how should commodities be taxed market structure product heterogeneity and the optimal structure of commodity taxes abstract this paper is concerned with the form in which commodity taxes are best imposed and particularly with the appropriate balance between specific and ad valorem components this neglected issue is of policy importance in relation to the harmonization of tax structures within the eec and of theoretical interest as a point of contact between optimal tax theory and models of non price competition the roles of the two taxes as purely corrective devices under a variety of market forms are established and discussed the analysis suggests that heavily taxed commodities should normally be subject to high specific rather than high ad valorem taxes

commodity taxes under uncertainty abstract this paper considers the relative distorting effect on output of commodity taxes specific and ad valorem in a situation where a firm faces revenue uncertainty it is shown generally that this effect depends both on the precise nature of the firm s revenue uncertainty and on the degree of its risk aversion more specifically the distorting effect of each tax is characterised for a selection of objective functions and uncertain environments these characterisations are compared in order to show the influence of alternative specifications on the relative distorting effect

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

euler equations and money market interest rates a challenge for monetary policy models standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption euler equation we use u s data to calculate the interest rates implied by euler equations derived from a number of specifications of household preferences correlations between these euler equation rates and the federal funds rate are generally negative regression results and impulse response functions imply that the spreads between the euler equation rates and the federal funds rate are systematically linked to the stance of monetary policy our findings pose a fundamental challenge for models that equate the two

trade policy in a super size me world abstract when a foreign monopolist sets a single market clearing price for its product the sign of the optimal tariff is determined by the extent of pass through also known as the terms of trade effect however when a foreign monopolist employs a second degree price discrimination mechanism in the domestic market the calculus of welfare maximization is very different while there are still terms of trade effects from the imposition of a tariff the existence of such effects are neither necessary nor sufficient to determine the sign of the optimal tariff instead the distribution of valuations within the population is the key determinant of the nature of policy intervention this result differs significantly from the uniform price case and is driven by the incentive compatibility constraint which places the distribution of types at the center of the analysis if there is a relatively large fraction of high valuation types in the population then domestic information rents may be increased by subsidizing imports thereby increasing the consumption of the low valuation types and moving the incentive constraint in favor of the high valuation types however if the share of high types in the population is relatively small then the increase in information rents will also be small but the fiscal implications of a subsidy will be large consequently the optimal policy will be to impose a trade tax

optimal monetary policy in a cash in advance economy i introduction this paper addresses the issue of optimal monetary policy within a particular general equilibrium model of the monetary transmission mechanism the model analyzed is a member of the recent class of liquidity models of the monetary business cycle 1 these liquidity models are something of a growth industry partly because they are potentially consistent with a monetary equilibrium in which monetary injections drive down nominal rates of interest and stimulate real activity stylized facts supported by evidence presented in for example christiano and eichenbaum 1992 an unexplored question is the role of monetary policy in these models this paper makes an attempt at remedying this deficiency by analyzing optimal monetary policy in a model with liquidity effects as in the liquidity models mentioned above the model analyzed here is constructed by imposing two trading frictions on an otherwise frictionless arrow debreu environment 2 the first is a requirement that all transactions be carried out in a decentralized fashion with the use of cash this friction is the well known cash in advance constraint first suggested by clower 1967 but now quite commonplace in models of monetary equilibrium as in lucas and stokey 1987 and cooley and hansen 1989 i impose this constraint because it is a tractable way of introducing a transactions demand for cash the qualitative results would be unaffected if a more general transactions technology was employed the second friction is unique to the liquidity models i assume that private agents cannot quickly move cash across markets this assumption of sluggish cash flow presumably motivated by transactions costs that are not explicitly modeled implies that cash may not be equally valued across markets with its value in a particular market determined by the amount of cash or liquidity contained in the market this friction introduces the so called liquidity effects on asset prices and real activity the paper proceeds as follows the next section develops the basic model and discusses the effects created by the assumed trading frictions section iii explores optimal monetary policy the nature of the trading frictions introduces a role for activist monetary policy in particular to the extent that the central bank can adjust liquidity more rapidly than the private sector there is a welfare improving role for monetary policy in some cases interest rate smoothing is a good idea while in others optimal policy will increase interest rate variability section iv links the results to the optimum quantity of money literature and offers up a few conclusions ii a model of monetary non neutrality the economy is populated with three types of agents households firms and financial intermediaries there are numerous identical agents of each type so that all behave as atomistic competitors given this assumption i will confine my discussion to a representative agent of each type the representative household is made up of two members a shopper and a worker the shopper s role is to use the household s assets to acquire consumption goods during each period while the worker supplies some portion of the household s time endowment equal to 1 each period to firms in exchange for payment the household s preferences over uncertain consumption and leisure streams are given by e summation of beta sup t u c sub t v 1 l sub t where t 0 to infinity where beta is an element of 0 1 c sub t and l sub t are time t consumption and work effort respectively v is increasing and concave and mathematical expression omitted the expectation is over realizations of the economy wide shocks the expression s sub t is an element of s subset r denotes the state of the world at time t where s is a compact set these states are i i d across time with a distribution function given by

financial integration and business cycles in a small open economy abstract the purpose of this study is to examine a dynamic stochastic general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy the existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy moreover there is uncertainty involved in the production process which leads to collateralized borrowing by firms and therefore has to be taken into account in the design of the loan contracts between firms and financial intermediaries it is shown that increasing financial integration amplifies the effect of a positive temporary monetary shock on output consumption investment labor demand and loans whereas it has barely any implication for the impact of a positive temporary technology shock on the economy

testing the liquidity effect with equilibrium interest rate we examine the existence of liquidity effects by using the equilibrium interest rates estimated from the disequilibrium analysis instead of the observed interest rate the use of equilibrium interest rates allows us to take the growth rate in the money supply as being exogenous and circumvent the identification problem away following the traditional ar model and the method proposed by hamilton 1997 we obtain evidences showing the negative relationship between the equilibrium interest rate and the growth rate in money supply

exchange rate regimes banking and the non tradable sector abstract this paper presents a small open economy two good version of the diamond and dybvig model with cash constraints to analyze the implications on banking of different exchange rate regimes and monetary policies i show that fixed exchange rates with a central bank providing liquidity in local currency imply pareto efficiency with conditions for a run equilibrium stronger than in the literature in a flexible exchange rate regime multiple equilibria may not be eliminated in particular for very a expansive monetary policy there exists an equilibrium where a fraction of patient consumers purchases dollars in the interim period which constitutes a partial currency run a dollarized banking system without international short run credit may also implement the efficient allocation under certain conditions

wage stickiness and the non neutrality of money a cross industry analysis abstract the paper provides an empirical test of sticky wage models of business fluctuations by focusing on industry level cross sectional implications that emerge this breaks the observational equivalence existing at the aggregate level between rational expectations long term contracting and imperfect information models the specific implication tested is whether output responses to nominal disturbances industry phillips curve slopes are inversely related to wage indexation elasticities the phillips curve slopes are found to vary across industries for the canadian economy but bear no relationship to indexation elasticities casting doubt on the role of nominal wage rigidity in generating the observed non neutrality of money

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

excise taxes on a non uniform pricing monopoly ad valorem and unit taxes compared in this paper ad valorem and unit taxation are compared on a model that allows for various monopolistic pricing policies including uniform pricing and all three types of pigouvian price discrimination it shows that for any given unit tax on a non uniform pricing monopoly 1 there exists an output neutral ad valorem tax rate that gives rise to a higher tax yield than the unit tax and 2 there exists an ad valorem tax rate that welfare dominates the unit tax not only in the aggregate sense but also in the pareto sense taxes d accise dans le cas d un monopole qui n a pas une tarification unique comparaison des taxes ad valorem et unitaire ce memoire compare la taxe ad valorem et la taxe par

on the fisher effect abstract we use post war quarterly data for belgium canada denmark france germany greece ireland japan the netherlands the united kingdom and the united states to examine the fisherian link between inflation and short term nominal interest rates in doing so we apply the king and watson 1997 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful fisher effect tests critically depend on such properties we conclude that the data are generally rejecting the fisher effect

the distribution of money balances and the nonneutrality of money recent monetary models with explicit microfoundations are made tractable by assuming that agents have access to centralized markets after one round of decentralized trade given quasi linear preferences this makes the distribution of money degenerate which keeps the models simple but precludes the discussion of distributional effects of monetary policy we generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically we show that unexpected symmetric lump sum money injections may increase short run output and welfare whereas asymmetric injections may increase long run output and welfare

a pareto comparison of ad valorem and unit taxes in noncompetitive environments abstract a literature that began with wicksell 1896 has shown that an ad valorem tax is welfare superior to an equal yield unit tax in both monopoly and oligopoly markets this paper proves a stronger result for any unit tax imposed on a monopoly there exists an ad valorem tax that pareto dominates it that produces larger profit tax revenue and consumer surplus the paper then considers whether this pareto result generalizes to all cournot nash oligopolies the paper shows that pareto dominance holds in such markets whenever the tax level exceeds a critical value that depends on various market parameters

indirect taxation and cournot equilibrium we analyse a cournot model of oligopoly in an industry which is subject to indirect taxation we consider value added as well as excise taxes we allow for various types of demand and cost conditions as well as cost differences across firms as the tax is raised two types of outcomes can prevail on the one hand the net price can increase which is shown to lead to an increase in market share of high cost firms on the other hand the net price can fall in which case efficiency is rewarded in that low cost firms gain market share this latter outcome which accords with intuition will obtain in most instances it is more likely to occur i with vat rather than with an excise tax ii with concave rather than convex demand and iii with decreasing rather than increasing marginal cost finally we show that an increase in vat can lead to higher profits for low cost firms provided cost differences across firms are large enough

the availability doctrine abstract this paper develops a general equilibrium model in which monetary disturbances have effects reminiscent of roosa s classic description of the availability doctrine the model is a marriage of the modern credit rationing literature and the recent sluggish cash flow models of monetary transmission both elements are crucial the credit rationing aspect leads to a focus upon the quantity or availability of credit however the rationing model in and of itself is a real model and there is no reason for fluctuations in the nominal quantity of fiat money to have any effect on the availability of real credit this is where the sluggish cash flow assumption enters into the analysis under this assumption changes in the nominal supply of fiat money do affect the real supply of credit because a subset of the economy absorbs a disproportionate share of the monetary injection

gaps and triangles we derive principles of optimal short run monetary policy in a real business cycles model with money and prices set in advance the optimal allocation is achieved under the friedman rule however given that policy the allocation is indeterminate we move away from the friedman rule take the interest rate path as exogenous and characterize the optimal money supply policy we identify the conditions under which it is optimal to replicate the allocation under exible prices in general sticky prices provide the planner with tools to improve upon a distorted exible prices allocation

the comparison between ad valorem and specific taxation under imperfect competition abstract this paper compares ad valorem and specific taxation in two models of oligopoly with and without free entry predominantly ad valorem taxation implies a relatively low consumer price high tax revenue and when entry is precluded low profits ad valorem taxation dominates specific taxation from the welfare perspective the set of circumstances under which with free entry specific taxation raises welfare is a strict subset of that in which ad valorem taxation is welfare improving and in both models the maximisation of consumer welfare subject to a binding revenue constraint requires maximum reliance on ad valorem taxation

time varying risk interest rates and exchange rates in general equilibrium under mild assumptions the data indicate that time varying risk is the primary force driving nominal interest rate differentials on currency denominated bonds this finding is an immediate implication of the fact that exchange rates are roughly random walks a general equilibrium monetary model with an endogenous source of risk variation a variable degree of asset market segmentation can produce key features of actual interest rates and exchange rates in this model the endogenous segmentation arises from a fixed cost for agents to exchange money for assets as inflation varies so does the benefit of asset market participation and that changes the fraction of agents participating these effects lead the risk premium to vary systematically with the level of inflation this model produces variation in the risk premium even though the fundamental shocks have constant conditional variances

the cross industry effects of unanticipated money in an equilibrium business cycle model abstract this paper examines the differential real effects of monetary policy across industries the purpose is to test whether these differential effects can be accounted for by an incomplete information rational expectations model of the business cycle in the lucas barro tradition such a model implies a positive relation across markets between the variability of market specific shocks and the reduced form output effect of a monetary shock this proposition is tested using industry level post war u s data and support is found the exploration also uncovers other interesting industry level and aggregate results

money and exchange rates in the grossman weiss rotemberg model abstract we analyze the impact of monetary policy on inflation interest rates and exchange rates in a model with segmented asset markets developed by grossman and weiss 1983 and rotemberg 1984 1985 we find parameters for which real and nominal exchange rates in this model are 1 much more volatile than interest rates inflation rates and money growth rates 2 highly correlated with each other and 3 highly persistent while this model fails to match the data in other important respects it illustrates a potentially useful approach to modelling exchange rate behavior

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

forward discount puzzle and liquidity effects some evidence from exchange rates among the united states canada and japan this paper empirically examines whether the interaction between foreign exchange markets and monetary markets can help to resolve the forward discount puzzle following the monetary models of lucas 1990 and fuerst 1992 we define as liquidity effects the negative impact of monetary injection on nominal interest rates temporary deviations from the standard euler equation the liquidity effect identified by these models weakens the linkage between current forward rates and expected future spot rates and improves on the standard rational expectations model that predicts a one to one correspondence between the two using time series of exchange rates among the united states canada and japan this paper shows that the liquidity measure identified above has an impact on forward premiums and that once the liquidity effect is taken into consideration the unbiased prediction of the forward discount rate is recovered to some extent in a theoretically consistent manner

optimal fiscal and monetary policy some recent results this paper studies the quantitative properties of fiscal and monetary policy in business cycle models in terms of fiscal policy optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average in terms of monetary policy the friedman rule is optimal nominal interest rates are zero and optimal monetary policy is activist in the sense that it responds to shocks to the economy

the monetary transmission mechanism is it relevant for policy we study environments with sticky prices wages or portfolios where it is feasible and optimal to use monetary policy to replicate the allocation under full flexibility in these environments the optimal policy does not depend on the scope of the frictions in this sense the strength of the monetary transmission mechanism is irrelevant for the conduct of monetary policy so asymmetries in the strength of the transmission mechanisms do not impose a cost on a common policy jel e31 e41 e58 e62

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

inflation and productive activity in a multiple matching model of money abstract this paper investigates the relationship between money growth inflation and productive activity in a dynamic general equilibrium multiple matching framework where trade frictions are manifested by limited consumption variety productive activity and matching in the goods market are endogenized by a time allocation decision of work and search effort we find that a high degree of complementarity between participation in the labor and goods markets creates a channel by which inflation can positively influence production and output this feature arises when household preferences for consumption variety is sufficiently large and it can also lead to the multiplicity of monetary equilibria

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

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

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

monetary policy and endowment risk in a limited participation model i introduction an asset market segmentation model is constructed in this paper to study the risk sharing role of monetary policy economic agents face uninsurable endowment risk when there is limited asset market participation because an initial money injection goes first to those who can access the asset market money is nonneutral and monetary policy redistributes consumption across agents thus monetary policy plays a risk sharing role that provides crude insurance limited participation models that capture nonneutralities of money were initially developed by grossman and weiss 1983 and rotemberg 1984 and followed by lucas 1990 fuerst 1992 and chatterjee and corbae 1992 recently alvarez and atkeson 1997 alvarez lucas and weber 2001 and alvarez atkeson and kehoe 2002 have made important contributions but they focus on the implications of liquidity effects asset prices and the exchange rate instead of the risk sharing implications of monetary policy my model is built on alvarez lucas and weber 2001 there are two types of households traders who participate in the asset market and nontraders who do not these types are determined exogenously in each period traders receive constant endowments whereas nontraders face uninsurable endowment shocks in the asset market the government injects money through open market operations and traders initially receive the money injection in equilibrium money is nonneutral and monetary policy redistributes consumption between traders and nontraders the government money injection increases traders consumption and decreases nontraders consumption because traders get the money injection through the asset market whereas nontraders suffer from inflation if nontraders all receive the same endowment shock then monetary policy is a perfect risk sharing tool that can smooth out consumption across traders and nontraders however if nontraders receive idiosyncratic endowment shocks then monetary policy is not enough to perfectly insure nontraders although monetary policy does not achieve a pareto optimal allocation it can mitigate the dispersion of consumption across nontraders the optimal money growth rate can be positive or negative depending on the endowment distribution the friedman rule is not optimal in general there is a set of limited participation literature where the asset market is endogenously segmented chatterjee and corbae 1992 alavarez atkeson and kehoe 2002 chiu 2004 and chiu and molico 2007 although endogenous asset market segmentation is useful in some contexts for this paper nothing is lost by assuming exogenous segmentation and much is gained in simplicity models of the redistributional effects of monetary policy include levine 1991 shi 1999 berentsen camera and waller 2005 and molico 2006 the models studied by levine 1991 and mollico 2006 are particularly relevant levine 1991 studies an incomplete markets environment where positive money growth implemented through lump sum transfers can be optimal molico 2006 studies a search environment and shows similarly that positive inflation with lump sum transfers can be welfare enhancing but not at high rates of inflation in both the levine 1991 and molico 2006 environments there is an insurance role for monetary policy much as in the environment studied in this paper the model here has the virtue of being much more tractable than either the levine 1991 or molico 2006 models furthermore a novelty here is to study an insurance role for monetary policy in the context of market segmentation where the agents who received the first round effects of monetary policy do not wish to share risk among themselves the key risk sharing problem has to do with risk sharing between asset market participants and nonparticipants the remainder of the paper is organized as follows

the value of commuting time in an empirical on the job search model an application based on moments from two samples this article estimates the value of commuting time voct among swedish males in an empirical on the job search model it uses a large sample of employee establishment linked data obtained from administrative registers the sample lacks information on mode choice for the journey to work we therefore estimate a mode choice model on another sample and use this model to link the administrative data to the relevant set of travel times costs and distances the voct is found to be 1 8 times the net hourly wage rate in the sample the relatively high estimate results from a high voct among cohabiting men

inflation liquidity and innovation this paper presents a simple model with financial frictions where inflation increases the cost faced by firms holding liquid assets to hedge risky production against expenditure shocks inflation tilts firms technology choice away from innovative activities and toward safer but return dominated ones and therefore reduces long run growth the theory makes specific predictions about how the severity of this adverse effect depends on industry characteristics these predictions are tested with novel harmonized firm level data from 139 developing countries overcoming small sample problems constraining previous work the analysis finds that inflation affects the composition but not the overall quantity of investment a one percentage point increase in inflation reduces the establishment level probability of innovation by 4 3 percent but does not affect total investment moreover innovating firms display a stronger dependence on liquid assets which in turn are negatively related to inflation generalized difference in differences estimations corroborate the sector specific predictions of the theoretical model

central bank liquidity management and unconventional monetary policies central banks that work under an inflation targeting regime generally use an interest rate as the main instrument to implement monetary policy the latter can be denominated conventional monetary policy central banks often deviate from this practice however and engage in other policies to deal with particular situations as these alternatives depart from the usual practice they are generally labeled unconventional policies during the recent global financial crisis and recession of 2008 09 central banks around the world and in latin america in particular responded to exter nal shocks in a variety of ways canales kriljenko and others provide a precise description of how different latin american central banks reacted to the u s financial crisis shock in 2008 with an emphasis on the heterogeneity in the use of unconventional monetary policy instruments 1 for example while colombia and peru lowered reserve requirements in their banking systems the central bank of chile relaxed the collateral requirements for repurchase repo transac tions 2 also chile and peru extended the repayment period in repo transactions these examples illustrate not only the heterogeneity in responses but also the prevalent use of unconventional instruments ishi stone and yehoue note that the central bank interest rate increased rather than decreased in many emerging countries in the months immediately following the fall of lehman brothers 3deviations from conventional policies were observed in latin america even before the recent global financial crisis and before the central banks implemented inflation targeting frameworks most notably central banks have often engaged in sterilized exchange rate interventions to smooth the effects of capital inflows due in part to commodity price booms and the resulting nominal exchange rate appreciation some countries like peru have used these inter ventions quite frequently whereas others have implemented these policies only after extreme movements in the nominal exchange rate for instance in chile even after the inflation targeting policies were already in place in this regard one important policy discussion is the relationship between inflation targeting regimes and liquidity management responses 4 in particular it is not obvious whether the application of such liquidity management policies implied some type of threat to the good implementation of the inflation targeting framework ishi stone and yehoue highlight the difficulties of using econometric time series techniques to evaluate the impact of liquidity man agement policies implemented in an inflation targeting framework because it requires disentangling the impact of each type of policy as well as the impact of the external shocks that presumably triggered the implementation of such policies 5 the fact that such policies were usually in place for just a few quarters further complicates the application of the time series based impact evaluation this paper contributes to the evaluation of such policies by constructing solving and simulating a dynamic stochastic general equilibrium dsge model that explicitly includes the central bank s balance sheet as a key modeling input the model can explicitly predict the impact of selected unconventional monetary policies on the major macroeconomic variables including gross domestic product gdp consumer price index cpi inflation and the real exchange rate and it pays special attention to the role played by the specific facilities used by the central bank to manage market liquidity this paper uses chile as the main case for the application of the model providing a detailed account of its experience with these alternative tools since the introduction of the flexible inflation targeting framework in 1999 and calibrating the model to then analyze the effects of some of the policies implemented the theoretical framework is an extension of a new keynesian model of a small open economy with banks that take deposits from households which is the only way for the latter to finance consumption extending the more traditional cash in advance assumption borrow abroad lend to productive firms and hold bonds issued by the central bank

the effect of money shocks on interest rates in the presence of conditional heteroskedasticity most current empirical work finds no evidence that money shocks lower interest rates we show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates autoregressive conditional heteroskedasticity arch models find a significant liquidity effect where ordinary least squares ols models do not the existence of a liquidity effect is found using different models and sample periods when arch models are used in estimation but never when ols is employed

overshooting and the exchange rate disconnect puzzle a reappraisal transitions to floating exchange rate regimes have led to sharp increases in exchange rate volatilities with no corresponding changes in the distribution of macroeconomic fundamentals in the spirit of dornbusch 1976 we assess whether nominal exchange rate overshooting is responsible for this phenomenon as long as uncovered interest rate parity holds nominal exchange rate overshooting is linked to a persistent fall in the spread between domestic and foreign nominal interest rates we thus develop a limited participation model in a small open economy setting with small adjustment costs on money holdings overshooting substantially contributes to the nominal exchange rate volatility

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

armen alchian s contribution to macroeconomics i introduction this essay examines alchian s contribution to the theory and practice of macroeconomics we have the task of reviewing alchian s contributions in an area that represents only a tiny fraction of his body of work citations to his work on the theory of the firm greatly outnumber those on money and inflation nevertheless we find that many of the major developments in macroeconomics in the last two decades follow paths that were pointed out in the late 1950s and early 1960s by armen alchian much of it in collaboration with reuben kessel alchian s ideas about macroeconomics were developed in a fertile environment at ucla in conversations with colleagues such as karl brunner and jack hirshleifer as well as with graduate students such as allan meltzer and rachael and ted balbach a signature of alchian s work was his great ability to clarify the issues he was careful to distinguish the effects of money versus real shocks of anticipated versus unanticipated inflation and to work through the impact of an event to the general equilibrium consequences he understood that real world problems such as incomplete information might explain apparently noneconomic behavior but unlike many macroeconomists of that time he did not abandon microeconomic principles when explaining nominal real interactions alchian s views were a clear contrast to those of prominent macroeconomists of the day who argued that aggregate monetary policies could not be used to stabilize the price level at full employment because of asymmetric rigidities in markets that prevented the downward adjustment of any nominal price as part of the process of adjusting relative prices 1 the conventional wisdom of the day led to policies that ultimately caused two decades of accelerating and costly inflation both the rational expectations revolution and developments in modeling the microfoundations of business cycles were a reaction to this experience and to the apparent failure of standard macroeconomic analysis alchian s 1970 work on the effect of private information was one of the original articles in this microfoundation literature although he used a narrative approach rather than the highly structured mathematical models available to researchers today alchian was more than two decades ahead of the real business cycle economists in asking researchers to explore economic explanations fully before adopting explanations based on market failure money illusion and irrational behavior this paper is organized in four parts the first part describes alchian s work involving the fundamental role of money in society king and plosser 1986 93 wrote but in the explosion of formal modeling of monetary economies in the postwar period brunner and meltzer 1971 and alchian 1977 stand nearly alone in stressing the idea that monetary arrangements economize on the information production that would otherwise be necessary to mitigate problems of moral hazard in the exchange of commodities the second part discusses alchian and klein s work on the measurement of inflation this measurement problem appears to be more obvious when inflation is low and the variance of price indexes is dominated by real factors this work was generally neglected at the time it was written perhaps because inflation accelerated so rapidly that the real factors became less important now that inflation has declined to moderate levels the measurement problems are resurfacing the third part of the paper documents alchian s insight into the problems and intellectual developments that followed the erratic inflation policies of the u s government in the 1960s and 1970s in a 1962 journal of political economy article he and reuben kessel set forth a description of the events that occur as an economy shifts from one steady state inflation regime to another this work revealed an understanding of the importance of credibility for the policymaker that was missing from much of the writing about macro policymaking in the subsequent three decades

upstream and downstream pollution taxations in vertically related markets with imperfect competition when two markets are vertically related the government can control pollution at the upstream as well as the downstream market levels this paper employs the stylized model of input price discrimination and compares the effectiveness of upstream and downstream pollution taxations we consider the situation in which downstream firms have heterogeneous abatement technologies and an upstream monopolist performs input price discrimination against them in order to mitigate pollution the government imposes input tax on the intermediate inputs and emission tax on the pollutant we show that the degree of input price discrimination decreases with a rise in the input tax and increases with a rise in the emission tax we further examine the effect of a green tax reform in which the government changes the source of taxation from input tax to emission tax we argue that although this green tax reform may reduce the tax revenue of the government it will certainly increase social welfare

eliciting gps preferences for pecuniary and non pecuniary job characteristics abstract this study examines general practitioners preferences for pecuniary and non pecuniary job characteristics in the context of choosing a general practice in which to work a discrete choice experiment is used to test hypotheses about the nature of the utility function marginal rates of substitution between income and non pecuniary characteristics are calculated the results suggest that policies aimed at influencing general practitioners location choices should take account of both non pecuniary and pecuniary factors particularly out of hours work commitments

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

what do the vars mean measuring the output effects of monetary policy abstract vars describe the history of output and other variables following monetary shocks to measure the effects of monetary shocks one must add economic identifying assumptions i specify the relative effects of anticipated and unanticipated money and i calculate how var based measures of the effect of money on output change as one varies this assumption the anticipated unanticipated assumption influences measured output effects as much or more than the variable selection and shock orthogonalization assumptions on which the var literature focuses assuming that anticipated monetary policy can have some effect on output results in much shorter smaller and perhaps more believable estimates of the output response to monetary shocks

liquidity transaction costs and real activity this paper studies the liquidity effect in a pecuniary transaction cost model to model the asymmetric impact of monetary injections we consider two behavioral assumptions sluggish money demand and sluggish firm investment it is found that under reasonable parameterization the model is capable of generating a dominant liquidity effect our result suggests that with alternative monetary specifications and behavioral assumptions general equilibrium models are still useful for studying the liquidity effect at business cycle frequencies

preferences inflation and welfare abstract this paper systematically examines how degrees of household risk aversion ra and elasticity of intertemporal substitution eis impact the welfare costs of inflation in a heterogeneous agent environment featuring capital and essential money empirical evidence suggests that households have degrees of ra and eis that differ on average from traditional values and display large amounts of dispersion capturing these empirical features of preference values in an otherwise standard model leads to welfare enhancements of inflation due to household substitution of money for capital the analysis also compares the welfare implications for alternative ways to implement monetary policy

regional and sectoral evidence of the macroeconomic effects of labor reallocation a panel data analysis this paper revisits the sectoral shifts hypothesis by examining unemployment fluctuations for 48 u s states over the period 1990 01 2011 12 we develop a panel approach that incorporates dynamics parameter heterogeneity aggregate factors and cross sectional dependence our findings provide support for a positive and significant effect of the employment dispersion index on unemployment this outcome is robust under alternative specifications and measures of employment dispersion the empirical evidence corroborates the presence and relevance of cross sectional dependence and heterogeneity among states the results show that once unobserved common factors and cross state heterogeneity are taken into account labor reallocation has a significant effect on unemployment that is half the size of the estimate when cross sectional dependence is not taken into account

the source of fluctuations in money evidence from trade credit abstract this paper tests the relative importance of technology shocks and financial shocks as sources of fluctuations in money the model extends the theory of king and plosser 1984 by recognizing that both money and trade credit provide transactions services under certain conditions the co movements between money and trade credit can reveal the nature of the underlying shocks the empirical results strongly suggest that shocks to the financial system account for most of the fluctuations in money in the long run and at business cycle frequencies on the other hand technology shocks appear to be more important at seasonal frequencies

common currencies vs monetary independence we study the optimal monetary policy in a two country open economy model under two monetary arrangements a multiple currencies controlled by independent policy makers b common currencies with a centralized policy maker our findings suggest that i monetary policy competition leads to higher long term inflation and interest rates with large welfare losses ii the inflation bias and the consequent losses are larger when countries are unable to commit to future policies iii the welfare losses from higher long term inflation dominates the welfare costs of losing the ability to react optimally to shocks

real exchange rates and macroeconomics evidence and theory since the early 1980s a large body of research has thrown doubt on the relevance of macroeconomic models for understanding exchange rates the authors argue that a balanced reading of recent literature in exchange rate economics gives a more optimistic assessment many studies have established the pertinence of long run purchasing power parity ppp and the explanatory power of macroeconomic fundamentals in real exchange rate fluctuations a reasonably strong case can be made for a traditional macroeocnomic interpretation of real exchange rates which emphasizes short run price stickiness but long run ppp but a central new ingredient in this interpretation is the presence of international commodity market segmentation and persistent deviations from the law of one price an example is given of a dynamic general equilibrium model that can reproduce some of the observed features of real exchange rate fluctuations

interest rate rules vs money growth rules a welfare comparison in a cash in advance economy abstract this paper considers the welfare consequences of two particularly simple rules for monetary policy an interest rate peg and a money growth peg the model economy consists of a real side that is the standard real business cycle model and a monetary side that amounts to imposing cash in advance constraints on certain market transactions the paper also considers the effect of assuming a rigidity in the typical household s cash savings choice the competitive equilibrium of the economy is not pareto efficient partly because of two distortions a distortion on the capital accumulation decision and a distortion on portfolio choice that arises from the assumed rigidity the principal result of the paper is that the interest rate rule but not the money growth rule entirely eliminates these two distortions and is thus the benevolent central banker s policy choice

measurement of travel time values and opportunity cost from a discrete choice model section 1 of the paper introduces discrete choice models which contain elements of becker and deserpa theories section 2 outlines the concepts of quality adjusted value of travel time and the uniform or unadjusted shadow price of time sections 3 and 4 explain how values and shadow price of time can be measured using the discrete choice models described in section 2 section 5 explains the importance of the so called model specific constants in a mode choice model in the light of the empirical results of sections 3 and 4 trrl

taxation and the output and welfare of third degree price discrimination the literature on third degree price discrimination dates back to the work by pigou 14 and joan robinson 15 over half a century ago the subsequent works on the output effect can be seen in edwards 3 silberberg 19 battalio and ekelund 1 greenhut and ohta 7 finn 4 smith and formby 20 formby et al 6 and shih mai and liu 18 the welfare effect by yamey 26 was expanded and generalized by schmalensee 16 varian 24 and schwartz 17 in addition nahata ostaszewski and sahoo 12 demonstrate a sufficient condition for price changes that guarantees a welfare increase with the twice differentiable and monotonically decreasing demand functions previous work on third degree price discrimination has not addressed the issue of taxation governments often levy excise taxes on firm s sales under conditions of third degree price discrimination such taxes can have depending upon the form of the tax quite different output and welfare effects this paper investigates the joint effects of third degree price discrimination and excise taxation in several different ways first in a fashion analogous to suits and musgrave s analysis of simple non discriminating monopoly 22 we consider the effects of ad valorem and unit specific excise taxes at a constant level of output but in a third degree price discrimination environment second in a similar manner we compare cost and demand ad valorem taxes and the so called musgravian transformation 11 27 under discriminatory conditions finally we compare the output and welfare effects of a specific cost ad valorem and demand ad valorem excise tax that generate the same level of revenues in a third degree price discrimination environment

existence of competitive equilibrium under financial constraints and increasing returns abstract this paper studies a factor cost in advance model with increasing returns in production in the model both partial equilibrium and general equilibrium may exist since working capital of firms limit their input demand we provide a sufficient condition for the existence of partial equilibrium of a firm operating on a non convex choice set furthermore we establish the existence and uniqueness of competitive equilibrium in the special case of logarithmic utility

monetary policy in a financial crisis what are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis under what conditions will a cut stimulate output and employment and raise welfare under what conditions will a cut have the opposite effects we answer these questions in a general class of open economy models where a financial crisis is modeled as a time when collateral constraints are suddenly binding we find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy then a cut in the interest rate is most likely to result in a welfare reducing fall in output and employment when these frictions are absent a cut in the interest rate improves asset positions and promotes a welfare increasing economic expansion

inflation output and markup dynamics with forward looking wage and price setters abstract medium scale new keynesian models are sometimes criticized for their use of backward looking wage and price setting mechanisms and for assuming several types of disturbances including some that would be difficult to interpret economically we propose a dsge model with purely forward looking wage and price setters and parsimoniously chosen disturbances our model emphasizes an interplay between production firms networking and working capital firms can use working capital to finance all or a fraction of their outlays on production factors and use the output of other firms as an input in a what is often called a roundabout production structure our model generates a response of inflation which is mute on impact of a monetary policy shock but highly persistent and very hump shaped afterwards it also yields a large contract multiplier for output two times larger than the one implied by a model relying on indexation only we also show that the response of the price markup can be positive on impact of an expansionary monetary policy shock which differs from the standard countercyclical markup channel emphasized in conventional new keynesian models in contrast to models relying on indexation to past inflation our model produces non inertial responses of inflation to productivity and investment shocks a finding which is broadly consistent with the existing var evidence

the welfare implications of foreign exchange intervention abstract this paper examines the welfare implications of foreign exchange intervention in a two country two currency general equilibrium model with limited participation in financial markets and cash in advance constraints on transactions both sterilized and nonsterilized intervention operations have significant impacts on the allocation of liquidity in international financial markets and therefore affect real economic activities the welfare effects of shocks to monetary policy sterilized and nonsterilized foreign exchange interventions are examined and compared the design of welfare maximizing intervention policy rules is also discussed