a theory of commerce abstract the theory of commerce advanced here captures prominent features of retail trade large employment congestion effects anonymous posted prices and quantity discounts this theory is built around a directed search model where buyers preferences are private information the analytical solution is easily inserted in a neoclassical growth framework in this framework the parameters of retail trade are calibrated using commercial margins and employment welfare properties depend on the sellers ability to charge two tier prices with two tier prices the directed search equilibrium is efficient otherwise it is not this contrasts with the full information benchmark where directed search is always efficient

the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

residual wage disparity and coordination unemployment how much of residual wage dispersion can be explained by an absence of coordination among firms to answer we construct a dynamic directed search model with identical workers where firms can create high or low productivity jobs and are uncoordinated in their offers to workers calibrated to the u s economy workers can exploit ex post opportunities once approached by firms and can conduct on the job search the stationary equilibrium wage distribution is hump shaped skewed significantly to the right and with baseline parameters generates residual dispersion statistics 75 90 of those found empirically however the model underestimates the average duration of unemployment

precautionary demand for money in a monetary business cycle model we investigate the quantitative implications of precautionary demand for money for business cycle dynamics of velocity of money and other nominal aggregates there is a standing challenge in monetary macroeconomics to account for business cycle dynamics of nominal variables as previous business cycle models that have tried to incorporate demand for money have failed to generate realistic predictions in this regard our stance is that part of this failure results from the fact that demand for money in those previous models is deterministic since agents in them face only aggregate risk whereas we believe idiosyncratic risk to be important as well we conduct the exercise inside a monetary search model as our additional goal is to put to the test a recent generation of such frictional models to examine whether their quantitative predictions are realistic and whether they generate additional insight into business cycle data that non search models of money cannot generate on the first question our results suggest that precautionary demand for money plays a substantial role in accounting for business cycle behavior of velocity of money and other nominal variables such as inflation and nominal interest rates on the second question our preliminary results indicate that the search frictions generate discernible though small quantitative effects helping the model account for relevant properties of the data but not very significantly the biggest quantitative potential for search frictions in this setting is in the dynamic implications they generate for inventories and markups in the retail sector assessment of this potential is in progress

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

financial innovation and the transactions demand for cash we document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives we extend the baumol tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost this modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology such as the increasing diffusion of bank branches and atm terminals we characterize the solution of the model which qualitatively reproduces several empirical patterns we estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns the estimates are used to quantify the expenditure and interest rate elasticity of money demand the impact of financial innovation on money demand the welfare cost of inflation and the benefit of atm ownership

forest valuation under the new zealand emissions trading scheme a real options binomial tree with stochastic carbon and timber prices under the new zealand emissions trading scheme forests planted on or after january 1 1990 earn carbon credits these credits have to be repaid when the forest is harvested this paper analyses the effects of this scheme on the value of bareland on which radiata pine is to be planted a real options method is developed and applied assuming stochastic carbon and timber prices we find that land value increases by about 73 with the optimal rotation age substantially lengthened the derived optimal harvest price thresholds are useful in deciding whether to harvest or to wait jel q23 q28

inflation output and welfare this paper studies the effects of anticipated inflation on aggregate output and welfare within a search theoretic framework we allow money holders to choose the intensities with which they search for trading partners so inflation affects the frequency of trade as well as the quantity of output produced in each trade we consider the standard pricing mechanism for search models i e ex post bargaining as well as a notion of competitive pricing if prices are bargained over the equilibrium is generically inefficient and an increase in inflation reduces buyers search intensities output and welfare if prices are posted and buyers can direct their search search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates the friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates

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

precautionary balances and the velocity of circulation of money the observed low velocity of circulation of money implies that households hold more money than they normally spend a natural explanation for this behavior is that households face uncertain expenditure needs so they have a precautionary motive for holding money we investigate the precautionary demand for money in a search model where households are subject to preference shocks the model predicts that the velocity of circulation of money is not only low but also interest elastic the model closely fits united states data on the velocity of circulation of money and interest rates that span the period 1892 2003 the empirical analysis reveals a dramatic reduction in precautionary balances towards the end of our sample probably linked to innovations in the information technology this drop in precautionary balances is crucial for important issues of monetary economics such as the elasticity of the demand for money and the welfare cost of inflation

whither monetary economics i argue that monetary economics should be pursued by applying implementation theory to models which contain explicit frictions that make money essential the argument has two parts first i argue that models in which real balances are assumed to be productive models with money in utility or production functions or with cash in advance constraints contain hidden inconsistencies second i argue that the approach advocated is capable of providing new insights about some of the main issues in monetary economics the effects of monetary shocks the welfare cost of inflation and the roles of inside and outside money

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

financial innovations money demand and the welfare cost of inflation in the 1990s the empirical relation between money demand and interest rates began to fall apart we analyze to what extent improved access to money markets can explain this break down for this purpose we construct a microfounded monetary model with a money market which provides insurance against liquidity shocks by offering short term loans and by paying interest on money market deposits we calibrate the model to u s data and find that improved access to money markets can explain the behavior of money demand very well furthermore we show that by allocating money more efficiently better access to money markets decrease the welfare cost of inflation substantially

money liquidity and welfare abstract this paper develops an analytically tractable bewley model of money demand to shed light on some important questions in monetary theory such as the welfare cost of inflation it is shown that when money is a vital form of liquidity to meet uncertain consumption needs the welfare costs of inflation can be extremely large with log utility and parameter values that best match both the aggregate money demand curve suggested by lucas 2000 and the variance of household consumption agents in our model are willing to reduce consumption by 3 4 to avoid 10 annual inflation the astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer stock insurance value of money thus hindering consumption smoothing at the household level such an inflation induced increase in consumption risk at the micro level cannot be captured by representative agent models or the bailey triangle although the development of financial intermediation can mitigate the problem with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the bailey triangle our findings provide a strong justification for adopting a low inflation target by central banks especially in developing countries where money is the major form of household financial wealth

equilibrium wage dispersion and interindustry wage differentials this paper develops a search theoretic explanation of interindustry wage differentials given coordination problems in the labor market the probability of filling a vacancy is an increasing function of the wage offered in equilibrium firms that find vacancies more costly will offer higher wages the model thus explains the persistence of interindustry wage differentials and their correlation with industry average capital labor ratio and profitability additionally the model predicts that high wage firms will receive more applications per job opening and that wages in the labor market will behave as strategic complements

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

lack of recall and centralized monetary trade we introduce lack of recall of past transactions as an alternative assumption to anonymity in a model where trade is centralized in environments where there is an intertemporal lack of double coincidence of wants problem and lack ofcommitment lack of recall can give rise to monetary equilibria that dominate nonmonetary outcomes in terms of welfare

search for a monetary propagation mechanism abstract this paper examines a monetary propagation mechanism in an economy where exchanges in goods and labor markets involve costly search it is shown that an increase in the money growth rate increases steady state employment and output when the money growth rate is low but reduces steady state employment and output when the money growth rate is already high the model produces persistent hump shaped responses in employment and output to money growth shocks even when the shocks have no persistence the model also generates desirable features in job vacancy sales inventory and the velocity of money all these features emerge here in an economy with perfectly flexible prices and wages journal of economic literatureclassification numbers e40 e30

directed search unemployment and public policy we examine the effects of public policy parameters in a simple directed search model of the labour market and contrast them with those in standard random matching models with nash bargaining both finite and limit versions of the directed search model are considered and the value of the limit model as an approximation of the finite one is assessed as with the random matching model job creation is the key channel through which the policy parameters affect the equilibrium of the directed search model both comparative static effects of the policy parameters and optimal configurations are identified on examine les effets des parametres de la politique publique dans un modele simple de recherche dirigee d emploi sur le marche du travail et on les contraste avec ceux qu on obtient par des modeles d appariements aleatoires avec marchandage a la nash a la fois les versions finie et limite du modele de recherche dirigee sont examinees et la valeur du modele limite en tant qu approximation de la version finie est evaluee comme dans le modele d appariement aleatoire la creation d emploi est le canal principal a travers lequel les parametres de la politique affectent l equilibre du marche du travail on identifie les effets de statique comparative des parametres de la politique ainsi que les configurations optimales

money and asset prices in a cash in advance economy an asset pricing model with money introduced via a cash in advance constraint is presented the monetary velocity is variable hence money demand does not obey the trivial quantity equation the effects of disturbances in output and money growth on real balances the price level and interest rates are examined monetary policy has effects on real asset prices the fisher relation and the premium on nominal bonds are discussed the precise role of the timing of information and transactions for properties of price levels and interest rates are clarified

taxes subsidies and equilibrium unemployment this paper considers the effects of wage taxes employment subsidies and unemployment benefits in a simple model of equilibrium search unemployment is determined by the equality of job matchings and job separations job vacancies are determined by a zero profit condition and wages by a nash bargain between the meeting firm and worker i show that marginal wage taxes influence the firm s and worker s equilibrium sharing rule whereas employment subsidies and unemployment benefits influence only the surplus shared hence tax financed subsidies reduce wages and raise employment and vacancies whereas tax financed unemployment benefits raise wages and reduce employment and vacancies in this paper we consider the effects of wage taxes employment subsidies and unemployment benefits on equilibrium search unemployment in a model where wages are determined competitively by the meeting firm and worker discussions about the desirability of taxes and subsidies and their effect on employment and wages abound in the labour economics literature yet the only tax or subsidy that has been systematically discussed in a competitive search framework is a lump sum unemployment benefit the reason for this might be that the structure of the model is such that it is ideally suited to the study of unemployment benefits whereas traditional supply and demand analysis could arguably cope with other kinds of taxes this might be true in some cases but if it is at all appropriate to think of equilibrium unemployment as coming out of an essentially competitive framework when the process which brings together jobs and workers is characterized by frictions traditional supply and demand analysis may not be rich enough to give us all the answers we need 1 the model of this paper is a simple equilibrium model with endogenous unemployment supply of jobs i e demand for labour and real wages unemployment exists because unemployed workers and unfilled jobs cannot find each other instantaneously in the interval of time required to match all workers and jobs some existing job worker pairs break up providing a new flow into unemployment thus unemployment can never be eliminated in equilibrium flows into and flows out of unemployment are equal wages are set endogenously by generalized nash bargains between the individual firm and worker the equilibrium wage rate is shown to depend on all the parameters of the model and to be determined simultaneously with equilibrium unemployment the driving force in the model which provides the link between wages and unemployment is the rate of job vacancies the total number of jobs is determined by zero profit conditions because of constant returns to scale the number of jobs taken up each period depends positively on the number of job vacancies because a typical unemployed worker will have a better chance of locating a job when there are more vacancies if the real wage rate falls the expected profits from a job rise firms open up more vacancies to take advantage of this and so more jobs are taken up but as vacancies rise and

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

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

sluggish responses of prices and inflation to monetary shocks in an inventory model of money demand we examine the responses of prices and inflation to monetary shocks in an inventory theoretic model of money demand we show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households money inventories leads to a partially offsetting endogenous reduction in velocity we also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate in a quantitative example we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match u s households holdings of m2

ex post bidding and efficient coordination unemployment we study the implementation of constrained efficient allocations in labour markets where a basic coordination problem leads to an equilibrium matching friction we argue that these allocations can be achieved in a non cooperative equilibrium if wages are determined by ex post bidding this holds true even in finite sized markets where the equilibrium matching process has decreasing returns to scale where the hosios rule does not apply both with and without heterogeneity

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

money search and business cycles monetary models that specify explicit frictions to generate money demand have been developed over the last 20 years and have been used to address many questions in this article i investigate the short run properties of a particular model considering a number of versions based on some modeling choices all versions feature flexible prices i find that in many aspects both real and nominal the model resembles other more reduced form models some variations of the model come closer to matching some key nominal facts than a reduced form model the model also generates counter cyclical markups in line with the data

the variability of velocity of money in a search model abstract we construct a dynamic equilibrium model where there is costly search in the goods market and the labor market incorporating shocks to money growth and productivity we calibrate the model to the us time series data to examine the model s quantitative predictions on aggregate variables and in particular on the variability of consumption velocity of money despite the fact that money is the only asset the model captures most of the variability of velocity in the data it also generates realistic predictions on the moments of other variables and provides persistent propagation of the shocks the model generates these results largely because costly search gives an important role to the extensive margin of trade

asset trading mechanisms and expansionary policy abstract previous authors have argued that the otimal monetary policy is contractionary if buyers value consumption substantially more than sellers there is some randomness and informational constraints make asset trading useful we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies