optimality of the friedman rule in an overlapping generations model with spatial separation recent models with spatial separation and limited communication suggest that the friedman rule may not be optimal this is important in light of the disparity between theory and practice concerning optimal monetary policy we take a close look at these models and show that intergenerational transfers are key to the suboptimality of the friedman rule the friedman rule is a necessary condition for achieving the efficient allocation in equilibrium we also show that the friedman rule is chosen whenever agents can implement mutually beneficial arrangements

an overlapping generations model for monetary policy analysis abstract we integrate an overlapping generations structure into the standard lagos and wright 2005 framework and show that mild inflation can be welfare improving the reason behind this result is that inflation induces young agents to reduce their savings and to increase their consumption which overpowers the utility loss of old agents however the beneficial effect disappears for higher inflation rates such that the optimal inflation rate is one at an intermediate level

federal timber restrictions interregional spillovers and the impact on us softwood markets abstract an econometric model of the us softwood lumber and timber markets is estimated and used to simulate the price trade and welfare effects of reductions in federal timber sales in the western us commencing in the late 1980s results indicate that the timber sale reductions increased lumber prices by roughly 15 percent in the mid 1990s lumber consumers were the unambiguous losers from the policy while lumber and timber producers were net welfare gainers as the quantity induced losses to western lumber producers were more than offset by price increases and quantity gains to southern us and canadian lumber producers and timber producers in all regions

an analysis of the true notional bond system applied to the cbot t bond futures abstract the conversion factor system cfs is used in the determination of the invoice price of the chicago board of trade treasury bond futures as an alternative to the cfs oviedo oviedo r a 2006 improving the design of treasury bond futures contracts the journal of business 79 1293 1315 proposed the true notional bond system tnbs and showed that it outperforms the cfs when interest rates are deterministic the main purpose of this paper is to compare the effectiveness of the two systems in a stochastic environment in order to do so we price the cbot t bond futures as well as all its embedded delivery options under both the cfs and the tnbs our pricing procedure is an adaptation of the dynamic programming algorithm described in ben abdallah et al ben abdallah r ben ameur h breton m 2007 pricing cbot treasury bond futures les cahiers du gerad g 2006 77 numerical illustrations show that in a stochastic framework tnbs does not always outperform the cfs however as the long term mean moves away from the level of the notional rate the tnbs performs increasingly better than the cfs

heterogeneity redistribution and the friedman rule we study monetary models with nondegenerate stationary distributions of money holdings we find that the friedman rule does not typically maximize ex post social welfare an increase in the rate of growth of the money supply has two effects the standard distortionary or rate of return effect makes money a less desirable asset for all moneyholders a second redistributive effect creates a transfer from one type of agent to the other an increase in the rate of growth of money away from the friedman rule can produce a rate of return effect that dominates the standard effect

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

protecting forests biodiversity and the climate predicting policy impact to improve policy choice p olicies must balance forest conservation s local costs with its benefits local to global in terms of biodiversity the mitigation of climate change and other eco services such as water quality the trade offs with development vary across forest locations we argue that considering location in three ways helps to predict policy impact and improve policy choice i policy impacts vary by location because baseline deforestation varies with characteristics market distances slopes soils etc of loca tions in a landscape ii different mixes of political economic pressures drive the location of different policies and iii policies can trigger second order or spillover effects likely to differ by location we provide empirical evidence that suggests the importance of all three considerations by reviewing high quality evaluations of the impact of conservation and development on forest impacts of well enforced conservation rise with private clearing pressure supporting i protection types e g federal state dif fer in locations and thus in impacts supporting ii differences in development process explain differ ent signs for spillovers supporting iii

imperfect interbank markets and the lender of last resort abstract this paper presents a monetary model in which interbank markets have limited commitment to contracts limited commitment reduces the proportion of assets that can be used as collateral and thus banks with high liquidity demands face borrowing constraints in interbank markets these constraints can be relieved by the central bank a lender of last resort through the provision of liquidity loans i show that the constrained efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited otherwise a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency

friedman rule in a model with endogenous growth and cash in advance constraint this paper introduces money into an overlapping generations model with endogenous growth the model due to docquier et al 2007 exhibits a positive intergenerational externality which precludes its laissez fair equilibrium to be optimal even if the government can control the level of physical capital and set it to satisfy the modified golden rule the main message of the paper is that as long as the modified golden rule is attained friedman rule is optimal the result holds regardless of the ability of the government to internalize the externality and control the level of human capital other results include i violation of friedman rule for a different second best environment wherein human capital accumulation is controlled but not physical capital accumulation ii existence of a negative relationship between money growth rate and the economy s endogenous growth rate and iii non uniqueness of friedman rule

forest management conservation and global timber markets this article develops a global timber market model which captures how timber supply reacts to future predicted increases in the demand for timber higher future demand is expected to increase prices increase investments in regeneration increase establishment of plantations and expand output dynamic market responses imply a greater reliance on plantations in productive regions allowing large areas of natural forest in low valued regions to remain largely intact sensitivity analysis suggests that price harvest and management are most sensitive to the rate of demand increase the interest rate the cost of plantations and access costs of natural forests two forest conservation strategies are examined which predict the system wide implications of forest conservation in europe and north america the policies indicate that whereas set asides can induce net conservation harvests increase elsewhere particularly in natural forests

banking crises and liquidity in a monetary economy abstract this study investigates banks liquidity provision using the lagos and wright model of monetary exchange with aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors needs for consumption smoothing we also show that banking crises can be eliminated by a rate of return equalizing policy under perfect risk sharing but the first best outcome can be only achieved with the friedman rule these results cannot be obtained with other monetary models e g overlapping generations models we also derive a rich array of non trivial effects of inflation on equilibrium deposits the probability of banking crises and banks portfolios

forecasting bank loans loss given default abstract with the advent of the new basel capital accord banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach in order to be compliant with this approach institutions must estimate the loss given default the fraction of the credit exposure that is lost if the borrower defaults this study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses the out of sample predictive ability of these models is evaluated at several recovery horizons after the default event the out of time predictive ability is also estimated for a recovery horizon of 1 year the performance of the models is benchmarked against recovery estimates given by historical averages the results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss given default

optimal monetary policy and economic growth abstract a question at the center of many analyses of optimal monetary policy is why do central banks never implement the friedman rule to the list of answers to this question we add neoclassical production specifically the tobin effect as one possible explanation to that end we study an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money we assume a production function with a knowledge externality romer style that nests economies with endogenous growth ak form and those with no long run growth the diamond model the tobin effect is shown to be always operative under crra preferences a mild degree of social increasing returns is sufficient but not necessary for some positive inflation to dominate zero inflation and for the friedman rule to be sub optimal irrespective of the degree of risk aversion

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

money financial stability and efficiency most analyses of banking crises assume that banks use real contracts however in practice contracts are nominal and this is what is assumed here we consider a standard banking model with aggregate return risk aggregate liquidity risk and idiosyncratic liquidity shocks we show that with non contingent nominal deposit contracts the first best efficient allocation can be achieved in a decentralized banking system what is required is that the central bank accommodates the demands of the private sector for fiat money variations in the price level allow full sharing of aggregate risks an interbank market allows the sharing of idiosyncratic liquidity risk in contrast idiosyncratic bank specific return risks cannot be shared using monetary policy alone real transfers are needed

product quality and sustainability the effect of international environmental agreements on bilateral trade this paper addresses the impact of sustainability in production on international trade in particular it examines the effect of the international tropical timber agreement itta on tropical timber trade the empirical analysis is based on a gravity equation in a difference in difference setting which is estimated by a panel heckman s selection model this accounts for the potentially systematic selection of trading partners into timber trade activity we then conduct a comprehensive comparative static analysis solving the structural gravity model with and without the itta this allows us to determine the trade impact of an itta induced increase in sustainability for participating as well as for third countries we find that countries participating in the itta exhibit a significant and substantial increase in trade intensity ranging from 4 to 6 furthermore we observe that this effect is more pronounced for smaller member countries non itta countries are confronted with reduced tropical timber flows

crises in competitive versus monopolistic banking systems we study a monetary general equilibrium economy in which banks exist because they provide inter temporal insurance to risk averse depositors a banking crisis is defined as a case in which banks exhaust their reserve assets this may but need not be associated with liquidation of a storage asset when such liquidation does occur the result is a real resource loss to the economy and we label this a costly banking crisis there is a monetary authority whose only policy choice is the long run constant rate of growth of the money supply and thus the rate of inflation under different model specifications the banking industry is either a monopoly bank or a competitive banking industry it is shown that the probability of a banking crisis may be higher either under competition or under monopoly this is shown to depend on the rate of inflation in particular if the nominal rate of interest rate of inflation is below above some threshold a monopolistic banking system will always result in a higher lower crisis probability thus the relative crisis probabilities under the two banking systems cannot be determined independently of the conduct of monetary policy we further show that the probability of a costly banking crisis is always higher under competition than under monopoly however this apparent advantage of the monopoly banking is strictly due to the fact that it provides relatively less valuable inter temporal insurance

monetary policy banking crises and the friedman rule banking crises are frequent events gerard caprio and daniela klingebiel 1997 catalog over 80 banking crises during the last 25 years interestingly some banking crises are associated with no output losses whatsoever while others involve massive recessions finally it is known that the probability of a banking crisis rises as the rate of inflation rises see asli demirguc kunt and enrica detragiache 1997 john boyd et al 2001a b while received wisdom exists about the conduct of monetary policy while a crisis is underway there is no formal treatment of how the conduct of monetary policy during normal times affects the potential for banking crises to occur to fill that gap i consider economies where spatial separation and limited communication create a transactions role for money and random shocks to agents liquidity preferences create a role for banks in addition banks confront randomness in withdrawal demand when withdrawal demand is sufficiently high banks exhaust their cash reserves there are good reasons to associate this with a banking panic the output lost during a banking panic depends on how great withdrawal demand is some banking crises generate no output losses while others generate large reductions in resource availability in addition the conduct of monetary policy during normal times affects the probability of a banking crisis the higher the nominal interest rate the inflation rate the higher is the probability of a panic driving the nominal interest rate to zero following the friedman rule eliminates bank panics this constitutes a new rationale for the friedman rule nonetheless conventional methods of implementing the friedman rule never produce an optimal resource allocation in particular low nominal interest rates induce banks to hold large cash reserves thereby forgoing socially more productive investments in effect the friedman rule induces banks to become narrow banks voluntarily the banking system is very safe but it undertakes a suboptimal level of investment less conventional methods for implementing the friedman rule such as allowing unrestricted access to the discount window at a zero nominal interest rate lead either to the nonexistence of equilibrium or to massive indeterminacies none of the equilibria will be consistent with full optimality

green public procurement of certified wood spatial leverage effect and welfare implications certified and conventional products are not traditional substitute goods green public procurement stimulates certification globally but not in each region public procurement of the cheaper unsustainable product does not maximise welfare increasing the price premium for certified wood creates a trade barrier the high costs of forest certification exclude vulnerable producers

optimal monetary rules under persistent shocks abstract the tug o war for supremacy between inflation targeting and monetary targeting is a classic yet timely topic in monetary economics in this paper we revisit this issue within the context of a pure exchange overlapping generations model in which spatial separation and random relocation create an endogenous demand for money we study ar 1 shocks to both real output and the real interest rate irrespective of the nature of the shocks the optimal inflation target is always positive under monetary targeting shocks to output necessitate negative money growth rates for shocks to real interest rates money growth rates may be either positive or negative depending on the elasticity of consumption substitution also for output shocks monetary targeting welfare dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk in sharp contrast for shocks to the real interest rate we prove that monetary targeting and inflation targeting are welfare equivalent only in the limit as the shocks become i i d the upshot is that persistence of the underlying fundamental uncertainty matters depending on the nature of the shock policy responses need to be either more or less aggressive as persistence increases

the value of creditor control in corporate bonds this paper introduces a measure that captures the premium in bond prices that is due to the value of creditor control we estimate the premium as the difference in the bond price and an equivalent synthetic bond without control rights that is constructed using credit default swap cds contracts we find empirically that this premium increases as firm credit quality decreases and around important credit events such as defaults bankruptcies and covenant violations the increase is greatest for bonds most pivotal to changes in control changes in bond and cds liquidity do not appear to drive increases in the premium

market frictions and the pricing of sovereign credit default swaps abstract this paper contributes to the general understanding of how sovereign cds prices are formed by studying the information content of pricing errors generated by a non arbitrage model we implement a price discrepancy measure in the spirit of the noise measure introduced by hu et al 2013 in the treasury bond market and analyze its main determinants in panel data analysis the main results show that sovereign cds pricing errors are systematically related to higher bid ask spreads the evidence in this paper also suggests that exits of capital arbitrage during distressed periods as measured by changes in net offsetting can be associated to larger pricing errors in sovereign cds from advanced economies thereby supporting the main claims of the limit to arbitrage theories these findings are robust for the most common cds pricing models employed in the industry and different estimation techniques

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

emissions trading with offset markets and free quota allocations we study optimal climate policy for a policy bloc of countries facing a market where emissions offsets can be purchased from a non policy fringe of countries such as with the cdm policy bloc firms benefit from free quota allocations which are updated according to either firms past emissions or outputs we show that the resulting abatement and its allocation between policy bloc and fringe are both inefficient when all quotas are traded freely at a single price the policy bloc chooses to either not constrain the offset market leading to suboptimal policy bloc mitigation or ban offsets completely the former latter case occurs when free allocation of quotas is not very generous and the offset market is large small it is preferable for policy bloc countries governments to instead buy offsets directly from the fringe at a quota price below marginal damage cost of emissions while the policy bloc quota price will be above this cost with maximization of global welfare and a unified quota price this price is higher and offsets constrained in fewer cases but the solution still inefficient full efficiency then requires a higher quota price in the policy bloc than in the fringe

money banking and financial markets the fact that money banking and financial markets interact in important ways seems self evident the theoretical nature of this interaction however has not been fully explored to this end we integrate the diamond 1997 journal of political economy 105 928 956 model of banking and financial markets with the lagos and wright 2005 journal of political economy 113 463 484 dynamic model of monetary exchange a union that bears a framework in which fractional reserve banks emerge in equilibrium where bank assets are funded with liabilities made demandable in government money where the terms of bank deposit contracts are affected by the liquidity insurance available in financial markets where banks are subject to runs and where a central bank has a meaningful role to play both in terms of inflation policy and as a lender of last resort among other things the model provides a rationale for nominal deposit contracts combined with a central bank lender of last resort facility to promote efficient liquidity insurance and a panic free banking system

the delivery option in credit default swaps abstract under standard assumptions the reduced form credit risk model is not capable of accurately pricing the two fundamental credit risk instruments bonds and credit default swaps cds simultaneously using a data set of euro denominated corporate bonds and cds our paper quantifies this mispricing by calibrating such a model to bond data and subsequently using it to price cds resulting in model cds spreads up to 50 lower on average than observed in the market an extended model is presented which includes the delivery option implicit in cds contracts emerging since a basket of bonds is deliverable in default by using a constant recovery rate standard models assume equal recoveries for all bonds and hence zero value for the delivery option contradicting this common assumption case studies of chapter 11 filings presented in the paper show that corporate bonds do not necessarily trade at equal levels following default our extension models the implied expected recovery rate of the cheapest to deliver bond and applied to data largely eliminates the mispricing calibrated recovery values lie between 8 and 47 for different obligors exhibiting strong variation among rating classes and industries a cross sectional analysis reveals that the implied recovery parameter depends on proxies for the delivery option primarily the number of available bonds and bond pricing errors no evidence is found for a direct influence of the bid ask spread notional amount coupon or rating used as proxies for bond market liquidity

modeling sovereign yield spreads a case study of russian debt we construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring and allows for compensation for illiquidity using a new and relatively efficient method we estimate the model using russian dollar denominated bonds we consider the determinants of the russian yield spread the yield differential across different russian bonds and the implications for market integration relative liquidity relative expected recovery rates and implied expectations of different default scenarios this paper develops a model of the termstructure of credit spreads on sovereign bonds that accommodates i default or repudiation the sovereign announces that it will stop making payments on its debt ii restructuring or renegotiation the sovereign and the lenders agree to reduce or postpone the remaining payments and iii a regime switch such as a change of government or the default of another sovereign bond that changes the perceived risk of future defaults we build on the framework of duffie and singleton 1999 showing that cash flows promised by a sovereign bond can be discounted using a default adjusted short termdiscount rate that reflects the m ean arrival rate and associated losses in market value upon arrival of each of the aforementioned types of credit events since a sovereign credit event is often not a liquidation event the model allows for continued trading and pricing of a sovereign instrument through credit events possibly after writedowns in face value or cash distributions to creditors on credit event dates additionally we accommodate the possibility that bonds issued by the same sovereign of exactly the same type but possibly of different maturities may be priced in the market using different discount factors reasons for this may include i bond covenants may not include cross default clauses that would force upon the default of one bond the simultaneous default of other bonds of the same type but of a different maturity for various strategic reasons related to internal

measuring transnational leakage of forest conservation abstract forest conservation in one country can influence the degree of conservation or deforestation in other countries because of international linkages of the forest products industry and markets and a lack of global coordination thus leakage and offsetting losses of environmental quality may be present this paper develops an analytical framework for measuring this leakage and estimates its magnitude via general equilibrium modeling we find that the magnitude of leakage depends upon the price elasticities of supply of and demand for forestry products across the countries and degree of cooperation in forest conservation we estimate that a significant portion 42 95 of the reduced forestry production implemented in a country region can be transferred to elsewhere offsetting environmental gains leakage generally diminishes as more countries cooperate but cooperation among only a few countries does not always dramatically reduce leakage thus forest conservation efforts and associated environmental quantity gains in a country or group of countries can be seriously undermined in terms of global net conservation gain in the absence of effective global cooperation our results also point to the importance of taking leakage into account in evaluating local or regional forest carbon sequestration projects

optimal choice of monetary policy instruments in an economy with real and liquidity shocks faced with real and nominal shocks what should a benevolent central bank do x the money growth rate or target the in ation rate in this paper we make a rst attempt at studying the optimal choice of monetary policy instruments in a micro founded model of money speci cally we produce an overlapping generations economy in which limited communication and stochastic relocation creates an endogenous transactions role for at money we nd that when the shocks are real welfare is higher under money growth targeting when the shocks are nominal and not large welfare is higher under in ation rate targeting while under in ation rate targeting it is always optimal to pursue an expansionary policy it is never optimal to do so under money growth targeting

the liquidity trap the real balance effect and the friedman rule this paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates using a model with population growth that nests as a special case a more conventional specification in which there is a single infinitely lived representative agent the paper shows that with a growing population monetary policy has distributional effects that give rise to a real balance effect thereby eliminating the liquidity trap these same distributional effects however can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive

credit swap valuation this review of the pricing of credit swaps a form of derivative security that can be viewed as default insurance on loans or bonds begins with a description of the credit swap contract turns to pricing by reference to spreads over the risk free rate of par floating rate bonds of the same quality and then considers model based pricing the role of asset swap spreads as a reference for pricing credit swaps is also considered

sub optimality of the friedman rule in townsend s turnpike and stochastic relocation models of money do finite lives and initial dates matter abstract the friedman rule a widely studied prescription for monetary policy is optimal in townsend s turnpike model of money it is not so in the overlapping generations version of his stochastic relocation model of money we investigate these monetary models in the light of this disparity to this end we create a modified version of the turnpike model that generates the same stationary monetary equilibria as does the two period overlapping generations model with random relocation we exploit this equivalence to explain the aforementioned disparity we also discuss the importance of whether or not the economy has an initial date

default parameter estimation using market prices this article presents a new methodology for estimating recovery rates and the pseudo default probabilities implicit in both debt and equity prices in this methodology recovery rates and default probabilities are correlated and depend on the state of the macroeconomy this approach makes two contributions first the methodology explicitly incorporates equity prices in the estimation procedure this inclusion allows the separate identification of recovery rates and default probabilities and the use of an expanded and relevant data set equity prices may contain a bubble component which is essential in light of recent experience with internet stocks second the methodology explicitly incorporates a liquidity premium in the estimation procedure which is also essential in light of the large observed variability in the yield spread between risky debt and u s treasury securities and the illiquidities present in risky debt markets