decriminalization and marijuana smoking prevalence evidence from australia this article uses the 2001 national drug strategy household survey to assess the impact of marijuana decriminalization policy on marijuana smoking prevalence in australia both parametric and nonparametric methods are used the parametric approach includes endogenous probit switching two part sample selection and standard dummy variable models while the nonparametric approach uses propensity score stratification matching specification analyses are also conducted a nonparametric kernel based test is constructed to select between parametric and nonparametric models and the likelihood ratio test is used to choose among parametric models our analyses favor the endogenous switching model where decriminalization increases the probability of smoking by 16 2

multiple equilibrium overnight rates in a dynamic interbank market game abstract we analyse a two period model of the interbank market i e the market where banks trade liquidity we assume that banks do not take the interbank interest rate as given but instead negotiate on interest rates and transaction volumes with each other the solution concept applied is the shapley value we show that there are a multiplicity of average equilibrium interest rates of the first period so that the average interest rate in this period does not convey any information on the expected liquidity situation on the interbank market as the banks control not only the transaction volumes but also the interest rates they can leave the interest rates constant and adjust the transaction volumes when for example a liquidity deficit becomes more likely

discounting in integrated assessments of climate change one of the key decisions that economists working on integrated studies of climate change face is the selection of the method of accounting for damages resulting from possible climate change across a long temporal scale and the method for the intertemporal comparison of the costs associated with possible greenhouse gas abatement strategies sensitivity tests show that the method applied and the resulting discount rate has a major impact on the optimal climate strategy the paper is intended to provide a short review of the various techniques that have been proposed and applied in various integrated models of climate change the underlying problem is as follows we can attempt to be consistent with the economic theory and empirical observations but in this case the derived discount rate will be on the order of 5 to 8 as a result even possibly significant damages from climate change turn out to be negligible when considered at their present value the artificially low discount rate based on ethical reasoning on the other hand makes our climate related decisions and resource allocations inconsistent with the majority of other public policy decisions

a model of intraurban employment location an application to bogota colombia this report which examines the location behaviour of manufacturing firms in urban areas is part of a world bank urban study project a theoretical model of employment location is formulated and extended to an empirical specification in the multinomial logit framework a bid rent function is derived from the profit function and captures the firms locational equilibrium situations survey data from bogota colombia provides information on i attributes of the establishment such as plant space and ii attributes of the plant site such as access to markets the estimated model is capable of predicting the location choices of different types of firms separate regression results using the same data set indicate a strong relationship between the intensity of input use and land price supporting the hypothesis that the firms respond to the substitutability of land with respect to other inputs over space the patterns of employment location in bogota are by no means random they are quite similar to those observed for large cities in the united states

an analysis of the climate change architecture abstract this paper examines the complexity of the current negotiations to avert climate change under the united nations framework convention on climate change drawing on economic game theory modelling it interprets the latest developments within the international negotiations and provides a political economy analysis of the climate change architecture it places the pursuit of international co operation via the kyoto protocol s second commitment period in the context of a country s maintenance of national interest and a flexible emissions abatement strategy accepting that countries will reject an international agreement or obligation that is seen as inimical to their economic competitiveness it incorporates a new game theory model considers how learning from such models can influence agreement design and proposes a new approach from a non monotonic polluting payoff function attention is placed on enabling conditions that entice countries to ratify a climate agreement thereby encouraging participation and accelerating a near term deployment of low carbon technologies

industrial location behaviour and regional restructuring within the fifth tiger economy evidence from the thai electronics industry the paper investigates the location behaviour of firms in the electronics industry in thailand our approach is to use a logit model in order to analyse how the characteristics of the firms and the regions are related to the location decisions of firms in these sectors the logit results throw some light on the question of the nature of agglomeration behaviour in a developing economy in which the national spatial industrial structure is dominated by a single primal city our conclusions provide tentative support for a product cycle argument of industrial concentration and dispersion

cheap talk and strategic rounding in libor submissions interbanking rates were until recently based on judgmental estimates of borrowing costs we interpret this as a cheap talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost but in times of financial stress only coarse equilibria survive we take this prediction to the data and show that banks round more frequently if the risk of the bank increases rounding is also more frequent for the more liquid short term rates and certain benchmark maturities

a search based model of the interbank money market and monetary policy implementation we present a search based model of the interbank money market and monetary policy implementation banks are subject to reserve requirements and the central bank tenders reserves interbank payments redistribute holdings and banks trade with each other in a decentralized over the counter market the central bank provides standing facilities where banks can either deposit surpluses or borrow to cover shortfalls of reserves overnight the model provides insights on liquidity trading volume and rate dispersion in the interbank market features largely absent from the canonical models in the tradition of poole 1968 and fits a number of stylized facts for the eurosystem observed during the recent period of unconventional monetary policies moreover it provides insights on the implications of different market structures

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

the intraday price of money evidence from the e mid interbank market we provide empirical evidence based on tick by tick data for the e mid euro area interbank market covering 2003 and 2004 that the overnight interest rate shows a clear downward pattern throughout the operating day thus a positive hourly interest rate half basis point implicitly emerges from the intraday term structure of the overnight rate such a pattern was not detected in the mid 1990s we explain this evolution as an outcome of the recent trend toward real time settlement the estimated intraday interest rate is lower than in the united states this is due to the different cost of central bank daylight credit

economic convergence and climate policy abstract this paper addresses the relevance of the economic convergence hypotheses between the developing and the developed world in international greenhouse gas ghg emissions negotiations the results are based on a two region the oecd and the rest of the world row neo classical growth model with exogenous technical progress different technological diffusion patterns and a set of geophysical relationships that consider an environmental externality linked to ghg emissions a game framework is taken into account in the model to capture the strategic interactions between agents the outcome of the negotiations seems indeed to depend on the economic convergence hypotheses faster economic growth of the row countries would encourage them to further mitigate carbon emissions

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

international co2 emissions control an analysis using ceta abstract this paper explores issues of international cooperation in co2 emission control we consider three cases selfish in which region 1 controls optimally given its own damage costs and region 2 does not control altruistic in which region 1 controls optimally given total worldwide damage costs while region 2 does not control and optimal in which regions 1 and 2 exercise jointly optimal control of emissions and region 1 pays region 2 to participate we find that neither region gains much in the selfish case but both regions are better off in the optimal case than in the altruistic case though region 1 s benefits are negative in both these cases

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

rethinking the economics of location and agglomeration fundamental problems exist with the classical characterisation of agglomeration economies since such definitions do not reflect the various cost issues on which firms may wish to economise a lack of understanding of the relationship between the notions of market hierarchies and locational behaviour leads to confusion not only in applied economic interpretation but more fundamentally in the construction of theoretical location models in particular neo classical location theory can be shown to be crucially flawed as a basis for spatial analysis this paper therefore attempts to provide an alternative definition of the various types of agglomeration economies such that the various strands of economic theory might be used in a more rigorous manner in the discussion of spatial increasing returns

distribution of potential gains from international environmental agreements the case of the greenhouse effect abstract international negotations between countries will be needed to reach a pareto efficient solution for global environmental problems such as the enhanced greenhouse effect we try to quantify how the potential gains derived from cooperation would be distributed among countries a weighted sum of all countries welfare functions is used as the global welfare function and three different cooperative solutions are considered thefirst best fb thenash bargaining nb and thekalai smorodinsky ks the main result obtained from the simulation of the theoretical model is that although at the world level gains from cooperation are quite similar in all three cooperative solutions distribution of these gains between countries is very different in the fb solution compared to the nb and the ks solutions

interest rate dispersion and volatility in the market for daily funds abstract the purpose of this paper is to study the determinants of equilibrium in the market for daily funds we use the eonia panel database which includes daily information on the lending rates applied by contributing commercial banks the data clearly show an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period these increases are highly correlated we design a model to account for these empirical facts our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period this reduction in the elasticity together with market segmentation and heterogeneity is able to generate distributions for the interest rates and quantities traded with the same properties as in the data we also investigate the effects of the changes in the eurosystem s operational framework enacted on march 2004 for interest rate behaviour

monetary policy transmission with interbank market fragmentation this paper shows how interbank market fragmentation disrupts the transmission of monetary policy fragmentation is the fact that banks depending on their country of location have different probabilities of default on their interbank borrowings once fragmentation is introduced into standard theoretical models of monetary policy implementation excess liquidity arises endogenously this leads short term interest rates to depart from the central bank policy rates using data on monetary policy operations i show that this mechanism has been at work in the euro area since 2008 the model is used to analyze conventional and unconventional monetary policy measures

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

a model for the federal funds rate target this paper is a statistical analysis of the manner in which the federal reserve determines the level of the federal funds rate target one of the most publicized and anticipated economic indicators in the financial world the paper introduces new statistical tools for forecasting a discrete valued time series such as the target and suggests that these methods in conjunction with a focus on the institutional details of how the target is determined can significantly improve on standard vector autoregression forecasts of the effective federal funds rate we further show that the news that the fed has changed the target has statistical content substantially different from the news that the fed failed to make an anticipated target change causing us to challenge some of the conclusions drawn from standard linear var impulse response functions

liquidity regulation and the implementation of monetary policy in addition to revamping existing rules for bank capital basel iii introduces a new global framework for liquidity regulation one part of this framework is the liquidity coverage ratio lcr which requires banks to hold sufficient high quality liquid assets to survive a 30 day period of market stress as monetary policy typically involves targeting the interest rate on loans of one of these assets central bank reserves it is important to understand how this regulation may impact the efficacy of central banks current operational frameworks we introduce term funding and an lcr requirement into an otherwise standard model of monetary policy implementation our model shows that if banks face the possibility of an lcr shortfall then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

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

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

voluntary reserve targets we study monetary policy implementation through an operating regime involving voluntary reserve targets vrts operating regimes based on reserve requirements may lead to a collapse in interbank trade as they have since the financial crisis we show that no matter the abundance of reserves vrts encourage market activity and support the central bank s control over interest rates we consider i the impact of anticipated and unanticipated liquidity injections by the central bank on market outcomes and ii a comparison with the implementation framework currently adopted by the federal reserve overall a vrt framework may provide several advantages over other frameworks

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

interest rate corridors and reserves abstract this paper evaluates reserves regimes versus interest rate corridors which have become competing frameworks for monetary policy implementation rate corridors relying on lending and deposit facilities to create ceilings and floors for overnight interest rates evince mixed results on controlling volatility reserve requirements allow period average smoothing of interest rates but even if remunerated are subject to reserve avoidance activities a system of voluntary period average reserve commitments could offer equivalent rate smoothing advantages if central banks created symmetric opportunity costs of meeting or falling short of period average reserve requirements or commitments they could achieve flat reserve demand on settlement day

the over the counter theory of the fed funds market a primer we present a dynamic over the counter model of the fed funds market and use it to study the determination of the fed funds rate the volume of loans traded and the intraday evolution of the distribution of reserve balances across banks we also investigate the implications of changes in the market structure as well as the effects of central bank policy instruments such as open market operations the discount window lending rate and the interest rate on bank reserves

portfolio choice and pricing in illiquid markets abstract this paper studies portfolio choice and pricing in markets in which immediate trading may be impossible it departs from the literature by removing restrictions on asset holdings and finds that optimal positions depend significantly and naturally on liquidity when expected future liquidity is high agents take more extreme positions given that they do not have to hold those positions for long when they become undesirable consequently larger trades should be observed in markets with more frequent trading liquidity need not affect the price significantly however because liquidity has offsetting impacts on different agents demands this result highlights the importance of unrestricted portfolio choice the paper draws parallels with the transaction cost literature and clarifies the relationship between the price level and the realized trading frequency in this literature

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

a model of job and worker flows we develop a model of gross job and worker flows and use it to study how the wages permanent incomes and employment status of individual workers evolve over time and how they are affected by aggregate labor market conditions our model helps explain various other features of labor markets such as the size and persistence of the changes in income that workers experience due to displacements or job to job transitions the length of job tenures and unemployment duration and the amount of worker turnover in excess of job reallocation we also examine the effects that labor market institutions and public policy have on the gross flows as well as on the resulting wage distribution employment and aggregate output in the equilibrium from a theoretical point of view we study the extent to which the competitive equilibrium achieves an efficient allocation of resources

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

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

a regional dynamic general equilibrium model of alternative climate change strategies outcomes and noncooperative equilibria this study finds that cooperative policies show much higher levels of emissions reductions than do noncooperative strategies that there are substantial differences in the levels of controls in both the cooperative and the noncooperative policies among different countries and that high income countries may be the major losers from cooperation jel h41 q4 q2 q20

a theory of money and marketplaces this article considers an infinitely repeated economy with divisible fiat money the economy has many marketplaces that agents choose to visit in each marketplace agents are randomly matched to trade goods there exist a variety of stationary equilibria in some equilibrium each good is traded at a single price whereas in another every good is traded at two different prices there is a continuum of such equilibria which differ from each other in price and welfare levels however it is shown that only the efficient single price equilibrium is evolutionarily stable

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

liquidity requirements and the interbank loan market an experimental investigation abstract we develop a stylized interbank market environment and use it to evaluate with experimental methods the effects of liquidity requirements baseline and liquidity regulated regimes are analyzed in a simple shock environment which features a single idiosyncratic shock and in a compound shock environment in which the idiosyncratic shock is followed by a randomly occurring second stage shock interbank trading of the illiquid asset follows each shock in the simple shock environment we find that liquidity regulations reduce the incidence of bankruptcies but at a large loss of investment efficiency in the compound shock environment liquidity regulations not only impose a loss of investment efficiency but also fail to reduce bankruptcies