money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

scarce collateral the term premium and quantitative easing abstract a model of money credit and banking is constructed in which the differential pledgeability of collateral and the scarcity of collateralizable wealth lead to a term premium an upward sloping nominal yield curve purchases of long maturity government debt by the central bank are always a good idea but for unconventional reasons a floor system is preferred to a channel system as a floor system permits welfare improving asset purchases by the central bank

bond liquidity premia recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries in the us the repo market is the key funding market then the premium of on the run u s treasury bonds should share a common component with risk premia in other markets

money and risk sharing we study the use of money for sharing consumption risk in our model agents randomly receive endowments at some points in time and produce at other points due to information frictions agents cannot use intertemporal contracts to share risk the use of money allows agents to overcome these information frictions the friedman rule is shown to generate efficient risk sharing furthermore we quantify the welfare costs of incomplete risk sharing and find that with 10 inflation the welfare cost of inefficient risk sharing is approximately 1 1 5 of steady state consumption

stakeholder interviews with two mavt preference elicitation philosophies in a swiss water infrastructure decision aggregation using swing weighting and disaggregation using uta gms abstract we used two types of preference elicitation methods based on multi attribute value theory mavt for a wastewater infrastructure decision in switzerland we aimed to register the implementation impacts of two preference elicitation philosophies aggregation disaggregation in a large real world case and give guidance on these elicitation approaches for practitioners we conducted two series of face to face interviews with the same ten the first interview set used direct aggregation preference elicitation methods which decomposed an additive value model into the elicitation of weights smart swing variant and marginal value functions bi section method in the second interview series indirect disaggregation was used based on uta gms the weights and marginal value functions for 19 objectives were later simultaneously inferred with linear programming from pairwise comparisons of hypothetical alternatives one aim was to design the uta gms comparisons for many objectives further we aimed to identify differences and commonalities of the two methods concerning the elicited preferences the mavt evaluation results of six real world wastewater infrastructure alternatives and the stakeholders and analysts feedbacks similar best alternatives indicate convergence of the two elicitation methods this demonstrates the applicability of the uta gms elicitation procedure to a very complex decision problem however the two elicitation methods were perceived differently by the respondents and required different effort from the analysts for individual stakeholders preferences were sometimes rather different between the interviews which could be largely explained by the constructive nature of preference formation this indicates the importance of supporting stakeholder learning in the application of mcda

preference disaggregation 20 years of mcda experience abstract the philosophy of preference disaggregation in multicriteria decision aid systems mcda is to assess infer global preference models from the given preferential structures and to address decision aiding activities this paper presents a panorama of preference disaggregation methods and summarises the most important results and applications over the last 20 years

money and credit as means of payment a new monetarist approach abstract we study the choice of payment instruments in a model with money and credit where sellers must invest in a record keeping technology to accept credit and buyers have limited commitment our model captures the two sided market interaction between consumers and retailers that can generate multiple equilibria limited commitment yields an endogenous debt limit that depends on monetary policy money and credit coexist for a range of parameters and bargaining related hold up problems can lead to inefficiencies in the adoption of monitoring technologies changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

dynamic portfolio choice with frictions abstract we show how portfolio choice can be modeled in continuous time with transitory and persistent transaction costs multiple assets multiple signals predicting returns and general signal dynamics the objective function is derived from the limit of discrete time models with endogenous transaction costs due to optimal dealer behavior we solve the model explicitly and the intuitive solution is also the limit of the solutions of the corresponding discrete time models we show how the optimal high frequency trading strategy depends on the nature of the trading costs which in turn depend on dealers inventory dynamics finally we provide equilibrium implications and illustrate the model s broader applicability to micro and macro economics monetary policy and political economy

market frictions and consumption based asset pricing a fundamental equilibrium condition underlying most utility based asset pricing models is the equilibration of intertemporal marginal rates of substitution imrs previous empirical research however has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition in this paper we examine whether market frictions can explain previous findings our results suggest that a combination of short sale borrowing solvency and trading cost frictions can drive a large enough wedge between imrs so that the apparent violations may not be inconsistent with market equilibrium

liquidity and asset prices in a monetary model with otc asset markets abstract we study how asset prices are affected by the amount of liquidity that is available in over the counter asset markets where dealers post prices and quantities at which they are willing to buy and sell assets we find that higher levels of market liquidity lead to higher asset prices and lower bid ask spreads hence an increase in inflation which lowers market liquidity increases asset returns and decreases asset prices when agents immediate consumption needs are stochastic asset prices will fluctuate even though asset fundamentals are unchanging the fluctuations in asset prices reflect the stochastic availability of market liquidity that results from agents changing consumption opportunities

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

modeling project preferences in multiattribute portfolio decision analysis abstract when choosing a portfolio of projects with a multi attribute weighting model it is necessary to elicit trade off statements about how important these attributes are relative to each other such statements correspond to weight constraints and thus impact on which project portfolios are potentially optimal or non dominated in view of the resulting set of feasible attribute weights in this paper we extend earlier preference elicitation approaches by allowing the decision maker to make direct statements about the selection and rejection of individual projects we convert such project preference statements to weight information by determining the weights for which i the selected project is included in all potentially optimal or non dominated portfolios or ii the rejected project is not included in any potentially optimal or non dominated portfolio we prove that the two complementary selection rules will exclude exactly the same set of weights however analyses that apply the dominance structure often lead to multiple mutually exclusive feasible weight sets and therefore the approach based on potential optimality is more relevant for practical decision analysis we also propose ex ante value of information measures to guide the elicitation of project preference statements and illustrate our results by analyzing a real case on the selection of infrastructure maintenance projects

on the coexistence of money and higher return assets and its social role this paper adopts mechanism design to investigate the coexistence of at money and higherreturn assets we consider an economy with pairwise meetings where at money and riskfree capital compete as means of payment as in lagos and rocheteau 2008 the trading mechanism in pairwise meetings is chosen among all individually rational renegotiation proof mechanisms to maximize society s welfare we show that in any stationary monetary equilibrium capital commands a higher rate of return than at money

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

money and collateral this paper presents a model in which money and collateral are both essential and complement each other as media of exchange the model has implications for asset prices output in ation and monetary policy both in steady state and

coexistence of money and interest bearing securities abstract a random matching model with money is used to study the nominal yield on small denomination bearer safe discount securities issued by the government there is always one steady state with matured securities circulating at par and for some parameters another with them circulating at a discount in the former a necessary and sufficient condition for a positive nominal yield on not yet matured securities is exogenous discriminatory treatment of them by the government in the latter the post maturity discount on securities induces a deeper pre maturity discount even without such discriminatory treatment

monetary policy and asset prices a mechanism design approach we investigate the eects of monetary policy on asset prices in economies where assets are traded periodically in over the counter otc markets with bilateral meetings between buyers and sellers the trading mechanism in pairwise meetings is designed to maximize social welfare taking as given the frictions in the environment e g lack of commitment and limited enforcement and monetary policy we show that asset price bubbles emerge in a constrained e cient monetary equilibrium only if liquidity is abundant and the rst best allocation is implementable in contrast if liquidity is scarce assets are priced at their fundamental value in any constrained e cient monetary equilibrium in which case an increase in in ation has no eect on asset prices but it reduces output and welfare finally for low in ation rates the bursting of an asset price bubble can be an optimal response to a shock that reduces assets resalability

2002 lawrence r klein lecture liquidity and asset prices we broadly define liquid assets or monetary assets as any asset that can be readily sold in the market and can be held by a number of people in succession before maturity we ask in what environment is the circulation of liquid assets essential for the smooth running of the economy by developing a canonical model of a monetary economy i e where the circulation of liquid assets is essential we are able to examine the interaction between liquidity asset prices and aggregate economic activity

implausible alternatives in eliciting multi attribute value functions abstract many methods to elicit preference models in multi attribute decision making rely on evaluations of a set of sample alternatives by decision makers using orthogonal design methods to create this set of alternatives might require respondents to evaluate unrealistic alternatives in this paper we perform an empirical study to analyze whether the presence of such implausible alternatives has an effect on the quality of utility elicitation using a new approach to measure consistency we find that implausible alternatives in fact have a positive effect on consistency of intra attribute preference information and consistency with dominance but do not affect inter attribute preference information

do nominal devaluations lead to real devaluations in ldcs abstract devaluation or depreciation of nominal exchange rate is a policy to boost exports however since any favorable effects of devaluation could be offset by its inflationary effects one must consider real devaluation this note investigates whether nominal devaluation leads to real devaluation by employing a relatively new method of cointegration and error correction modeling

money and asset prices with uninsurable risks abstract we present a theory of differences of liquidity across assets based on an endogenous ranking of assets as media of exchange arising from their relative quality as hedging devices when assets have two distinct roles as intertemporal media of exchange and hedging devices buyers have generically a strict preference for paying sellers with the asset which is the relative better hedging device for sellers the consequence of this preference is that there are three monetary policy regimes and these regimes differ in which assets serve as media of exchange whether assets carry a liquidity premium and in the impact that monetary policy has on asset prices

asset prices and liquidity in an exchange economy i develop an asset pricing model in which financial assets are valued for their liquidity the extent to which they are useful in facilitating exchange as well as for being claims to streams of consumption goods the implications for average asset returns the equity premium puzzle and the risk free rate puzzle are explored in a version of the model that nests the work of mehra and prescott 1985

money asset prices and the liquidity premium this paper examines the effect of monetary policy on the liquidity premium i e the market value of the liquidity services that financial assets provide to guide the empirical analysis i set up a monetary search model in which bonds provide liquidity services in addition to money the theory predicts that money supply and the nominal interest rate are positively correlated with the liquidity premium but the latter is negatively correlated with the bond supply the empirical analysis over the period from 1946 and 2008 confirms the theoretical findings this indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination the model can rationalize the existence of negative nominal yields when the nominal interest rate is low and liquid bond supply decreases

payments and liquidity under adverse selection informational asymmetries regarding the future value of assets affect their role in exchange i construct a random matching economy composed of two assets a risk free bond and a lucas tree whose terminal value is privately known to its holder no restrictions are imposed on payment arrangements the main finding supports a pecking order theory of payments agents use their risk free bonds first in order to finance their spending shocks and they use their information sensitive assets only if their holdings of bonds are depleted the theory has implications for the optimal provision of risk free bonds the structure of asset returns and liquidity

a model of money and credit with application to the credit card debt puzzle many individuals simultaneously have significant credit card debt and money in the bank the credit card debt puzzle is given high interest rates on credit cards and low rates on bank accounts why not pay down the debt while economists have gone to elaborate lengths to explain this observation we argue it is a special case of the rate of return dominance puzzle from monetary economics we analyze the issue by extending standard monetary theory to incorporate consumer debt this seems interesting in its own right since developing models where money and credit coexist is a long standing challenge and it helps put into context recent discussions of consumer debt

a monetary explanation of the equity premium term premium and risk free rate puzzles this paper develops and estimates a monetary model that offers an explanation of some puzzling features of observed returns on equities and default free bonds the key feature of the model is that some assets other than money play a special role in facilitating transactions which affects the rate of return that they offer the model is capable of producing a low risk free rate a high equity premium and an average positive relationship between maturity and term premium for default free bonds the model s implications for the joint distribution of asset returns velocity inflation money growth and consumption growth are also compared to the behavior of these variables in the u s economy

liquidity and asset market dynamics this study analyzes economies with an essential role for liquid assets in the exchange process the model can generate multiple stationary equilibria across which asset prices market participation capitalization output and welfare are positively related it can also generate a variety of nonstationary equilibria even when fundamentals are deterministic and time invariant including periodic chaotic and stochastic sunspot equilibria with recurrent market crashes some equilibria have asset price trajectories that resemble bubbles growing and bursting endogenous private and public liquidity is also introduced sometimes it is efficient to provide enough liquid assets to satiate demand other times it is not

collateral constraints and the law of one price an experiment we test the asset pricing implications of collateralized borrowing that is of using assets as collateral to borrow money in the laboratory to this purpose we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data in the laboratory assets that can be leveraged fetch higher prices than assets that cannot even though assets payoffs are identical in all states of the world collateral value therefore creates deviations from the law of one price the spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions

some results on the optimality and implementation of the friedman rule in the search theory of money abstract i characterize a large family of monetary policies that implement milton friedman s prescription of zero nominal interest rates in a monetary search economy with multiple assets and aggregate uncertainty this family of optimal policies is defined by two properties i the money supply must be arbitrarily close to zero for an infinite number of dates and ii asymptotically on average over the dates when fiat money plays an essential role the growth rate of the money supply must be at least as large as the rate of time preference

asset prices liquidity and monetary policy in an exchange economy i formulate a model in which money coexists with equity shares on a risky aggregate endowment agents can use equity as a means of payment so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange i characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations i also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

the concomitants of exchange rate depreciation less developed countries 1971 1973 this study shows what happens when less developed countries ldcs revalue their currencies with these findings we aim to provide evidence toward improving their currency valuation policies a background presumption and justification for the inquiry is that disequilibrium exchange rates can be an important cause of serious injury to economic performance against which the costs of shifting toward equilibrium rates can be measured but whether or not this presumption is valid exchange rate variation is a phenomenon with potential major effects which should be known more accurately so that policy can be better guided exchange rate revaluation is taken to mean a substantial alteration in the average rate at which transactions are effected between domestic and foreign currencies this concept implies three problems the exchange rate shift must be a certain size for it to be counted one country has current and capital transactions with a number of other countries and transactions may be carried out at both official and free black market rates section i below addresses these problems

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

discussion of information and liquidity i discuss the model of asset liquidity by lester postlewaite and wright 2011 this issue forthcoming i consider a model with bilateral matching and bargaining in which a perfectly divisible asset serves as means of payment a recognizability problem is introduced by assuming that the asset can be counterfeited at a positive cost in contrast to lester postlewaite and wright in equilibrium sellers always accept objects that they do not recognize the private information problem manifests itself by smaller quantities traded in uninformed matches

liquidity premia in dynamic bargaining markets abstract this paper develops a search theoretic model of the cross sectional distribution of asset returns abstracting from risk premia and focusing exclusively on liquidity in contrast with much of the transaction cost literature it is not assumed that different assets carry different exogenously specified trading costs instead different expected returns due to liquidity are explained by the cross sectional variation in tradeable shares the qualitative predictions of the model are consistent with much of the empirical evidence

nominal bonds and interest rates in this article i integrate the microfoundation of monetary theory with the model of limited participation to analyze the competition between nominal bonds and money the market for government nominal bonds is centralized and walrasian whereas the goods market is modeled as random matches the government imposes a legal restriction that requires all government goods to be purchased with money but not with bonds by contrast private agents can exchange between themselves with both money and bonds i show that an arbitrarily small legal restriction is sufficient to prevent matured bonds from being a medium of exchange i also analyze the effects of monetary policy with and without the legal restriction some of those effects differ significantly from traditional monetary models

systemic illiquidity in the federal funds market this paper shows how the intra day allocation and pricing of overnight loans of federal funds reflect the decentralized inter bank market in which these loans are traded a wouldbe borrower or lender typically finds a counterparty institution by direct bilateral contact once in contact say by telephone the two counterparties to a potential trade negotiate terms that reflect their incentives for borrowing or lending as well as the attractiveness of their respective options to forego a trade and to continue shopping around this overthe counter otc pricing and allocation mechanism is quite distinct from that of most centralized markets such as an electronic limit order book market in which every order is anonymously exposed to every other order with a centralized order crossing algorithm while there is a significant body of research on the micro structure of specialist and limit order book markets most otc markets do not have comprehensive transactionslevel data available for analysis the federal funds market is a rare exception we go beyond a previous study by craig furfine 1999 of the microstructure of the federal funds market by modeling how the likelihood of matching a particular borrower with banking studies federal reserve bank of new york 33 liberty street new york ny 10045 we are grateful for support and data from the federal reserve bank of new york and for comments from guillaume plantin jamie mcandrews craig furfine michael fleming and anonymous federal funds traders we have also benefited from comments by andrew metrick jeremy stein ken french larry harris owen lamont john taylor and randy westerfield the views expressed here are not necessarily those of the federal reserve bank of new york or the federal reserve system

liquidity premiums on government debt and the fiscal theory of the price level we construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements if the collateral constraint binds agents price in a liquidity premium on bonds that lowers the real rate on bonds in equilibrium the price level is determined according to the fiscal theory of the price level however the market value of government debt exceeds its fundamental value we then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending the price dynamics are driven solely by the liquidity premium on the debt

asset pricing puzzles and incomplete markets the representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets the model features two types of agents who differ up to a nontradable idiosyncratic component in their endowment processes numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone restrictions on the variability of intertemporal marginal rates of substitution hansen and jagannathan 1991 are used to argue that incomplete markets as modeled here cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory a large literature in financial economics has investigated the extent to which variants of the lucas 1978 general equilibrium theory of asset pricing can account for the joint behavior of aggregate u s consumption and asset returns by and large this literature has concluded that a theory based upon frictionless arrow debreu markets and or a representative agent makes strongly counterfactual predictions regarding even the simple unconditional properties of this relationship mehra and prescott 1985 for instance show that the theory drastically underpredicts the average excess rate of return on u s stocks the so called equity premium puzzle weil 1989 points out as did mehra and prescott that the magnitude of the average risk free rate is far below that predicted by the theory this has been dubbed the risk free rate puzzle numerous authors including grossman melino and shiller 1987 and backus gregory and zin 1989 show that the theory cannot account for term premia inherent in the yield curve hodrick 1987 surveys a large literature which documents the theory s shortcomings in accounting for excess expected returns in foreign exchange markets the notion that the representative agent model cannot account for excess returns across a wide array of asset markets can be made more precise by using tools developed by hansen and jagannathan 1991 and shiller 1982

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

government transaction policy the medium of exchange and welfare abstract policy regarding what the government accepts in transactions is embedded in a version of the kiyotaki wright model of media of exchange in an example with two goods and one fiat money the policies that are consistent with fiat money as the unique medium of exchange are identified these policies have the government favoring fiat money in its transactions a benefit and a cost accompany any such policy the benefit is that a worse nonmonetary steady state is eliminated the cost is that a better monetary steady state is eliminated journal of economic literatureclassification number e40

outside versus inside bonds a modigliani miller type result for liquidity constrained economies when agents are liquidity constrained two options exist sell assets or borrow we compare the allocations arising in two economies in one agents can sell government outside bonds and in the other they can borrow by issuing inside bonds all transactions are voluntary implying no taxation or forced redemption of private debt we show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true however the optimal policy in each economy makes the allocations equivalent

trade dynamics in the market for federal funds we develop a model of the market for federal funds that explicitly accounts for its two distinctive features banks have to search for a suitable counterparty and once they have met both parties negotiate the size of the loan and the repayment the theory is used to answer a number of positive and normative questions what are the determinants of the fed funds rate how does the market reallocate funds is the market able to achieve an efficient reallocation of funds we also use the model for theoretical and quantitative analyses of policy issues facing modern central banks

on the interplay between speculative bubbles and productive investment the aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones a three period lived overlapping generations model allows us to make this distinction agents have a portfolio decision when young they can invest in human capital that is a productive long term investment that provides a return during the following two periods when young or in the middle age they can invest in a bubble young individuals can also borrow on a credit market to finance the productive investment however the amount borrowed is limited by a credit constraint we show that the existence of a stationary bubble raises productive investment and production when the bubleless economy is credit constrained and dynamically efficient indeed young agents sell short the bubble to increase productive investments whereas traders at middle age transfer wealth to old age the bubble allows to relax the credit constraint we outline that a permanent technological shock inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital production and the bubble size we use our framework to discuss the effect on the occurrence of bubbles of financial regulation and fiscal policy

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

search in asset markets market structure liquidity and welfare this paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market to this end we generalize the search theoretic model of financial intermediation of darrell duffie et al 2005 to allow for entry of dealers and unrestricted asset holdings

savings asset scarcity and monetary policy abstract this paper analyzes optimal monetary policy regarding asset markets in a model where money and savings are essential and asset markets matter the model is able to explain why different regimes for the correlation of real interest rates and stock price dividend ratios exist and offers two explanations why the correlation vanished after 2007 a decrease in inflation or changes in the supply of risky and safe assets the results on optimal policy show that away from the friedman rule fiscal policy can improve welfare by increasing the amount of outstanding government debt if the fiscal authority is not willing or able to increase debt the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks

pairwise trade and coexistence of money and higher return assets abstract a new theory of coexistence of money and higher return assets is set out it applies to any setting in which some trade involves an exchange of goods for assets and occurs between two people a buyer and a seller we show that there exists a function mapping the portfolios of the buyer and the seller to the trade that occurs such that i the trade is in the buyer seller core and ii some people are induced to enter the buyer seller meeting with money

government transaction policy media of exchange and prices abstract we study government transaction policies in search theoretic models of money we model government as a subset of agents who are subject to the same random matching technology and other constraints as private agents but who behave in an exogenous way regarding which objects they accept in trade and at what price the objective is to see how these policies affect private agents strategies and hence the set of equilibria we analyze how the effects depend on factors like the size of government the intrinsic properties of money and the availability and efficacy of substitutes like barter or foreign currency journal of economic literature classification numbers c78 e31 e42

leaning against the wind during financial disruptions market makers provide liquidity by absorbing external selling pressure they buy when the pressure is large accumulate inventories and sell when the pressure alleviates this paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure and order execution delays i show that competitive market makers offer the socially optimal amount of liquidity provided they have access to sufficient capital if raising capital is costly this suggests a policy role for lenient central bank lending during financial disruptions

decentralized trading with private information the paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values we consider an economy in which a large number of agents trade two assets in bilateral meetings a fraction of the agents has private information about the asset values we show that over time uninformed agents can elicit information from their trading partners by making small offers this form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy as a consequence the economy converges to a pareto efficient allocation

a tractable model of indirect asset liquidity abstract assets have indirect liquidity if they cannot be used as media of exchange but can be traded to obtain a medium of exchange money and thereby inherit monetary properties this essay describes a simple dynamic model of indirect asset liquidity provides closed form solutions for real and nominal assets and discusses properties of the solutions some of these are standard assets and money are imperfect substitutes asset demand curves slope down and money is not always neutral other properties are more surprising prices are flexible but appear sticky and an increase in the supply of indirectly liquid assets can decrease welfare because of its simplicity the model can be useful as a building block inside a larger model and for teaching concepts from monetary theory

the liquidity coverage ratio and security prices abstract what is the added value of a security which qualifies as a high quality liquid asset hqla under the basel iii liquidity coverage ratio lcr in this paper we quantify the added value in terms of yield changes and as suggested by stein 2013 call it hqla premium to do so we exploit the introduction of the lcr in switzerland as a unique quasi natural experiment and we find evidence for the existence of an hqla premium in the order of 4 basis points guided by theoretical considerations we claim that the hqla premium is state dependent and argue that our estimate is a lower bound measure furthermore we discuss the implications of an economically significant hqla premium thereby we contribute to a better understanding of the lcr and its implications for financial markets

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

monetary policy and efficiency in over the counter financial trade we develop a monetary model that incorporates over the counter otc asset trade after agents have made their money holding decisions they receive an idiosyncratic shock that affects their valuation for consumption and hence for the unique liquid asset namely money subsequently agents can choose whether they want to enter the otc market in order to sell assets and thus boost their liquidity or to buy assets and thus provide liquidity to other agents a unique feature of our model is that inflation affects welfare not only through the traditional channel i e through determining equilibrium real balances but also through influencing agents entry decisions in the financial market we use our framework to study the effect of inflation on welfare asset prices and otc trade volume in contrast to most monetary models which predict a negative relationship between inflation and welfare we find that inflation can be welfare improving within a certain range because it mitigates a search externality that agents impose on one another when they make their otc market entry decision

pairwise trade asset prices and monetary policy abstract we construct a search theoretic model where fiat money coexists with real assets and all assets can be used as a media of exchange the terms of trade in bilateral matches are determined by a pairwise pareto efficient pricing mechanism we do not have to appeal to exogenous liquidity constraints to generate asset prices that are consistent with the following facts i fiat money can be valued despite being dominated in its rate of return ii real assets with identical dividend flows can have different rates of return and iii an increase in inflation raises asset prices lowers their returns and widens the rate of return differences between assets on the normative side we show that there is a range of inflation rates that implement the first best allocation

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment

ramsey tax cycles this paper asks whether tax cycles or tax smoothing represents the optimal policy in models without any extrinsic uncertainty to answer this question i develop a general framework for studying tax cycles in a large class of models that feature various types of frictions this framework adds various wedges resembling tax wedges to the labour market to the product market and to money acquisition into an otherwise frictionless economy so that it nests a large class of models used for policy analysis i derive a criterion for this general framework that indicates when cycles are welfare improving in a frictionless economy and why frictions make cycles more likely to be optimal i then calibrate two models with frictions a labour search model and a monetary model and show that cycles are welfare improving under standard preferences copyright wiley blackwell

adjustment policies and the real exchange rate in kenya since 1975 abstract we show using several proxies that the real exchange rate in kenya has moved in accordance with the dependent economy model since 1975 the adjustment policy supported by the international monetary fund imf in the first half of the 1980s led to a rise in the kenyan real exchange rate and an improvement of its external position macroeconomic policy since 1986 however has resulted in a deterioration of the external position and is likely to result in a reduction in the real exchange rate in the near future