the demand for money in developing countries assessing the role of financial innovation traditional specifications of money demand have commonly been plagued by persistent overprediction implausible parameter estimates and highly autocorrelated errors the authors argue that some of these problems stem from the failure to account for the impact of financial innovation they estimate money demand for ten developing countries using various proxies for financial innovations they also assess the relative importance of this variable finding financial innovation can be better modeled as a stochastic random walk trend rather than a deterministic time trend financial innovation plays an important role in determining fluctuations of the demand for money the importance of this role increases with the rate of inflation

the optimum quantity of money theory and evidence in this paper we propose a simple and general model for computing the ramsey optimal inflation tax which includes several models from the previous literature as special cases we show that it cannot be claimed that the friedman rule is always optimal or always non optimal on theoretical grounds the friedman rule is optimal or not depending on conditions related to the shape of various relevant functions one contribution of this paper is to relate these conditions to measurable variables such as the interest rate or the consumption elasticity of money demand we find that it tends to be optimal to tax money when there are economies of scale in the demand for money the scale elasticity is smaller than one and or when money is required for the payment of consumption or wage taxes we find that it tends to be optimal to tax money more heavily when the interest elasticity of money demand is small we present empirical evidence on the parameters that determine the optimal inflation tax calibrating the model to a variety of empirical studies yields an optimal nominal interest rate of less than 1 per year although that finding is sensitive to the calibration

transparency of information and coordination in economies with investment complementarities how do public and private information affect equilibrium allocations and social welfare in economies with investment complementarities and what is the optimal transparency in the information conveyed for example by economic statistics policy announcements or news in the media we first consider an environment where the complementarities are weak so that the equilibrium is unique no matter the structure of information an increase in the precision of public information may have the perverse effect of increasing aggregate volatility nevertheless as long as there is no value to lotteries welfare unambiguously increases with an increase in either the relative or the absolute precision of public information hence full transparency is optimal this is because more transparency facilitates more effective coordination which is valuable from a social perspective on the other hand when complementarities are strong enough that multiple equilibria are possible more transparency permits the market to coordinate more effectively on either the bad or the good equilibrium in this case constructive ambiguity becomes optimal if there is a high risk that more transparency will lead to coordination failures this abstract was borrowed from another version of this item

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

nonoptimality of the friedman rule with capital income taxation this paper studies the efficient taxation of money and factor income in intertemporal optimizing growth models with infinite horizons transaction costs technologies and flexible prices second best optimality calls for a positive inflation tax and a non zero capital income tax when there are restrictions on taxation of production factors or profits rents our cases of nonoptimality of the friedman rule which differ from those of mulligan and sala i martin 1997 and extend substantially those of schmitt grohe and uribe 2004a follow from the violation of the diamond and mirrlees 1971 principle on production efficiency

inflationary finance and currency substitution in a public finance framework abstract this paper analyzes the impact of currency substitution on inflationary finance in a public finance framework it is shown that if foreign money balances can be taxed or subsidized the optimal inflation tax is always zero in the more realistic case in which foreign money cannot be taxed the optimal inflation tax is positive whenever there are revenue needs moreover the optimal inflation tax is an increasing function of government spending and the foreign nominal interest rate

principles of fiscal and monetary policy abstract this paper describes a complete and internally consistent set of principles for the conduct of a welfare maximizing fiscal and monetary policy issues of time consistency that arise in applying these principles to actual economics are also discussed

the inflation discipline of currency substitution abstract we examine the argument that currency substitution should be encouraged since it provides an inflation discipline in highly stylized games of national welfare maximization we find that as currency substitution increases currency survival comes to dominate all other considerations and inflation rates do indeed come down however we find no reason to think that these competitive inflation rates will be optimal the discipline embodied in currency substitution may be too weak or too strong it may be a poor substitute for direct coordination of monetary and fiscal policies we try to relate our analysis to recent u k proposals

exchange rate determination interest rates and an integrative approach to the demand for money abstract this paper presents a simple framework in which the money in the utility function miuf and the cash in advance cia approaches to the demand for money can be seen as equivalent this integrative approach to money demand is extended to a two country world and the equilibrium relationship between terms of trade exchange rates and interest rates implied by the underlying stochastic structure of the economy is discussed a theory of currency substitution is presented

the friedman rule in an overlapping generations model with nonlinear taxation and income misreporting this paper models a two period overlapping generations economy with money populated with individuals of different skills they face a nonlinear income tax schedule and can engage in tax evasion money serves two purposes the traditional one modeled through a money in the utility function it also facilitates tax evasion the main message of the paper is that income tax evasion in this framework leads to the violation of the friedman rule the paper also shows that even in the absence of tax evasion when optimality requires differential commodity taxation complementarity of real cash balances and labor supply does not guarantee the optimality of the friedman rule as a boundary solution an additional assumption is required

the optimal inflation tax when money reduces transactions costs abstract it has been argued that if money acts as an intermediate good the optimal inflation tax is zero this paper reexamines such a claim in the context of a model in which money reduces transactions costs it is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero the optimality of a zero inflation tax depends on the properties of the transactions costs technology in particular if the transactions costs technology does not exhibit constant returns to scale it is optimal to resort to the inflation tax

sticky information in general equilibrium this paper develops and analyzes a general equilibrium model with sticky information the only rigidity in goods labor and financial markets is that agents are inattentive sporadically updating their information sets when setting prices wages and consumption after presenting the ingredients of such a model the paper develops an algorithm to solve this class of models and uses it to study the model s dynamic properties it then estimates the parameters of the model using u s data on five key macroeconomic time series it finds that information stickiness is present in all markets and is especially pronounced for consumers and workers variance decompositions show that monetary policy and aggregate demand shocks account for most of the variance of inflation output and hours jel e30 e10

optimal policy intervention and the social value of public information svensson 2006 argues that morris and shin s 2002 analysis is contrary to what is claimed actually pro transparency this paper re examines the issue but with an important modification to the original morris and shin framework recognizing that central banks impact on the economy not only indirectly via their public announcements but also directly through their policy actions we consider the social value of public information in the presence of active policy intervention our results strengthen morris and shin s conclusions considerably in particular we find that public disclosure of the central bank s information is always undesirable

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

heterogeneous private sector information central bank disclosure and stabilization policy conventional wisdom has it that a central bank that uses an informational advantage to undertake active policy intervention can do as well at least so far as real outcomes are concerned by making its information publicly available and abstaining from stabilization this notion is examined using a framework incorporating heterogeneous private sector information concerning aggregate demand shocks an activist regime in which the central bank exploits its own information to engage in stabilization is found to be unambiguously superior to a noninterventionist regime where the central bank maintains a constant setting of policy but publicly discloses its own information

the impact of inflation on budgetary discipline abstract this paper views the budgetary process as a limited contingencies contract between the treasury and the ministers allowing a minister to ask for budget revisions upon costly verification by the treasury the minister may obtain extra funds for significant state verification costs and for low volatility the contract is non contingent for volatility significant enough the contract becomes state contingent it reduces the initial allocation and reduces the threshold associated with budgetary revisions in volatile economics the projected revenue understates the realized budget and the average budget error is positive the model s predictions are confirmed using data from latin america

policy with dispersed information information regarding economic fundamentals is widely dispersed in society is only imperfectly aggregated through prices or other indicators of aggregate activity and cannot be centralized by the government or any other institution in this paper we seek to identify policies that can improve the decentralized use of such dispersed information without requiring the government to observe this information we show that this can be achieved by appropriately designing the contingency of taxation on ex post public information regarding the realized fundamentals and aggregate activity when information is common as in the ramsey literature or when agents have private information only about idiosyncratic shocks as in the mirrlees literature the contingency on fundamentals alone suffices for efficiency when instead agents have private information about aggregate shocks the contingency on aggregate activity is crucial an appropriate combination of the two contingencies permits the government to i dampen the impact of noise and hence reduce non fundamental volatility without also dampening the impact of fundamentals ii induce agents to internalize informational externalities and hence improve the speed of social learning iii restore a certain form of constrained efficiency in the decentralized use of information and iv guarantee that welfare increases with the provision of any additional information jel c72 d62 d82

is the friedman rule optimal when money is an intermediate good in contrast to the recent literature on the optimal inflation tax we show that in models where money reduces transactions costs it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes the main reasons for this result are that the variable costs of supplying real balances are negligible and the inflation tax is a unit tax we also show that the intermediate good optimal taxation rules in the public finance literature cannot be directly applied both when money is costless and when it requires resources to be produced

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

welfare costs of inflation in a dynamic economy with search unemployment abstract we present a monetary general equilibrium model with labor market frictions in the form of search unemployment which is calibrated for the us economy interestingly both employment and output may even increase with the rate of inflation depending on the elasticity of labor supply considering the transition dynamics following a change in the monetary policy the optimal quarterly inflation rate is found to amount to approximately 0 6 in the benchmark case a reduction of the inflation rate from its current level to its optimal value only results in small welfare gains equal to 0 08 of total consumption

the optimal inflation path in a sidrauski type model with uncertainty abstract in this paper it is shown that in a sidrauski type model with uncertainty the chicago rule remains valid as a prescription for the average rate of inflation although there is a systematic difference between the perfect foresight and the uncertainty case quantitatively however the difference turns out to be very small the paper shows how to calculate the optimal monetary policy as a function of the state variables using the method of parameterized expectations in terms of expected utility the optimal policy is as good as the simple policy that reduces the money supply at the rate of time preference

inflation employment and welfare in the presence of transactions costs for some time now two issues of primary importance in macroeconomics and monetary theory have been the relation between inflation and unemployment the phillips curve and the optimum rate of inflation the optimum quantity of money in both of these areas the work of friedman and phelps has been influential friedman 1968 and phelps 1970 emphasized the role of inflationary expectations in generating a short run phillips curve like tradeoff but argued that in the long run the phillips curve is vertical that is friedman and phelps claimed that in the long run defined as the time period within which expectations fully adjust to actual circumstances inflation and employment should be uncorrelated more recently friedman 1977 has argued that since the rate of inflation and its variability tend to be positively related inflation and employment may be negatively related in the long run this is the positively sloped phillips curve phenomenon in recent years the link between inflation and employment has continued to receive considerable attention the vast rational expectations literature on the role of monetary policy and the equilibrium approach to the business cycle are in large part an outgrowth of the earlier phillips curve controversy the notion that there is an inverse long run relation between inflation and employment has recently received theoretical support from barro and santomero 1976 stockman 1981 and aschauer and greenwood 1983 related studies concerning the real effects of inflation have been undertaken by jovanovic 1982 stockman 1984 and abel 1985 the common element running through all of these papers is that the real effects of inflation arise from the transactions technology that underlies money demand l

on the persistence of leadership or leapfrogging in international trade when two countries starting from different quality levels reflecting different conditions on domestic market demands open to trade two possible equilibria arise in the first the quality leader maintains its position in the second leapfrogging occurs however the latter is possible only if the initial quality gap is not too wide further when the risk dominance criterion is used only the former equilibrium is selected these results suggest that initial conditions such as domestic market size or home demand preferences are important factors in determining relative competitiveness of firms in international markets

characterization of the optimal tax on money when it functions as a medium of exchange abstract this paper compares the relative efficiency of the implicit taxation of money and the explicit taxation of real commodities to finance a given amount of government expenditures in the model used money has the property of reducing transactions costs a sufficient condition for a tax on money to be welfare dominated by a linear tax on consumption expenditures is characterized in terms of a few parameters very familiar in macroeconomics this characterization is especially useful in the cases of heterogeneous consumers and increasing returns to scale in transactions since then the optimal tax on money may in principle be positive

seigniorage and tax smoothing in the united states 1914 1986 abstract when monetary and fiscal authorities cooperate to minimize the distortionary costs of financing an exogenous stream of government expenditures barro s tax smoothing model implies a long run relationship between tax revenues and inflation previous empirical tests of this relationship are reinterpreted in light of recent work on cointegration and are shown to hold only when stochastic temporal variation in the excess burden of taxes and seigniorage is transitory in nature a new test that holds in the presence of nonstationary disturbances is developed and applied annual u s data from the period 1914 to 1986 reject the revenue smoothing hypothesis

time consistency of fiscal and monetary policy the problem of time inconsistency arises from two different sources first as shown by guillermo a calvo 1978 the re is an incentive for each government to engage in an initial unanti cipated inflation second as discussed by robert e lucas and nancy l stokey 1983 there is an incentive for each government to deviat e from the path of taxes announced by the preceding government in th is paper it is shown that these two sources of time inconsistency ca n be removed by a particular method of debt management involving bot h nominal and indexed government bonds of various maturities copyright 1987 by the econometric society

on the flexibility of monetary policy the case of the optimal inflation tax this paper examines optimal monetary policy under uncertainty in a context in which policy makers are able to make credible policy commitments we study an optimal taxation problem of minimizing the social cost of financing a stochastic and exogenous level of government transfers since in the basic model the welfare costs of inflation derive only from expected inflation the optimal monetary policy is highly responsive to the state of nature in a benchmark case in which all shocks are transitory the optimal policy calls for loading all the variability of government transfers on the shoulders of the inflation tax

efficient use of information and social value of information this paper analyzes equilibrium and welfare for a tractable class of economies games that have externalities strategic complementarity or substitutability and heterogeneous information first we characterize the equilibrium use of information complementarity heightens the sensitivity of equilibrium actions to public information raising aggregate volatility whereas substitutability heightens the sensitivity to private information raising cross sectional dispersion next we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective the efficient use of information reflects the social value of aligning choices across agents finally we examine the comparative statics of equilibrium welfare with respect to the information structure the social value of information is best understood by classifying economies according to the inefficiency if any in the equilibrium use of information we conclude with a few applications including production externalities beauty contests business cycles and large cournot and bertrand games

heterogeneous information quality strategic complementarities and optimal policy design abstract the beauty contest framework of morris and shin 2002 is extended to allow sub groups within the population of agents to differ in the quality i e precision of their private information we discuss the inefficiency of the resulting model s equilibrium and assess the relative effectiveness in remedying this inefficiency of i a pigouvian tax scheme ii direct policy intervention by means of an instrument which can modify the state of the world the disclosure policy implications of each of these two policy approaches are also analyzed

socially optimal coordination characterization and policy implications in recent years there has been a growing interest in macro models with heterogeneity in information and complementarity in actions these models deliver promising positive properties such as heightened inertia and volatility but they also raise important normative questions such as whether the heightened inertia and volatility are socially undesirable whether there is room for policies that correct the way agents use information in equilibrium and what are the wel

a liquidity in advance model of the demand for money under price uncertainty abstract we develop a model of money demand in which the asset and goods markets open sequentially money balances are subject to price level and consumption risk empirical evidence from a bivariate arch framework suggests both sources of risk reduced money demand in the 1970s inflation risk depresses money demand throughout our sample 1962 1987 the econometric analysis resolves conflicting empirical estimates reported in the literature

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

inflation and growth pecuniary transactions costs and qualitative equivalence this paper develops a pecuniary transactions costs tc approach to reexamine the principal relationships and results concerning inflation and growth in a model with a general tc function and an endogenous labor leisure choice we consider four special cases by distinguishing among money as 1 a consumption good 2 a production good 3 an investment good and 4 a consumption good as well as an investment good under some weaker conditions as in related studies a reversed tobin effect obtains for all cases a high monetary growth rate leads to lower steady state capital labor consumption and real money balances these findings suggest that a pecuniary tc model is qualitatively equivalent to alternative models in the literature

optimal monetary policy when information is market generated endogenous i e market generated signals observed by firms have crucial implications for monetary policy when information is endogenous firms gather a demand signal from their market that is both real and nominal as a result the traditional surprise channel of monetary policy is absent instead monetary policy works through a signaling channel as it affects firms information through the demand signal the optimal policy is then the signaling policy i e the policy that maximizes the information content of the demand signal in our setup the signaling policy targets a positive correlation between money supply and prices which emphasizes the natural response of prices to real shocks on the contrary in the more traditional case of exogenous information optimal monetary policy would stabilize prices as it acts through the surprise channel we show that the signaling policy is optimal regardless of the amount of attention that firms pay to central bank communication

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

information acquisition and learning from prices over the business cycle abstract we study firms incentives to acquire costly information in booms and recessions to investigate the role of endogenous information in accounting for business cycles our model predicts that for a wide range of parameter values firms have a stronger incentive to acquire information when the economy has been in a recession and a pessimistic belief about the state of the economy prevails than after a boom when firms share an optimistic belief the equilibrium price system which features endogenous information transmission dampens aggregate fluctuations by discouraging information acquisition our welfare analysis reveals that information acquisition in the decentralized economy is not efficient this is due to inefficient employment dispersion arising from information heterogeneity in equilibrium time series data for the u s economy support the model s prediction of wages being more informative about total factor productivity after recessions than following booms

attention misallocation social welfare and policy implications we examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern in this setting the attention allocation may not be monotone in endowed attention capacity agents may decrease their attention on or even ignore the more accurate signal when capacity increases as a result social welfare may decrease when they have more attention to process information and it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity we derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies

the optimal inflation tax in the presence of currency substitution abstract an important result in the optimal inflation tax literature is that if money is modeled as reducing transactions costs the optimal nominal interest rate is zero this paper examines this issue in the context of a small open economy where both domestic and foreign currency circulate as media of exchange it is shown that the presence of foreign money enables the government to reduce the distortion introduced into the economy by a positive foreign nominal interest rate by setting a positive domestic nominal interest rate