carbon tax and opec s rents under a ceiling constraint we study the markov perfect nash equilibrium mpne of a game between oil importing countries who seek to maintain the atmospheric carbon concentration under a given ceiling and oil exporting countries the oil importing countries set a carbon tax and the oil exporting countries control the producer price we obtain implicit feedback rules and explicit non linear time paths of extraction carbon tax and producer price consumers are always able to reap some share of the scarcity and monopoly rents whereas producers partially pre empt the carbon tax only if the marginal damage under the ceiling is small we compare the mpne to the efficient open loop and cartel without tax equilibria

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

a characterization of erratic dynamics in the overlapping generations model abstract in this paper we characterize and give examples o wide classes of utility functions which generate erratic dynamics in the standard deterministic overlapping generations model erratic dynamics refers to feasible trajectories which are bounded but which do not converge to stationary points or periodic orbits we show that such trajectories are pareto efficient we introduce credit into the model and show how a constant credit expansion rate can result in erratic trajectories in prices and the real value of credit finally we briefly discuss certain technical aspects of the mathematics used and the statistical nature of the dynamics that can arise from deterministic dynamical systems

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

an equilibrium model with involuntary unemployment at flexible competitive prices and wages this paper presents a general equilibrium model in which all prices and quantities transacted are the direct choices of econom ic agents there is no walrasian auctioneer multiple subgame perfect equilibria exist with prices and wages at their walrasian levels among the equilibrium allocations are the walrasian ones but there a re also outcomes in which price and wage taking workers are rationed in the labor market and are unable to sell all the labor they want a t the prevailing wage this involuntary unemployment results from sel f fulfilling expectations of inadequate excess demand as in some inte rpretations of keynes s ideas copyright 1987 by american economic association

pigouvian taxation of energy for flow and stock externalities and strategic noncompetitive energy pricing abstract the literature on energy and carbon taxes is by and large concerned about the derivation of globally efficient strategies in contrast this paper considers the dynamic interactions between cartelized energy suppliers and a consumers government that collectively taxes energy carriers for pigouvian motives two different kinds of external costs are associated with energy consumption flow e g acid rain and stock externalities e g global warming the dynamic interactions between a consumers government and a producers cartel are modeled as a differential game with a subgame perfect nash equilibrium in linear and nonlinear markov strategies the major implications are that the nonlinear solutions are pareto inferior to the linear strategies and energy suppliers may preempt energy taxation and thereby may raise the price at front however this effect diminishes over time because the producers price declines while taxes increase

a hybrid fiat commodity monetary system in this paper i describe a monetary system in which backing is provided for the government s liabilities by way of contingent resort to taxes the system is studied within the context of a one good pure exchange model of two period lived overlapping generations in which aside from various uniform boundedness assumptions considerable diversity is allowed both within and across generations two results are established i the existence of at least one perfect foresight competitive equilibrium and ii the pareto optimality of any such equilibrium the monetary system studied has some of the features of a commodity money system with a large seignorage spread between bid and ask prices one crucial feature of the system is that the government by taxing stands ready at any time to convert its outstanding liabilities into the commodity at an announced price in an important sense the hybrid scheme is a mixture of a fixed supply fiat scheme and a pure tax transfer scheme a social security scheme it makes some use of market pricing of net government indebtedness and some use of taxes and transfers its one advantage vis a vis the fixed supply fiat scheme is that any equilibrium under the hybrid scheme is pareto optimal for the fixed supply fiat scheme one can at best demonstrate that there exists an optimal equilibrium it is well known that there can exist nonoptimal equilibria under that scheme the presumed advantage of the hybrid scheme vis a vis the pure tax transfer scheme is its lesser use of taxes and transfers i say presumed because the framework i set out is not rich enough to imply that less use of taxes and transfers is preferable to more use of taxes and transfers

keynes lucas and scientific progress in one of those marvelous coincidences of intellectual history robert lucas was born the year after the publication of keynes general theory for the first thirty five years of their mutual lives the two apparently coexisted in harmony but their relationship has been tumultuous ever since lucas has frequently criticized keynesian economics as poor science and it is precisely in that spirit that i want to address the debate today we all know the old joke about the professor who uses the same exam questions year after year but changes the answers that joke encapsulates all too well what has happened to macroeconomics these last fifteen years and seems to reflect poorly on economics as a science or does it on second thought the best answers to scientific questions do change as new observations are made as new experiments are run and as better theories are developed the issue is whether the answers to important questions in macroeconomics have changed for good scientific reasons or for other reasons the joke provides the framework for my talk i will pose eight exam questions and for each one i will summarize the answers given by keynes by lucas and his followers and by modern keynesians i pick only questions that are answered differently by keynesians and lucasians and that are central to contemporary macroeconomic debates the focus is on whether the keynesian or new classical answers have greater claim to being scientific each student must answer every question i are expectations rational

nonlinear strategies in dynamic duopolistic competition with sticky prices abstract we discuss nonlinear strategies in an infinite horizon duopoly game with sticky prices where firms maximize their discounted sum of profit we construct a stationary feedback equilibrium without guessing value functions and feedback strategies that solve the hamilton jacobi equation for this purpose we study the auxiliary equation that is derived from the hamilton jacobi equation we show that the domain of the state space plays an crucial role in characterizing feedback equilibria and discuss several implications of this observation in particular we find that when the upper bound of the state space is not very high previously unknown feedback equilibria emerge

optimal multiperiod contracts and the gain from enduring relationships under private information informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts in an illustrative risk sharing model even relatively short two period contracts can be mutually beneficial if there is private information though one period contracts suffice otherwise further contracts which are pareto optimal relative to the environment and the information structure are defined and partially characterized an example illustrates how otherwise inefficient intertemporal tie ins can be used optimally to mitigate incentive problems the obvious borrowing lending schemes are not private information pareto optimal in these period by period actions are not sufficiently constrained discounting affects the form of the optimal contract but none of these qualitative conclusions

some macro implications of risk using the capital asset pricing model as the financial sector of a conventional rational expectations macro model an increase in expected inflation reduces the long run capital stock contrary to the usual result this occurs because the induced fall in real balances increases equity s share in the market raises equity s beta and discount rate and reduces investment increases in the variance of disturbances to aggregate demand reduce the capital stock while increases in the variance of inflation raise the stock a proportionate increase in both variances reduces the captial stock copyright 1987 by ohio state university press

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

capital income taxation and perfect foresight abstract this paper develops a perfect foresight model of capital income taxation in a representative household neoclassical one sector framework the household sector is based on intertemporal utility maximization the main result is the equivalence of a perfect foresight solution and an artificial central planning solution if there is no tax this is the equivalence of a market equilibrium and social optinum the equivalence result is used to deduce the implications of a partial tax reform policy it is shown that a partial reform increases capital at each time following the initial period of the program

legal restrictions sunspots and peel s bank act the real bills doctrine versus the quantity theory reconsidered this paper considers two questions i what is the purpose of legal restrictions intended to separate money from credit markets and ii is such a separation desirable it is argued that historical legal restrictions meant to achieve such a separation were designed to preclude the occurrence of sunspot equilibria it is also shown that a coherent model can be constructed in which sunspot equilibria exist in the absence of legal restrictions but not if money and credit markets are separated nevertheless there is no obvious welfare justification for such a separation

growth trends cyclical fluctuations and welfare with non expected utility preferences abstract using standard time separable discounted expected utility eu models lucas models of business cycles 1987 and others argue that growth trends have a crucial and cyclical fluctuations a trivial effect on individuals utility these conclusions are drastically altered if instead non eu preferences are assumed

the value of disease prevention vs treatment we present an integrated valuation model for diseases that are life threatening the model extends the standard one period value per statistical life model to three health prospects healthy ill and dead we derive willingness to pay values for prevention efforts that reduce a disease s incidence rate as well as for treatments that lower the corresponding health deterioration and mortality rates we find that the demand value of prevention always exceeds that of treatment people often overweight small risks and underweight large ones we use the rank dependent utility framework to explore how the demand for prevention and treatment alters when people evaluate probabilities in a non linear manner for incidence and mortality rates associated with common types of cancers the inverse s shaped probability weighting found in experimental studies leads to a significant increase in the demand values of both treatment and prevention

trade with polluting nonrenewable resources abstract the paper considers nonrenewable resource extraction in a situation where the resource buyers have formed a government which applies emission taxation for slowing pollution accumulation and the sellers are competitive or a resource cartel the noncompetitive situation is studied as a stackelberg differential game which the cartel leads it is first assumed that extraction costs do not depend on the resource stock level and that the pollution stock does not decay in the time consistent and markov perfect equilibrium the sellers monopoly power vanishes asymptotically the sellers market power reduces the buyers emission tax at each point in time in the stackelberg equilibrium the emission tax is below the marginal present value of pollution damage if pollution decays and extraction costs depend on the resource stock level buyers have monopsony power and the ability of sellers to receive emission tax revenues is weakened when the rate of pollution decay is high the producer price falls below the pareto optimal level

the exploitation of fossil fuels under the threat of global warming and carbon taxes a dynamic game approach this paper considers efficient and monopolistic extraction of non renewable energy resources when the resource consumption leads simultaneously to a stock externality global warming the case of monopolistic supply leads to a dynamic game between cartelised producers and a consumers government for this game we compute linear markov perfect strategies that are characterized by preemption of the tax at the wellhead when compared with the open loop solution unfortunately the general asymmetric two state variable model does not allow for an explicit analytical solution therefore a simplified version with one state variable neglecting depreciation of the stock of the pollutant is studied and a numerical example is presented it turns out that the simplified and analytically solved framework provides a good approximation of the initial phase of the transient behaviour but not of the long run