sustainability of the friedman rule in an international monetary policy game this article develops a two country monetary economy model in order to analyze the international monetary policy game between governments and the domestic monetary policy game between each government and its private sector we prove that if governments can commit to their own private sectors the cooperative equilibrium of the game between governments is for them to follow the friedman rule when governments lack such ability to commit we find that the friedman rule is more likely to be sustained in our open economy model than in the closedeconomy model of ireland jel e31 e52 e61 one recurring theme in the analysis of policy making is that in many situations policymakers can benefit from the opportunity to make a binding commitment to restrict their activities one such situation is what is known as the time consistency problem in monetary policy making a government or its monetary authority out of good intention may find it beneficial to generate unexpected inflation to fix some nonmonetary distortion in the economy for example goods market inefficiency due to monopoly power that is characterized by higher than efficient product prices this first best monetary policy however is not time consistent in the sense that firms foresee the government s incentive to impose monetary surprises and set their nominal prices at a higher level as a result the government s attempts to remedy the

economic deregulation days of reckoning for microeconomists economic deregulation of american industry is one of the most important experiments in economic policy of our time 1 in 1977 17 percent of u s gnp was produced by fully regulated industries 2 by 1988 following ten years of partial and complete economic deregulation of large parts of the transportation communications energy and financial industries that total had been cut significantly to 6 6 percent of gnp 3 the political forces behind the decision to change the market conditions under which roughly 600 billion of u s output is produced were strong and varied but according to political scientists martha derthick and paul quirk 1985 p 36 deregulation would never have occurred if economists especially microeconomists had not generally supported it through their research 4 in retrospect it is fair to ask were microeconomists able to develop a theoretical and empirical framework to explain regulation and its effects and to form predictions of deregulation s effects were they able to predict the actual effects of deregulation this paper surveys the evidence to address these questions and of

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

sustainable monetary policies abstract this paper uses a model with utility maximizing households monopolistically competitive firms and sticky goods prices to derive a version of barro and gordon s time consistency problem for monetary policy where the government s objectives are consistent with a representative household s preferences the paper applies the methods of chari and kehoe to characterize the entire set of time consistent or sustainable outcomes it goes on to find conditions under which the friedman rule the optimal policy under commitment can be supported when the government lacks a commitment technology

a quantitative analysis of optimal sustainable monetary policies abstract this study examines the quantitative properties of optimal sustainable monetary policies using a monetary model with a stabilization bias as in kurozumi 2008 the optimal sustainable policy is a strategy considered in the absence of commitment technologies however it is implemented following an optimal quasi sustainable policy derived by assuming that the commitment technologies are present this study finds that solving for the policy function of the optimal quasi sustainable policy yields a result basically identical to the ramsey optimal commitment policy under a set of parameters commonly used in the literature the simulation shows two further results policymakers have incentive to deviate from the ramsey optimal commitment policy when the lagged output gap is large and the optimal quasi sustainable policy endogenously diminishes the steadfastness of policymakers commitment

dynamics of entry and exit of firms in the presence of entry adjustment costs abstract this paper presents a simple model of industry dynamics with entry adjustment costs these costs imply a non instantaneous adjustment path to the steady state so that the model permits the short run and long run characterization of industry dynamics in a single framework the type of the steady state zero entry and exit or positive entry and exit with the co existence of high efficiency and low efficiency firms depends on the fixed cost of entry as well as entry adjustment costs the short run dynamics exhibits non monotonicity if persistence in efficiency over time is not too high the model is consistent with the empirical observations that the total number of firms and net entry follow non monotonic paths and entry and exit are positively correlated over time

inflexible rules in incentive problems in practice contracts involve standard terms or rules allowing for variations only under exceptional circumstances we develop a simple model in which optimal contracts display this feature even in the absence of transactions costs rules arise when an agent has countervailing incentives to misrepresent private information these incentives are created by endowing the agent with a critical factor of production ex ante applications in regulatory labor and legal settings

openness and inflation a general equilibrium model of a small open economy is developed to analyse the optimal rate of inflation under discretion once agents welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship a greater degree of openness may lead the policy maker to want to exploit the short run phillips curve more aggressively even if involves a smaller short run benefit because changes in export demand affect the terms of trade inflation can then be higher in a more open economy

money is an experience good competition and trust in the private provision of money the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money is studied with commitment trust is automatically achieved and competition ensures efficiency without commitment competition plays no role trust does play a role but requires a bound on efficiency stationary inflation must be non negative and therefore the friedman rule cannot be achieved the quality of money can be observed only after its purchasing capacity is realized in this sense money is an experience good

sustainability flexibility and inflation targeting abstract this paper examines sustainability of an inflation targeting policy regime in terms of sustainable equilibrium using a canonical model in the recent literature overly flexible inflation targeting is not sustainable strict inflation targeting is sustainable only when shock persistence is high enough

recursive monetary policy games with incomplete information abstract this paper provides recursive methods for analyzing the credible equilibria of an incomplete information monetary policy game the policy game is one in which a discretionary government has a short run temptation to engage in a surprise monetary expansion it also has the opportunity to imitate a government that always implements the ex ante optimal monetary policy actions we derive an algorithm for computing the set of credible equilibrium payoffs we use this algorithm to explore the idea that incomplete information monetary policy games of this kind have fewer equilibria and less indeterminacy than their complete information counterparts

on the efficiency effects of private dis trust in the government abstract we consider a version of the seminal kydland prescott model where in each period some private agents believe the policy announcements made by the government the other agents follow a standard optimizing strategy the fraction of agents who believe the government changes over time according to a word of mouth learning process we show that the initial number of believers and the speed of learning can have drastic consequences for the policy followed and the losses experienced by the different agents in particular the utility of the private sector may jump upwards if the initial number of believers exceeds a given threshold

a framework for the analysis of moderate inflations abstract optimal monetary policy is studied in a model with no contractual restrictions or physical costs of changing prices nevertheless the price level is sticky in a range of mark up indeterminacy and inflation occurs only when employment presses against capacity under full information the monetary authority can exploit price level stickiness to minimize the mark up and keep employment at a constrained optimum without inflation under uncertainty negative aggregate demand shocks produce real contractions and positive shocks raise the price level the monetary authority can raise the likelihood that aggregate demand will maximize employment but at the cost of higher expected inflation

credible monetary policy in an infinite horizon model recursive approaches abstract this paper develops recursive methods to study optimal and time consistent policy in dynamic models we analyze a version of calvo s 1978 monetary model and show that its time consistent outcomes can be completely characterized as the largest fixed point of either of two operators recursive application of these operators provides a computing algorithm which always converges to the set of time consistent outcomes finally we obtain valuable information about the nature of time consistent outcomes it is discovered in particular that all such outcomes are markovian the methods obtained are intuitive and should be useful for many applications journal of economic literatureclassification numbers e61 e52 c61

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

delegation time inconsistency and sustainable equilibrium this paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government s strategy the method of chari and kehoe 1990 sustainable plans journal of political economy 98 4 783 802 is applied to characterize the entire set of sustainable outcomes countering mccallum s 1995 two fallacies concerning central bank independence american economic review 85 2 207 211 second fallacy delegation is able to eliminate the time inconsistency problem with the commitment policy being sustained under discretion for any intertemporal discount rate

optimal sustainable monetary policy in recent monetary policy literature optimal commitment policy or its variant from a timeless perspective has been studied with emphasis on welfare gains from policy commitment regardless of its time consistency problem called a stabilization bias with an optimizing model used in the literature we examine sustainable equilibrium of chari and kehoe 1990 and study optimal sustainable policy the policymaker s strategy in the best sustainable equilibrium in the absence of commitment technologies calibrated versions of the model show that the ramsey equilibrium generated by optimal commitment policy is not achievable suggesting that optimal sustainable policy is the desirable policy benchmark from the viewpoint of policy operationality the latter policy involves some issues due to its dependence on the entire history of lagrange multipliers on a sustainability constraint as a guidepost for actual policy conduct that contains no such issues and attains higher social welfare than discretionary policy does we propose a sustainable policy conducted by following a policy rule that achieves the best markov equilibrium

survival duration of plants evidence from the us petroleum refining industry abstract this paper presents a duration analysis on the survival of us petroleum refining plants for the 1981 1986 period when the industry as a whole declines in response to the decontrol of crude oil markets the purpose is to examine the duration dependence and determinants of post deregulation plant lifetimes the weibull model with the correction for unobserved individual heterogeneity provides a better fit to the data empirical results show that plant size age regulatory subsidies technology use and multiplant coordination are key determinants of refinery life duration after deregulation in addition major integrated oil companies tend to make timely restructuring via refinery closures and sales the interactive effects of size and technology use and of multiplant coordination and integrated organization are also important to the refinery survival

inflation and reputation with generic policy preferences this paper analyzes a reputational equilibrium for inflation under the generic assumption that monetary policy reflects proximate preferences for low expected inflation and positive unexpected inflation the paper stresses the qualitative implication that in a reputational equilibrium the policymaker behaves as if he is concerned about controlling inflation even though he does not have a direct preference for a low actual inflation rate the analysis also shows how the equilibrium inflation rate depends on a decision interval that reflects the underlying real objectives of monetary policy and that determines how fast private agents would react to opportunistic behavior by the policymaker copyright 1990 by ohio state university press

discretionary monetary policy with costly inflation this paper considers how an output cost of inflation affects the discretionary inflation bias we show that conditions exist under which costly inflation actually increases this inflation bias

firm entry and exit in the canadian manufacturing sector 1970 1982 this paper measures the importance of entry and exit to the canadian manufacturing sector in the 1970s it focuses on the size of entrants as they move from a stage of infancy to adolescence the exit rates of births their length of life and the growth path of entrants are presented distinctions are made between greenfield and merger entry while entrants are small at birth the cumulative effect of successive cohorts of entrants in the 1970s adds up to a significant fraction of all firms and total sales by 1979

hyteresis in import prices the beachhead effect this paper shows that temporary real exchange rate fluctuations can have persistent hysteretic effects on trade specifically when market entry costs are sunk sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis this simple result has strong implications for exchange rate theory t rade policy and estimation of trade equations empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in u s import prices namely the aggregate pass through equation of exchange rates to import prices shifted in the 1980s the shift s nature and timing is broadly consistent with the hysteresis hypothesis copyright 1988 by american economic association

technological change entry and stock market dynamics an analysis of transition in a monopolistic industry we consider the share price dynamics induced by changes in technological progress perhaps due to the introduction of a new technology or institutional reforms and the resultant entry of firms the focus is not so much in comparing the steady states before or after the change but rather on the transitional dynamics of the industry or economy as it adjusts the model is one with efficient markets and perfect foresight where fundamentals drive the stockmarket value should we expect technological progress to lead only to increases in the level of the stockmarket monotonic dynamics or should we expect nonmonotonic behavior of boom followed by partial bust a u shaped or overshooting dynamic is it possible to have share values falling even when the underlying technology is improving we model a stylized monopolistic industry or economy in a continuous time generalequilibrium setting with no uncertainty and perfect foresight we adopt a model of entry found in sanghamitra das and satya p das 1997 datta and dixon 2000 and marta aloi and dixon 2001 in which the cost of entry is increasing in the flow of entry due to some congestion effect or other externality the flow of entry is determined by an intertemporal arbitrage condition that equates the cost of entry with the present value of incumbency this gives rise to a dynamic zero profit condition the present value of incumbents in each instant is equal to the cost of entry we first consider the case of a step increase in the level of technology with no other underlying growth when an unanticipated technological improvement occurs it causes a stock market boom there is a jump in the share value the current profitability of incumbents and an increase in the flow of entry however eventually entry drives the profit level back to zero and shares decline back to the initial value the initial boom is followed by a bust we next consider the case of an economy with constant exponential technology growth what happens when the pace of technological change unexpectedly increases there is an upward jump in the stock market value of firms this can overshoot the new balancedgrowth path with the possibility that there will be a u shaped dynamic the initial boom is followed by a slump before tracking back to the higher growth rate if the initial jump overshoots the new balanced growth path there is a downward pull of share prices toward the new balanced growth path which may dominate this stock market behavior reflects the behavior of entry after an initial rush there is a temporary slowdown before eventually getting back on track a similar pattern can occur if the change is anticipated we believe that this might be some part of the explanation of the behavior of the stock market in the late 1990 s although real life is much more complicated see jeremy greenwood and boyan jovanovic 1999 the initial technological change causes a bonanza of profitable investment opportunities resulting in high profits for incumbents and many new firms being set up the increase in entry reduces profitability and this may cause the flow of entry to reduce if only in the short run finally however the long run growth opportunities begin to come through and the economy gets onto the new higher growth path

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

on credible monetary policy and private government information credible and optimal monetary policies are considered in environments in which the government observes a signal that is correlated with the state of the economy when the signal is public information it is optimal for monetary policy to be conditioned upon it the extent to which such conditioning should occur when the signal is the private information of the government depends upon the government s incentives to misrepresent information it is shown that in some cases the ramsey policy is incentive compatible in others it is not in the latter cases policy must be constrained to be incentive compatible this may result in penalty phases along the equilibrium path following apparent mistakes by the policy maker it may result in the optimal monetary policy making no use of the signal journal of economic literature classification numbers c73 e52 e58

the suspension of the gold standard as sustainable monetary policy abstract this paper models the gold standard as a state contingent commitment technology that is only feasible during peace monetary policy during war when the gold convertibility rule is suspended can still be credible if the policymaker s plan is to resume the gold standard in the future the dsge model developed in this paper suggests that the resumption of the gold standard was a sustainable plan which replaced the gold standard as a commitment technology and made monetary policy time consistent trigger strategies support the equilibrium private agents retaliate if a policymaker defaults on its plan to resume the gold standard

priority service pricing investment and market organization tingent forward delivery contracts offered by a seller each customer s selection of one contract from the menu determines the customer s service order or priority in each contingency the seller rations supplies by serving customers in order of their selected priorities until the supply is exhausted or all customers are served various forms of priority service are widely

ruling out pareto dominated monetary equilibria abstract it is well known that under nominal money supply rules accomplished through lump sum transfers non uniqueness and non optimality of the resource allocation often obtains in monetary models we show that uniqueness and optimality of the resource allocation obtains if the monetary authority conducts friedman s rule through open market operations our result necessitates and we provide a clarification of existing irrelevance theorems for open market operations our result also provides a partial resolution of the uniqueness efficiency conflict of nominal money supply rules raised by woodford economic theory 4 1994 345 380

central bank design in general equilibrium we study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital theoretic general equilibrium economy we consider three institutional arrangements for determining monetary policy the first unconditional majority voting always leads to a substantial inflation bias the second a simple form of bargaining which we interpret as a policy board generally improves on the unconditional majority voting outcome finally we consider a constitutional rule which always achieves the social optimum

optimal random monetary policy with nominal rigidity abstract this paper studies a money in the utility function model with imperfect competition and one period ahead nominal price setting under standard assumptions on preferences friedman s rule setting the money growth rate equal to the household time discount factor generates an equilibrium that is optimal within the class of deterministic policies we then provide conditions under which a random monetary policy increases ex ante expected welfare relative to friedman s rule the result obtains because random policy can reduce the distortion associated with imperfect competition our result exhibits original features relative to existing cases of welfare improving random monetary policy such as polemarchakis and weiss j econom theory 15 1977 345

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

monetary policy and policy credibility theories and evidence within the past decade there has been a significant shift in attitude by many western industrialized countries toward the objectives and conduct of national economic policy the events of the 1970s accelerating inflation and stagnant economic growth motivated the view that inflation had created its own stubborn self sustaining momentum that either was not amendable to the influences of conventional macroeconomic policy or else would yield to such influences only at unacceptable costs this led to the development of a program aimed at reestablishing control over prices while minimizing any adverse consequences of anti inflationary policies on output and employment seen as a new monetary experiment the essential ingredients included prudent financial management abstinence from discretionary intervention commitment to intermediate targets and above all prior announcement of these policies evidence of this program and its effects can be found oni the continents of europe north america and latin america and provide further important lessons in anti inflationary management this paper is a survey of recent theoretical developments in monetary policy which among other issues attempt to explain one rationale for this program and the likely consequences thereof to the extent that the new program of monetary and fiscal reform was deliberately made public and impressed upon citizens as an overriding commitment of governments in advance of its execution reflects a prevailing opinion that economic policies are more effective if they are credible to private economic agents this view emphasized forcefully by william fellner 1976 1979 may be seen as being mainly due to the assimilation of the rational expectations hypothesis

strategic monetary policy with non atomistic wage setters monetary policy analyses usually assume an atomistic private sector thereby ignoring potential interactions between policy and wage setting decisions yet non atomistic wage setters are a key feature of several industrialized economies we study the economic consequence of non atomistic agents and show that this qualifies previous results on the effects and desirability of a conservative central banker in particular the central bank aversion to inflation may have a permanent effect on structural employment while no such effect emerges with atomistic agents

contributions of neoclassical economics to public utili iy analysis neoclassical economics the dominant economics paradigm has influenced and been influenced by developments in regulated industries we identify major theoretical and empirical accomplishments discuss the impactofthese accomplishmentsonpolicydevelopment andlist the channelsthrough which the impacts are madepossible we then discuss regulatorypolitics lack ofresearchperspective an overly narrow focus on economic efficiency and the academic profession as factors limiting the impact of neoclassical economics on public policy

entry exit and diffusion with learning by doing early entry has the advantage of higher revenues per unit of output early on late entry has the benefit of learning from the experience of earlier entrants and hence lower production costs the advantages are balanced off in a continuous time perfect foresight equilibrium competition generates s shaped diffusion and staggered entry and exit a monopolist will innovate less than a competitive industry but the innovation that he does do he will do sooner copyright 1989 by american economic association

firm entry excess capacity and endogenous productivity abstract we show that sluggish firm entry causes productivity to vary endogenously in response to technology shocks the endogenous productivity effect is caused by incumbent firms utilizing excess capacity as entry adjusts we develop a nonparametric model of endogenous sunk costs and monopolistic competition to show that imperfect competition and dynamic entry are necessary and jointly sufficient conditions for endogenous productivity fluctuations quantitatively we show the endogenous productivity effect is as large as that from a traditional capital utilization effect

central bank reputation in a forward looking model this paper examines whether reputation concerns can induce the central bank to implement the time inconsistent optimal monetary policy in the standard new keynesian model interestingly the forward looking nature of this model enables us to account for the coordination of the private agents on the punishment length of their trigger strategy our results suggest that both the inflation bias and the stabilization bias can be overcome by a reputation concerned central bank for the calibrations used in the literature these results enable us to endogenize woodford s timeless perspective and tend to weaken the case for recent monetary policy delegation proposals

a simple approach to international monetary policy coordination this paper analyzes the strategic interaction between the monetary policies of two countries in an intertemporal general equilibrium model with nominal rigidities and imperfect competition it offers an excursus on non cooperative towards cooperative solutions all the results can be read by comparing the strength of the two biases the monopolistic distortions and the terms of trade externalities in the best feasible allocation the larger country retains some monopolistic distortions while the smaller country reaches the competitive level

entry and exit over the industry life cycle this article presents a theoretical model of the rivalry between two firms in a market that undergoes a life cycle of growth and eventual decline firms in this market have the option of exit and reentry in the equilibrium for the growth phase high entry costs can act like high exit costs thereby conveying a commitment advantage for some parameter configurations this advantage is sufficient to enable a high costfirm to preempt its lower cost rival during the decline phase the smaller duopolist is able to outlast its rival provided that the smaller firm s reentry costs are positive

sustainable plans and debt abstract this paper presents a simple general equilibrium model of optimal fiscal policy similar to that of lucas and stokey j monet econ 12 1983 55 93 except that we let the government default on its debt we consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we concentrate on trigger mechanisms which specify reversion to the markov equilibrium after deviations by the government and show that such mechanisms cannot support equilibria with positive debt we go on to show by way of examples that there can be more complicated trigger mechanisms which support positive debt journal of economic literature classification numbers e61 e62

the dynamic effects of currency union on trade abstract the response of trade to a monetary union is a dynamic process an empirical study of the european monetary union finds that the extensive margin of trade in new goods responded several years ahead of emu implementation and ahead of overall trade volume a dynamic rational expectations trade model shows that early entry of new firms in anticipation is explainable as a rational forward looking response to news the model helps identify which types of trading frictions are reduced by a currency union and shows how new entry can be affected by uncertainty about emu

time consistent monetary policy with endogenous price rigidity abstract i characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion firms have the option to increase their frequency of price change at a cost in response to higher inflation previous studies which assume a constant degree of price rigidity across inflation regimes find two time consistent equilibria one with low inflation the other with high inflation in contrast when price rigidity is endogenous the high inflation equilibrium ceases to exist hence time consistent equilibrium is unique this result depends on two features of the analysis 1 a plausible quantitative specification of the fixed cost of price change and 2 the presence of an arbitrarily small cost of inflation that is independent of price rigidity