banking in computable general equilibrium economies abstract in this paper we develop a computable general equilibrium economy that models the banking sector explicitly banks intermediate between households and between the household sector and the government sector households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement banks pool households savings and they purchase interest bearing government debt and non interest bearing reserves we use this structure to answer two sets of questions one normative in nature that evaluates the welfare costs of alternative monetary and tax policies and one positive in nature that studies the real effects of following a procyclical interest rate policy rule

financial crises unconventional monetary policy exit strategies and agents expectations a central bank may purchase assets during a financial crisis and then exit from those purchases agents have rational expectations about financial crises as rare events the probability the central bank purchases assets and the exit strategy selling off assets quickly produces a double dip recession while slowly unwinding generates a smooth recovery expectations about the exit strategy influence the initial effectiveness of purchases increasing the probability of purchases during crises distorts the pre crisis economy and depends upon the exit strategy the welfare benefits of unconventional policy may differ ex ante versus ex post as can the preferred exit strategy

interest on reserves interbank lending and monetary policy abstract a two sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention only retail banks can hold reserves and these banks are subject to a capital requirement creating balance sheet costs of holding reserves an increase in the interest rate on reserves has different qualitative effects from a reduction in the central bank s balance sheet increases in the central bank s balance sheet can have redistributive effects and can reduce welfare a reverse repo facility at the central bank puts a floor under the interbank interest rate and is always welfare improving

control functions and simultaneous equations methods economic models of agent s optimization problems or of interactions among agents often exhibit simultaneity it is well known that any function in which an explanatory variable is partly determined by the dependent variable of the function cannot be identified without additional information typically this additional information is provided by observable exogenous variables or functional structures here we focus on nonlinear simultaneous equations models with nonadditive disturbances nonlinear nonadditive specifications are a fundamental feature of economic models with unobserved heterogeneity including multidimensional models of consumer and producer choice models of nash equilibrium in industrial organization and many models of labor market behavior in linear models with additive disturbances there are many alternative approaches to addressing endogeneity in estimation twostage least squares instrumental variable and control function approaches are three such commonly adopted approaches in simple specifications of the linear simultaneous model all three approaches generate consistent often analytically identical estimators hausman 1987 for example however linear models with additive

a simple general equilibrium model of large excess reserves abstract in a general equilibrium macroeconomic model with a banking system that can hold large excess reserves and is subject to possibly binding capital constraints i study how the quantity of government provided monetary assets is related to the price level in steady state when the central bank does not pay interest on reserves the price level moves one for one with the monetary base if instead the central bank can pay interest on reserves at market rates the price level can decouple from the quantity of monetary assets in the economy a larger monetary base need not imply a higher price level however for large enough levels of reserves the capital constraint binds and the tight link between money and prices reemerges

interest on reserves and sunspot equilibria friedman s proposal reconsidered friedman s 1960 proposal to pay interest on required reserves is considered in a setting that eliminates the indeterminacy of steady state equilibrium discussed by sargent and wallace 1985 in an overlapping generations model where the real rate of interest is technologically determined the payment of interest on reserves results in a determinate pareto optimal steady state equilibrium however interest payments on reserves reduce the steady state welfare of all young agents and for many economies result in the existence of stationary sunspot equilibria this is the case even if such equilibria cannot exist when reserves do not earn interest

monetary policy with interest on reserves abstract i analyze monetary policy with interest on reserves and a large balance sheet i show that conventional theories do not determine inflation in this regime so i base the analysis on the fiscal theory of the price level i find that monetary policy can peg the nominal rate and determine expected inflation with sticky prices monetary policy can also affect real interest rates and output though higher interest rates raise output and then inflation the conventional sign requires a coordinated fiscal monetary policy contraction i show how conventional new keynesian models also imply strong monetary fiscal policy coordination to obtain the usual signs i address theoretical controversies a concluding section places our current regime in a broader historical context and opines on how optimal fiscal and monetary policy will evolve in the new regime

on the social usefulness of fractional reserve banking abstract in this paper we argue that if monetary policy has insufficient deflation private agents have incentives to set up alternative payment systems like fractionally backed bank deposits which pay interest on the means of payment in a competitive environment with free entry these alternative systems are inherently fragile in the sense that they are subject to socially costly bank runs these social costs are not internalized by private individuals and banks and may exceed their social benefits we argue that as communication technologies improve the social benefits of fractional reserve banking decrease but the private benefits may still exceed the private costs so that such systems continue to be used in such situations 100 reserve requirements are optimal

interest on reserves abstract in a general equilibrium setting we study versions of the proposal to pay interest on reserves at the market rate we argue that the proposal makes the demand for total reserves indeterminate whether interest is paid on total reserves or on required reserves only one consequence is that tax financing of the proposal gives rise to a continuum of equilibria equilibria which differ in real returns and consumption allocations another consequence is that financing through earnings on the central bank s portfolio either gives rise to an equilibrium with a zero nominal interest rate or to no equilibrium

fdi spillovers over time in an emerging market the roles of entry tenure and barriers to imitation in this study we examine how foreign direct investment fdi spillovers to domestic firms in an emerging market occur over time from the organizational learning perspective we propose that as entry tenure of foreign firms in an industry increases domestic firms can learn from the foreign firms over time and improve their productivity we further build upon the competitor imitation argument to propose that this effect will be stronger when barriers to imitation faced by the domestic firms are lower based upon a comprehensive panel dataset on manufacturing firms in china in 1998 2007 our findings strongly support these arguments we find that entry tenure of foreign firms in an industry has a positive relationship with the productivity of individual domestic firms in the same industry albeit at a diminishing rate we also find that this positive relationship is stronger when the foreign firms have lower export intensity lower intangible asset intensity and have followed a more rhythmic i e less irregular entry pattern situations characterizing lower barriers to imitation

exit strategies for monetary policy abstract in response to the financial crisis of 2007 08 all major central banks decreased interest rates to historically low levels and created large excess reserves central bankers and academics currently discuss how to implement monetary policy going forward we find that paying interest on reserves ior is optimal if the central bank has full fiscal support if the central bank has no fiscal support reducing reserves is optimal this can be achieved by reserve absorbing operations which hold the size of the balance sheet constant or by selling assets which reduces the size of the balance sheet

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

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

monetary policy in a channel system abstract channel systems for conducting monetary policy are becoming increasingly popular despite its popularity the consequences of implementing policy with a channel system are not well understood we develop a general equilibrium framework of a channel system and study the optimal policy a novel aspect of the channel system is that a central bank can tighten or loosen its policy without changing its policy rate this policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest rate rules

on the stability of money demand abstract we show that regulatory changes that occurred in the banking sector in the early 1980s that considerably weakened regulation q can explain the apparent instability of money demand starting in the same period we evaluate the effects of the regulatory changes using a model that goes beyond aggregates as m1 and treats currency and different deposit types as alternative means of payments we use the model to construct a new monetary aggregate that performs remarkably well for all the period 1915 2012

product services as a research field past present and future reflections from a decade of research in the last decade many researchers institutes and programs in the eu paid attention to product service systems pss given this massive effort it is time to take stock is pss research a theoretical field in its own right is the pss concept indeed the road to the factor 10 world is it the road to enhanced competitiveness what is needed to really use the potential of the concept this paper discusses these questions summarizing the analysis done in the pss review book new business for old europe various eu sponsored projects and the conceptual approach chosen in a new research network on sustainable consumption and production called score 2006 elsevier ltd all rights reserved

why basel ii may need a leverage ratio restriction abstract we analyze regulatory capital requirements where the amount of required capital depends on the level of risk reported by the banks it is shown that if the supervisors have a limited ability to identify or to sanction dishonest banks an additional risk independent leverage ratio restriction may be necessary to induce truthful risk reporting the leverage ratio helps to offset the banks potential capital savings of understating their risks by i reducing banks put option value of limited liability ex ante and by ii increasing the banks net worth which in turn enhances the supervisors ability to sanction banks ex post

speculative runs on interest rate pegs abstract we analyze a new class of equilibria that emerges when a central bank conducts monetary policy by setting an interest rate as an arbitrary function of its available information and letting the private sector set the quantity traded these equilibria involve a run on the central bank s interest target whereby money grows fast private agents borrow as much as possible against the central bank and the shadow interest rate is different from the policy target we argue that these equilibria represent a particular danger when banks hold large excess reserves such as is the case following periods of quantitative easing our analysis suggests that successfully managing the exit strategy requires additional tools beyond setting interest rate targets and paying interest on reserves in particular freezing excess reserves or fiscal policy intervention may be needed to fend off adverse expectations

quantitative easing and unconventional monetary policy an introduction this article assesses the impact of quantitative easing and other unconventional monetary policies followed by central banks in the wake of the financial crisis that began in 2007 we consider the implications of theoretical models for the effectiveness of asset purchases and look at the evidence from a range of empirical studies we also provide an overview of the contributions of the other articles in this feature

open market operations abstract in an open market operation the central bank swaps currency for bonds we show how injecting money in this way is different from transfers the way policy is usually formulated the model captures liquidity explicitly by modeling the roles of assets in frictional exchange under various specifications for market structure and the acceptability or pledgeability of assets we discuss implications for the fisher and quantity equations the possibility of negative nominal yields liquidity traps and market segmentation when liquidity is endogenized using information theory multiple equilibria emerge with different policy predictions interest on reserves and quantitative easing are discussed