakers will also tax capital inflows in a crisis but such taxes may be welfare reducing with commitment capital controls involve a mix of current capital inflow taxes and future capital flow subsidies the optimal policy will never involve macro prudential capital inflow taxes or a departure from price stability whether or not commitment is available

purchase bidding strategies of an energy coalition with demand response capabilities the implementation of demand response programs drp has gained interest as a means to alleviate energy consumption during peak hours two explanations account for the success of such programs which involve both utilities and electricity consumers with the latter often organized into coalitions the system operator meets its goal of reducing the load peak simultaneously electricity consumers achieve economic benefits when reducing consumption during peak hours in this paper a monte carlo based algorithm has been proposed for the formulation of multiple purchase offers in the day ahead energy market daem by coalitions in which consumers vary in their sensitivity to drp manifesting different responsiveness to hourly tariffs based on the hourly market clearing prices being able to monitor how coalition members use air conditioning in the presence of variable hourly energy tariffs the coordinator can then define a purchase bidding strategy depending on how price sensitive the coalition is simulation results show that the presence of a price sensitive demand leads not only to a subsequent reduction in energy prices during peak hours but also leads to a decrease in their inter hour volatility

should the federal reserve pay competitive interest on reserves in 2008 the federal reserve began paying interest on reserves how should the fed use this new policy instrument as the fed reduces its balance sheet should it continue to satiate reserve demand and pay competitive interest on reserves here we argue that this may be an inefficient use of the new policy instrument using a standard dynamic stochastic general equilibrium model dsge augmented to include a banking sector and an interbank market our benchmark calibration implies an optimal tax on reserves of about 20 to 40 basis points in the steady state and a fluctuating tax rate in response to shocks

optimal monetary policy in a small open economy with home bias we analyze optimal monetary policy in a small open economy characterized by home bias in consumption peculiar to our framework is the application of a ramseytype analysis to a model of the recent open economy new keynesian literature we show that home bias in consumption is a su cient condition for inducing the monetary policy maker of an open economy to deviate from a strategy of strict markup stabilization and contemplate some optimal degree of exchange rate stabilization we focus on the optimal setting of policy both in the case of rms setting prices one period in advance and in a gradual fashion subject to adjustment costs while the rst setup allows us to analytically highlight home bias as an independent source of equilibrium

public debt discretionary policy and inflation persistence we describe a simple mechanism that generates inflation persistence in a standard sticky price model of optimal fiscal and monetary policy key to this mechanism is that policies are implemented under discretion the government s discretionary incentive to erode the real value of nominal public debt by means of surprise inflation renders inflation expectations and in further consequence equilibrium inflation rates highly correlated with the stock of public debt debt in turn is highly persistent allowing for tax smoothing in the face of disturbances due to the aforementioned correlation the persistence in debt carries over to inflation our analysis uncovers a non monotonic effect of nominal rigidities on inflation persistence and shows that government debt under discretion does not display the near random walk property familiar from the ramsey literature a calibrated version of the model that incorporates a moderate degree of monopolistic competition and price stickiness is quantitatively consistent with the inflation dynamics experienced in the usa since the volcker disinflation of the early 1980s

sophisticated monetary policies in standard monetary policy approaches interest rate rules often produce indeterminacy a sophisticated policy approach does not sophisticated policies depend on the history of private actions government policies and exogenous events and can differ on and off the equilibrium path they can uniquely implement any desired competitive equilibrium when interest rates are used along the equilibrium path implementation requires regime switching these results are robust to imperfect information our results imply that the taylor principle is neither necessary nor sufficient for unique implementation they also provide a direction for empirical work on monetary policy rules and determinacy

nominal rigidities monetary policy and pigou cycles capturing the boom phase of pigou cycles and resolving the comovement problem require positive sectoral comovement this article addresses these observations using a two sector new keynesian model price rigidities dampen movements in the relative price of durables following a monetary policy shock durables and non durables are estimated to be complements in utility allowing for a resolution of the comovement problem for modest degrees of price rigidity nominal rigidities also make firms forward looking in their pricing behaviour which leads to relative price dynamics that generate positive sectoral comovement in the boom phase of a pigou cycle

assessing the competitiveness of demand side bidding demand side bidding dsb provides a very flexible way of meeting the peak load in a production schedule this paper demonstrates that in a competitive electricity pool dsb and other forms of flexible generation can cause sharp and unwarranted price increases if the production schedule is established on the basis of a minimization of the total production cost furthermore the competitiveness of dsb is artificially inflated if the load recovery periods which accompany these load reductions are not taken into consideration by the scheduling program it is argued that the actual value of dsb should be re examined in the light of these findings

the case for open market purchases in a liquidity trap prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short term nominal interest rate renders open market operations ineffective for achieving macroeconomic stabilization goals we show that even were this the case there remains a powerful argument for large scale open market operations as a fiscal policy tool as we also demonstrate however this same reasoning implies that open market operations will be beneficial for stabilization as well even when the economy is expected to remain mired in a liquidity trap for some time thus the microeconomic fiscal benefits of open market operations in a liquidity trap go hand in hand with standard macroeconomic objectives motivated by japan s recent economic experience we use a dynamic general equilibrium model to assess the welfare impact of open market operations for an economy in japan s predicament we argue japan can achieve a substantial welfare improvement through large open market purchases of domestic government debt

optimal money and debt management liquidity provision vs tax smoothing abstract conventional wisdom on public debt management says that liquidity demand should be satiated and that tax rates should be smoothed conflicts between the two can arise when government bonds provide liquidity smoothing taxes causes greater variability in fiscal balances and therefore in the supply of government liabilities when prices are flexible and can jump to absorb fiscal shocks the tradeoff between liquidity provision and tax smoothing is eased when they conflict optimal policy subordinates tax smoothing to satiating liquidity demand when price fluctuations impose real costs conflicts necessarily arise and optimal policy gives primacy to neither goal

optimal fiscal and monetary policy in customer markets a growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics we investigate whether the existence of such customer relationships has important consequences for the conduct of both long run and short run policy our central result is that when consumers and firms are engaged in long term relationships the optimal rate of price inflation volatility is very low even though all prices are completely flexible this finding is in contrast to those obtained in first generation ramsey models of optimal fiscal and monetary policy which are based on walrasian markets echoing the basic intuition of models based on sticky prices unanticipated inflation in our environment causes a type of relative price distortion across markets such distortions stem from fundamental trading frictions that give rise to long lived customer relationships and makes pursuing inflation stability optimal

on the international dimension of fiscal policy this paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non state contingent debt the main finding of the paper is that once the open economy aspect of the policy problem is considered it is not optimal to smooth taxes following idiosyncratic shocks even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium the presence of a terms of trade externality lead to movements in the tax rate also in contrast with the closed economy the introduction of sticky prices can reduce the optimal volatility of taxes

fiscal consequences for mexico of adopting the dollar dollarization implies a reduction in the menu of assets available to the government and to the private sector in managing risk whatever the gains from dollarization the costs of reducing the asset menu need to be weighed against them this paper presents models one a simple generalization of a well known model of tax smoothing by ba1ao in which these costs are explicit along the way it suggests that there is likely to be no reduction in interest costs to the government from dollarization recently economists have been paying increasing attention to a dynamic general equilibrium approach to the theory of the price level that is often called the fiscal theory of the price level or ftpl this way of thinking emphasizes the role of fiscal and monetary policy in determining the risk and return properties of government liabilities it is particularly useful in analyzing proposals for large scale institutional changes that imply shifts in monetary and fiscal policies when dollarization is considered from this perspective some disadvantages are brought to light that may not be so apparent from other points of view section 1 below lays out the main ideas of ftpl section 2 displays a model that extends an earlier one of barro s to argue that optimal fiscal policy will use surprise inflation to achieve lower deadweight tax loss than would otherwise be possible section 3 considers the composition of government liabilities along the lines of the theory of corporate finance asking if dollarization will reduce the cost of funds section 4 presents annual estimates of the unanticipated returns to holders of u s government debt to show that these are substantial and are to some extent timed to match legitimate periods of fiscal stress as the optimality theory of section 2 would suggest section s discusses the lendel of last resort function and its connection to these fiscal issues section 6 briefly discusses some alternatives to pure dollarization in our concluding section 7 we sum up finding much to worry about in the prospect of dollarization

government debt management the long and the short of it standard optimal debt management dm models prescribe a dominant role for long bonds and advocate against issuing short bonds they require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue r r new ones these features of dm are inconsistent with u s data we introduce incomplete markets via small transaction costs which serves to make optimal dm more closely resemble the data r r are negligible short bond issuance substantial and persistent and short and long bonds positively co vary intuitively long bonds help smooth taxes over states and short bonds over time solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

the value of adaption climate change and timberland management abstract adaptation to exogenous change occurs on both intensive and extensive margins whether and how one accounts for human adaptation directly affects estimates of the economic consequences of environmental change estimates that are both critical in informing policy decisions and notoriously difficult to value this paper introduces and applies an analytical framework for placing an economic value on adaptation we explore the issue first in a stylized model that facilitates making concrete generalizations about the kinds of adaptations that generate high or low economic value we then test the soundness of our insights by incorporating learning and adaptive decision making into a structural dynamic forestry model where climate change is imposed exogenously and agents respond optimally using downscaled climate projections integrated with site and species specific timber productivity data we estimate the economic value of adaptation to climate change within the california timber industry we find on the intensive margin changing the rotation intervals will yield a low value of adaptation but on the extensive margin replanting more suitable tree species can yield significant value

optimal inflation persistence ramsey taxation with capital and habits ramsey models of fiscal and monetary policy featuring time separable preferences and a fixed supply of capital predict highly volatile inflation with no serial correlation in this paper we show that an otherwise standard ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation the result depends on increases in either the ability to smooth consumption or the preference for doing so the effect operates through the fisher relationship a smoother profile of consumption implies a more persistent real interest rate which in turn implies persistent optimal inflation our work complements a recent strand of the ramsey literature based on models with nominal rigidities in these latter models inflation volatility is lower than in the baseline model but continues to exhibit little persistence we quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

incomplete credit markets and monetary policy abstract we study monetary policy when private credit markets are incomplete the macroeconomy we study has a large private credit market in which participant households use non state contingent nominal contracts nscnc a second small group of households only uses cash supplied by the monetary authority and cannot participate in the credit market there is an aggregate shock we find that despite the substantial heterogeneity the monetary authority can provide for optimal risk sharing in the private credit market and thus overcome the nscnc friction via a counter cyclical price level rule the counter cyclical price level rule is not unique to pin down a unique monetary policy rule we consider two secondary goals for the monetary authority i expected inflation targeting and ii nominal gdp targeting we examine the impact of each of these approaches on the price level rule and other nominal variables in the economy

the fiscal role of conscription in the u s world war ii effort an often overlooked role of conscription is as a method of lump sum taxation in times of war conscription of military personnel allows the fiscal authority to minimize wartime government expenditure and hence minimize tax distortions associated with war finance this paper presents a simple dynamic general equilibrium model to articulate this view and calibrates the model to the u s world war ii experience analysis of the calibrated model indicates that the welfare value of conscription as a fiscal policy tool is quantitatively large despite the fact that the american involvement lasted only four years conscription is worth approximately 2 of annual aggregate consumption in perpetuity

optimal fiscal policy with labor selection this paper characterizes long run and short run optimal scal policy in the labor selection framework quantitatively the time series volatility of the labor income tax rate is orders of magnitude larger than the tax smoothing results based on walrasian labor markets but is a few times smaller than the results based on search and matching labor markets to understand these results in terms of model primitives we develop a welfare relevant analytic concept of externalities for the selection model which we label tightness this concept of tightness is the source of the decentralized economy s inecient cross sectional wage premia between the average newly hired worker and the marginal newly hired worker compared to the traditional concept of labor market tightness in the search and matching literature this new concept of tightness plays a highly similar role and like in the matching model is crucial for understanding eciency and optimal policy

risk premium shocks and the zero bound on nominal interest rates there appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real world and predictions from quantitative dsge models recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain optimal monetary policy

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

towards full integration of demand side resources in joint forward energy reserve electricity markets this paper proposes a security constrained forward market clearing algorithm within which the inherent characteristics of demand flexibility are acknowledged when the provision of reserve from the demand side is considered in the proposed formulation we co optimize the cost of scheduling the appropriate resources to guarantee the security of the system and the expected cost of operating under any credible system state in addition we consider that consumers can offer to provide spinning reserve capacity deployable by voluntary load reductions in response to contingencies due to the load recovery effect i e since energy usage is essentially postponed when demand side reserve is deployed in post contingency states any voluntary reduction in the load has to be accompanied by a subsequent increase in demand from the initial forecast we demonstrate that the marginal value of the reserve provided by the demand can only be calculated taking into account the cost of supplying the recovery consumption flexible consumers can reduce their payments on average if energy is settled through real time prices

measure twice cut once optimal inventory and harvest under volume uncertainty and stochastic price dynamics abstract natural resources are often subject to state uncertainty resource abundance is not known with certainty but can be measured measurements are typically imperfect and costly to obtain the decision of whether to invest in resource measurement may be influenced by other state variables for example a resource commodity price we introduce a mixed observability model of optimal forest management featuring a partially observable forest resource and perfectly observable stochastic price the decision maker optimizes the expected net present value of forest returns by choosing when to measure current forest volume conduct an inventory harvest and replant or delay action parameter values are obtained from numerous forestry data sources optimal investment in inventory reduces the cost of uncertainty about timber volume and increases the predictability of returns moreover price stochasticity interacts with inventory decisions to produce asymmetric effects of high and low prices on inventory timing we also produce the first graphical faustmann rule analogues for jointly optimal inventory and harvest

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

fiscal and monetary rules for a currency union abstract this paper addresses the optimal joint conduct of fiscal and monetary policy in a two country model of a currency union with staggered price setting and distortionary taxes a tractable linear quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules in the optimal equilibrium monetary policy should achieve aggregate price stability following a flexible inflation targeting rule fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules conversely the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions

on uncertain renewable resource stocks optimal harvest policies and the value of stock surveys abstract annual harvest quotas are commonly employed in the management of renewable resource stocks commercial fisheries being a prime example such resource stocks often undergo quite significant natural fluctuations to which quotas must be adapted a further complication arises from the fact that estimates of stock abundance are often highly uncertain in this paper a bayesian approach is used to model optimal quota decisions for an uncertain fluctuating renewable resource stock

optimal fiscal and monetary policy equivalence results in this article we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy we consider standard monetary economies that differ in the price setting restrictions imposed on the firms we show that independently of the degree or type of price stickiness it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness in this sense environments with different price setting restrictions are equivalent

central bank independence and the monetary instrument problem we study the monetary instrument problem in a dynamic noncooperative game between separate discretionary fiscal and monetary policy makers we show that monetary instruments are equivalent only if the policy makers objectives are perfectly aligned otherwise an instrument problem exists when the central bank is benevolent while the fiscal authority is short sighted relative to the private sector excessive public spending and debt emerge under a money growth policy but not under an interest rate policy despite this property the interest rate is not necessarily the optimal instrument

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

optimal fiscal and monetary policies in the face of rare disasters this paper studies optimal fiscal and monetary policies in an economy exposed to large adverse shocks rare disasters we contrast optimal policies under commitment and discretion and identify several striking differences between these institutional environments a government that can commit to its policy plans relies heavily on debt to smooth the adverse effects of large shocks over time lack of commitment seriously limits the government s ability to use debt as a shock absorber under discretion an increase in debt leads to an increase in inflation expectations and therefore higher nominal interest rate distortions hence the discretionary government keeps debt in close vicinity of its steady state level and the response of taxes inflation and interest rates to shocks is much more pronounced under discretion than under commitment this is particularly relevant for large shocks and when the initial stock of government debt is already high at the time the shock occurs we also argue that the adverse welfare effects of disasters are larger under discretion than under commitment but these welfare differentials can be significantly reduced by making the discretionary government inflation averse

optimal fiscal policy in the neoclassical growth model revisited this paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period thereby making the supply of capital elastic in the short run because taxing capital is distortionary in the short run the government s ability desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed our timing assumption also leads to a tractable ramsey problem without state contingent debt which can give rise to debt financed budget deficits during recessions

the valuation of forestry resources under stochastic prices and inventories a contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers strategic reactions to changing conditions are impor tant as an example of such a case we solve the classical problem of the duration of an investment in forestry resources i e when to cut down the trees in the general case of stochastic output prices and stochastic natural growth rate and timber inventories a con tingent claims approach is used to value the forestry resources as a function of 1 sto chastic prices and inventories and 2 an asymmetric optimal production policy that incorporates the option to halt timber production temporarily i introduction classical capital budgeting techniques are based on the assumption that fu ture cash flows follow a rigid pattern and can be accurately predicted far into the future on the basis of such cash flow predictions the project is either accepted or rejected the uncertainty in the project and management s strategic reactions to changing conditions are dealt with only superficially at best a risk adjusted interest rate is employed and various deterministic scenarios are plotted out in situations where uncertainty and management s strategic reactions to it are im portant the classical technique is apt to lead to wrong decisions the technology needed to deal with such problems more accurately is becoming available the purpose of this paper is to present a stylized example of how it can be used our example is a general solution to the classical duration problem of the optimal control of a long term renewable resource investment such as forestry resources i e when to chop down a tree 1 if the prices and the natural growth rate of the inventory of forest timber are assumed to be deterministic the optimal control is very simple to derive but when both the price and inventory of timber are stochastic the problem becomes both stochastic and asymmetric the asym

assessment and simulation of the responsive demand potential in end user facilities application to a university customer many problems have appeared with the practical implementation of restructured electrical business in the u s and european union such as lack of generation network constraints etc a good example of these problems is the scarce participation of the demand in the electricity markets energy reserve and other ancillary services problems that could be solved through new demand responsive programs aimed to replace the traditional demand side management programs into voluntary demand participation programs a methodology for the generation of demand side bids and offers in large customer facilities and a real application to a university customer is presented in this paper the methodology is based on the knowledge of the physical processes involved in the electricity consumption and on the flexibility of the required supply the result of the methodology proposed is a set of demand packages that can be used to participate in different electricity markets whose possibilities in the market arena will be explored in a consequent paper

tax smoothing in frictional labor markets we re examine the optimality of tax smoothing from the point of view of frictional labor markets our central result is that whether or not this cornerstone optimal scal policy pre

on the relevance of exchange rate regimes for stabilization policy this paper assesses the relevance of the exchange rate regime for stabilization policy using both fiscal and monetary policy we conclude that the exchange rate regime is irrelevant this is the case independently of the severity of price rigidities independently of asymmetries across countries in shocks and transmission mechanisms the only relevant conditions are on the mobility of labor and financial assets the results can be summarized with the claim that every currency area is an optimal currency area however with labor mobility or tradable state contingent assets additional policy instruments would be required to establish the irrelevance result

modern macroeconomics in practice how theory is shaping policy over the last three decades macroeconomic theory and the practice of macroeconomics by economists have changed significantly for the better macroeconomics is now firmly grounded in the principles of economic theory we focus on the role of economic theory in shaping policy over the last several decades the united states and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests the evidence that theoretical advances have had a significant effect on the practice of policy is often hard to see for policymakers and advisers involved in the hurly burly of day to day policymaking but easy to see if one steps back and takes a longer term perspective examples of the effects of theory on the practice of policy include increased central bank independence adoption of inflation targeting and other rules to guide monetary policy increased reliance on consumption and labor taxes instead of capital income taxes and increased awareness of the costs of policies that distort labor markets

are valuation effects desirable from a global perspective abstract recent studies have emphasized the role of valuation effects due to exchange rate movements in easing the process of adjustment of the external balance of a country this paper asks to what extent valuation effects are desirable from a global perspective as a mean to achieve an efficient allocation of resources in a frictionless world it is desirable to have large movements in prices and exchange rates but once a small degree of price rigidity is introduced not only should prices be stabilized but also the response of the exchange rate should be muted there is a minor role for valuation effects that depends both on the size and composition of assets and liabilities

the effects of government spending shocks on consumption under optimal stabilization abstract economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending with the aim to provide a theoretical benchmark we analyse if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard new keynesian setting augmented for the presence of liquidity constrained agents and non separable preferences our results provide little evidence in support of a crowding in effect under timelessly optimal policy

fiscal policy and debt management with incomplete markets a ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets we develop a method that uses second order approximations of ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion the asymptotic mean of the planner s portfolio minimizes a measure of fiscal risk we obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit aggregate consumption and returns on traded securities for u s data we find that the optimal target debt level is negative but close to zero the invariant distribution of debt is very dispersed and mean reversion is slow

a density projection approach for non trivial information dynamics adaptive management of stochastic natural resources abstract we demonstrate a density projection approximation method for solving resource management problems with imperfect state information the method expands the set of partially observed markov decision process pomdp problems that can be solved with standard dynamic programming tools by addressing dimensionality problems in the decision maker s belief state density projection is suitable for uncertainty over both physical states e g resource stock and process structure e g biophysical parameters we apply the method to an adaptive management problem under structural uncertainty in which a fishery manager s harvest policy affects both the stock of fish and the belief state about the process governing reproduction we solve for the optimal endogenous learning policy the active adaptive management approach and compare it to passive learning and non learning strategies we demonstrate how learning improves efficiency but typically follows a period of costly short run investment

optimal planning to include storage devices in power systems it is difficult to forecast renewable energy resources due to their variability high uncertainty of the resources increases the concern about the reliable operation of the electric power system storage devices have been considered a candidate to control variable energy resources and most studies on storage devices are performed in the economic dispatch therefore electric power adequacy may be an issue in this paper a new approach in the optimal power flow framework is proposed for deploying storage devices and the feasibility and economic impact analyses are discussed

in search of a theory of debt management the complete market approach to government debt management argues that a portfolio of non contingent bonds at different maturities should be chosen so that fluctuations in market value offset changes in expected future deficits however this approach recommends huge fluctuations in positions enormous changes in portfolios for minor changes in maturities and no presumption it is always optimal to issue long and invest short term in a wide array of model specifications these extreme volatile and unstable features are undesirable for two reasons firstly fragility of portfolios to small changes in assumptions means that it is often better to follow a balanced budget rather than issue the optimal debt portfolio under some possibly misspecified model secondly for even miniscule transaction costs governments prefer a balanced budget rather than the large positions complete markets recommends the complete market recommendations conflict with a number of features we believe are integral to bond market incompleteness e g transaction costs liquidity effects robustness etc and which need to be explicitly incorporated into the portfolio problem

capital taxation and ownership when markets are incomplete this paper is a normative investigation of the properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets the model features a representative agent economy with linear taxes on labor and capital i first allow the government to trade only a real risk free bond optimal policy has the following features labor taxes fluctuate very little capital taxes are volatile and feature a positive negative spike after a negative positive shock to the government budget and capital taxes average to roughly zero across periods i then consider the implications of allowing the government to trade capital

harvest decisions and asset valuation for biological resources exhibiting size dependent stochastic growth optimal harvest rules and preharvest valuation procedures are derived for biological assets with stochastic size dependent growth in a stochastic price environment these issues are analyzed as continuous time optimal stopping problems both the single rotation and ongoing rotations problems are addressed the sensitivity of harvest and valuation rules is assessed the results are compared with those derived from a myopic look ahead procedure and with the corresponding findings for age dependent growth copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimal monetary policy with endogenous entry and product variety deviations from long run price stability are optimal in the presence of endogenous entry and product variety in a sticky price model in which price stability would be optimal otherwise long run inflation deflation is optimal when the benefit of variety to consumers falls short of exceeds the market incentive for creating that variety the desired markup price indexation exacerbates this mechanism plausible preference specifications and parameter values justify positive long run inflation rates however short run price stability around this non zero trend is close to optimal even in the presence of endogenously time varying desired markups that distort the intertemporal allocation of resources

optimal forest rotation when stumpage prices follow a diffusion process a key assumption in the faustmann rule for financial maturity is that stumpage prices are constant over time timber price series however exhibit wide fluctuations over time which this paper models as a lognormal diffusion process comparing the diffusion results modeled here to the fixed price faustmann results show 1 the prescribed rotation length is generally longer 2 computed stand values are higher using the diffusion model with the greatest divergence occurring when a stand is about the midpoint of a rotation 3 as the stumpage price volatility increases the gain in computed npv increases though in a nonlinear fashion

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

optimal taxation with private government information the ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances in contrast empirical labour tax processes are smooth in the sense of being random walks they provide prima facie evidence for incomplete government insurance this paper considers whether private government information might lie behind such incomplete insurance it shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt and it argues that they are better approximations to empirical fiscal policies than those implied by the ramsey model the paper also establishes that optimal incentive compatible allocations converge to allocations such that the government s incentive compatibility constraint no longer binds generally these limiting allocations are ones in which the government is maximally indebted their credibility and the interaction of incentive compatibility and credibility is briefly discussed

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

optimal inflation rates with the trending relative price of investment abstract i study the effect of the trending relative price of investment on the optimal target rate of inflation in an estimated dynamic general equilibrium model of the u s economy the price of investment has a decreasing trend relative to that of consumption because of investment specific technological progress if the prices of investment goods are sticky a benevolent planner puts weight on stabilizing these prices which works to raise the optimal target rate of inflation in terms of the price of consumption the estimated model shows a high degree of price stickiness in an investment sector and the resulting optimal target rate of inflation is significantly positive this result is robust to an extended model in which the prices of some categories of investment goods are flexible

the impact of debt levels and debt maturity on inflation marcet is grateful for support from dges monfispol and excellence program if banco de espana faraglia and scott gratefully acknowledge funding from the esrc s world economy and finance program oikonomou is grateful to hec montreal for funding

fiscal hedging with nominal assets abstract we analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes nominal rigidities nominal debt of various maturities and short selling constraints optimal policy prescribes the almost exclusive use of long term debt such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods

structural estimation of the stochastic dynamic decision problems of resource users an application to the timber harvest decision abstract this paper examines a method for structural estimation of the stochastic dynamic decision problems of resource users the method involves nesting a stochastic dynamic programming algorithm within a maximum likelihood routine an application to the timber harvest decision indicates that owners of slash pine plantations in southeast georgia use a low discount rate and treat timber price as a random walk moreover the harvest decision is apparently dominated by profit shocks overlooked in the usual models of the harvest decision

optimal fiscal and monetary policy with sticky prices in this paper i consider the role of state contingent inflation as a fiscal shock absorber in an economy with nominal rigidities i study the ramsey equilibrium in a monetary model with distortionary taxation nominal non state contingent debt and sticky prices with sticky prices the ramsey planner must balance the shock absorbing benefits of state contingent inflation against the associated resource misallocation costs for government spending processes resembling post war experience introducing sticky prices generates striking departures in optimal policy from the case with flexible prices for even small degrees of price rigidity optimal policy displays very little volatility in inflation tax rates display greater volatility compared to the model with flexible prices with sticky prices tax rates and real government debt exhibit behavior similar to a random walk for government spending processes resembling periods of intermittent war and peace optimal policy displays extreme inflation volatility even when the degree of price rigidity is large as the variability in government spending increases smoothing tax distortions across states of nature becomes increasingly important and the shock absorber role of inflation is accentuated

the stochastic rotation problem a generalization of faustmann s formula to stochastic forest growth abstract in the present paper we study the optimal cutting strategy 1 2 for an ongoing forest by using stochastic impulse control we show how faustmann s formula can be generalized to stochastic growing forests the paper extends and clarifies previous studies by miller and voltaire 1983 clarke and reed 1989 and reed and clarke 1990

harvesting selectivity and stochastic recruitment in economic models of age structured fisheries abstract we develop the age structured fishery model by including endogenous harvesting selectivity and stochastic recruitment as a growing body of fishery ecological evidence suggests these factors to be critical for fisheries management optimal harvesting selectivity aims to direct fishing towards age classes that are preferable to catch given information on fish growth natural mortality and recruitment in addition to implications on harvesting cost we analytically show that maximum sustainable yield msy leads to potentially serious and previously unrecognized deviation from economic optimality as it neglects the dependence of harvesting costs on gear selectivity we further show that the steady state population level may fall below the msy population even with zero discounting and stock dependent harvesting costs we quantify our results using empirical data for baltic cod applying the age structured model with endogenous harvesting selectivity we find large differences between maximum sustainable yield and the economic optimum although the classic biomass model suggests that these differences should be unimportant stochastic recruitment implies a threefold increase in young age classes but the stochastic solution can be accurately approximated by the certainty equivalence principle