the optimal taxation of fiat money in search equilibrium this paper investigates the link between welfare and the taxation of money in the context of a general equilibrium search model where decentralized trading motivates the use of fiat money since buyers with money must invest effort or search intensity to contact sellers with goods a natural trading externality arises given a sufficiently productive economy search efforts will be too low relative to social efficiency this provides a welfare improving role for policies which tax money balances the nature of this role is explored and its implications for optimal monetary policy discussed copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

exchange rates and the fiscal theory of the price level abstract this paper addresses exchange rate determination under a nominal interest peg in a two country cash in advance model under two types of cash in advance constraints if both governments peg the nominal interest rate on domestic bonds there is a continuum of equilibria each consistent with different nominal exchange rates and real resource allocations the well known finding of equilibrium uniqueness under a nominal interest rate peg in a closed economy does not survive in a multi country multi currency setting

government spending the balance of trade and the terms of trade in british history abstract this paper investigates the relationship between government spending the balance of trade and the terms of trade using early british data a large open economy intertemporal framework in which ricardian equivalence holds predicts a larger effect of temporary government spending changes on the trade deficit than permanent ones further a pure switch between debt and taxes should have no effect on trade flows the results provide some support for these hypotheses although they are sensitive to sample period and the method of decomposition of government spending a negative relationship between government spending and the terms of trade is also found

positional goods conspicuous consumption and the international demonstration effect reconsidered abstract ragnar nurkse s early formulation of the international demonstration effect explicitly eschewed the possibility that international emulation of the rich has anything to do with status seeking or to use veblen s phrase with conspicuous consumption this paper argues in favor of a reassessment of nurkse s formulation in the light first of recent analyses of advanced countries by hirsch frank and scitovsky which show the powerful welfare implications of consumption based on status seeking and in the light second of the large sociological literature that has investigated the modernization process in developing countries the analysis casts doubt on nurkse s eschewal of status seeking behavior at the international level and suggests an alternative view with a profoundly different set of welfare implications for the third world

inflation interest rates and welfare this paper develops a simple general equilibrium model of a monetary economy with a capital market money demand arises from a cash in advance constraint rather than from any direct role in the utility function and uncertainty gives rise to a meaningful portfolio choice between money and bonds we show that velocity is increasing in the rate of inflation and that the optimal monetary policy is that which maximizes real balances we also show that the real rate of interest is not invariant to monetary policy inflation lowers the real rate

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

note on international differences in service prices and some related empirical phenomena abstract this paper provides an alternative explanation of some important stylized facts of development including the phenomenon of international differences in service prices in terms of differences in factor endowments between countries in so doing this paper advances a general equilibrium model of a small open economy which features non traded goods as well as demand factors thereby incorporating important economic aspects which were neglected by many others an interesting finding which emerges from this exercise is that many puzzles in development can be explained simply in terms of differences in factor endowments between countries

money interest rates and exchange rates with endogenously segmented markets we analyze the effects of money injections on interest rates and exchange rates when agents must pay a baumol tobin style fixed cost to exchange bonds and money asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money infrequently when the government injects money through an open market operation only those agents that are currently trading absorb these injections through their impact on these agents consumption these money injections affect real interest rates and real exchange rates the model generates the observed negative relation between expected inflation and real interest rates as well as persistent liquidity effects in interest rates and volatile and persistent exchange rates

specialization the terms of trade and the international transmission of monetary policies the ricardian model with a continuum of goods is extended to a cash in advance environment with variable labor supply which allows domestic monetary policy to influence real activity through an inflation tax channel and to be internationally transmitted to real activity abroad the continuum of goods feature of the model allows for the international transmission of monetary policies to occur at both intensive and extensive margins at the intensive margin monetary policy is internationally transmitted via its impact on relative employment levels at home and abroad this in turn alters the terms of trade thereby affecting the range of commodities in which the home country has a comparative advantage monetary policies are thus transmitted at the extensive margin by influencing international patterns of trade and specialization

international migration non traded goods and economic welfare in the source country abstract this paper examines the economic effects of emigration in a source country producing both traded and non traded commodities it is shown that even if the economy faces fixed terms of trade emigration can still affect the welfare of the non migrants and the direction of the effect in this context will always be negative

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

international financial intermediation and aggregate fluctuations under alternative exchange rate regimes this paper presents a two country overlapping generations model in which financial intermediation arises endogenously as an incentive compatible means of economizing on monitoring costs because of the existence of transactions costs money markets in the two countries are segmented and investors have differential access to international credit markets the model is used to generate predictions about the role of international intermediation in determining the nature of business cycle phenomena across alternative exchange rate regimes disturbances are propagated by a credit allocation mechanism which also lends a novel flavor to the model s long run properties

dynamic inconsistency and the optimal choice of the exchange rate regime abstract in a cash in advance monetary economy facing dynamic inconsistency issues a fixed exchange rate regime may be pareto superior to a flexible regime if it allows for a non zero level of trade in domestic currency denominated assets

stabilizing monetary injection policies abstract the primary concern of this paper is understanding how prices and interest rates respond to open market operations in a model economy developed by grossman and weiss but with more general utility functions we establish global existence of equilibrium paths and observe that prices and interest rates rise initially but thereafter oscillate around a new steady state also investigated are optimal monetary policies wherein injections take place in more than one time period and corresponding to which the equilibrium prices are most stable existence of such policies is established by mathematical analysis and its detailed structure explored by numerical simulation journal of economic literature classification numbers e50 e52

endogenous market participation and the general equilibrium value of money we study the monetary theory implications of fixed costs associated with trade in private assets we show that with heterogeneous endowment profiles it is possible for an endogenous subset of agents to hold currency even when it is dominated in return by a competing asset with respect to positive issues in monetary theory the model implies that changes in the steady state growth rate of the money supply have a negative effect on real interest rates because of endogenous market participation measures on the normative side we show that there may be an equity efficiency trade off from monetary deflation

the optimal mix of taxes on money consumption and income abstract we determine the optimal combination of taxes on money consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes we show that the optimal policy does not tax money regardless of whether the government can use as alternative fiscal instruments an income tax a consumption tax or the two taxes jointly these results are at odds with recent literature we argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature

international commodity prices growth and the outbreak of civil war in sub saharan africa to learn more about the effect of economic conditions on civil war we examine whether sub saharan civil wars are more likely to start following downturns in the international price of countries main export commodities the data show a robust effect of commodity price downturns on the outbreak of civil wars we also find that sub saharan countries are more likely to see civil wars following economic downturns in their main oecd export destinations

international transmission of anticipated inflation under alternative exchange rate regimes this paper studies the international transmission of anticipated inflation a two country two good two currency cash in advance model is used to examine analytically and numerically the consequences of changes in a country s inflation rate domestic monetary policy influences real activity at home through an inflation tax channel these real effects are transmitted to the foreign country via fluctuations in the real exchange rate under a flexible nominal exchange rate inflation is a beggar thy neighbor policy under a fixed nominal exchange rate each country suffers a welfare loss when one country inflates the quantitative results are fairly insensitive to variations in the cash credit mix used to finance investment expenditures 2001 elsevier science ltd all rights reserved

liquidity redistribution and the welfare cost of inflation abstract the long run welfare costs of inflation are studied in a micro founded model with trading frictions and costly liquidity management by modelling the liquidity management decision the model endogenizes the responses of velocity output the degree of market segmentation and the distribution of money compared to the traditional estimates based on a representative agent model the welfare costs of inflation are significantly smaller due to distributional effects of inflation the welfare cost of increasing inflation from 0 to 10 is 0 62 of consumption for the us economy furthermore the welfare cost is generally non linear in the inflation rate

search inflation and capital accumulation abstract this paper constructs a model to integrate the search monetary theory into a neoclassical growth model with divisible goods and money the model is used to examine the relationship between money growth and capital accumulation the framework uncovers a distinct extensive effect that an increase in the money growth rate increases the frequency of successful trades by increasing the number of agents in the market this positive extensive effect on the number of trades can dominate the conventional negative intensive effects of money growth on individuals labor input and real money balance in which case increasing the money growth rate increases aggregate capital and output

currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach

currency substitution and the real exchange rate the utility maximization approach abstract this paper studies the currency substitution hypothesis with rational expectations in terms of a sidrauski type model where domestic and foreign money enter the utility function it shows that contrary to liviatan 1981 the approach does not necessarily contradict calvo and rodriguez 1977 furthermore the impact of monetary stabilization policy is fully characterized with flexible and pre fixed rates for an extension of dornbusch and mussa 1975 a brief analysis of the optimal quantity of money is also provided

the demand of liquid assets with uncertain lumpy expenditures abstract we consider an inventory model for a liquid asset where the per period net expenditures have two components one that is frequent and small and another that is infrequent and large we give a theoretical characterization of the optimal management of liquid asset as well as of the implied observable statistics we use our characterization to interpret some aspects of households currency management in austria as well as the management of demand deposits by a large sample of italian investors

relaxing the cash in advance constraint at a fixed cost are simple trigger target portfolio rules optimal this paper studies the microeconomic foundations of trigger target rules of portfolio demand such as the demand for money it allows an agent to relax her cash in advance constraint by paying a fixed transactions cost to move between money and the interest bearing asset an example is generated where the potential of being liquidity constrained in order to avoid incurring the transactions cost can cause excessive nonconcavities of the value function in a dynamic program such that simple trigger target rules of money demand are suboptimal

alternative monies and the demand for media of exchange prepaid cards cash cards electronic purse smart cards these are but a few of the elements in the revolution now taking place in monetary systems around the world at that movement s heart is the emergence of a new value transfer system where alternative monies are offered to consumers through the miracle of electronics in some cases the new monies are merely a repackaging of existing media of exchange for example stored value cards that have been traditionally available for single vendors now are being offered for multiple merchant use in other cases technology and its acceptability are being cross sold as with debit cards and the expanded use of atm cards as point of sale vehicles however the banking industry is perhaps most enthusiastic about the emerging technology of smart cards chip in cards that have been making inroads in europe with the expanded capability of a memory chip alternative monies are seen to have the capability of moving to a new plateau of acceptance there are many stories in the business press about the general enthusiasm for these new forms of money for example block 1995 and cutler 1994 herald the new day of electronic money they forecast the demise of both the greenback and of commercial banks that exploit the float derived from its use according to the hyperbole from marketing reps from this side of the financial community currency and demand deposits soon will be endangered species consumer acceptance is alleged to be high and cost efficiency associated with the new technology is expected to be substantial

indeterminacy and volatility of exchange rates under imperfect currency substitution i introduction this paper presents a model of exchange rate determination under currency substitution its primary objective is to examine the implications of currency substitution for the behavior of exchange rates in a general equilibrium model under uncertainty the basic framework used here is the cash in advance model of lucas 1982 which is extended to allow for substitution among currencies it is well known that under perfect currency substitution foreign exchange rates may become indeterminate and behave independently of fundamental economic variables the reason is that the objects traded in foreign exchange markets are fiat currencies which unless supported by binding legal tender laws have no fundamental economic value when agents have unrestricted access to currency markets and are free to use any currency as the means of payment currency demands are entirely determined by speculation and consequently equilibrium exchange rates become indeterminate e g see kareken and wallace 1981 increased integration of financial markets reduces the costs and the risks of holding balances in multiple currencies 4 this creates more opportunities for currency substitution and it is reasonable to assume that agents are free to use any currency as the means of the payment in some of their international transactions for example suppose some percentage of transactions involving the u s exports to germany can be paid with either u s dollars or german marks agents will look at the opportunity costs i e u s and german nominal interest rates and expected exchange rate changes to decide what combination of the two currencies to use in these transactions if the potential costs and benefits of holding the two currencies are similar then agents will be indifferent between the two currencies we show that this could lead to exchange rate indeterminacy and nonfundamental volatility and change the effectiveness of monetary policies in our cash in advance framework agents are allowed to use any currency in some of their transactions called unrestricted transactions to make different currencies attractive at different times we allow the governments to follow timevarying monetary policies as a result agents will change their currency holdings to maximize the risk adjusted return on their portfolio subject to the constraint that specific currencies must be used as the means of payment in their restricted transactions 2 to answer specific questions about the behavior of exchange rates we obtain closed form solutions for agents demand functions equilibrium interest rates and the equilibrium exchange rate it turns out that two types of equilibrium exist in the first type the two currencies have different risk return profiles such that agents will prefer to use only one of them in unrestricted transactions in this case the exchange rate will be determined by fundamentals however as a large percentage of transactions become unrestricted the equilibrium exchange rate becomes more volatile under this type of equilibrium the effectiveness of monetary policies are changed currencies of countries that have high nominal interest rates will not be in demand for use in unrestricted transactions 3 this lack of demand means that any increase in the money supply of a high nominal rate country will lead to a larger increase in its rate of inflation and thus a larger reduction in the value of its currency in other words increased currency substitution increases the sensitivity of the currency values to changes in the money supply of high nominal rate countries also we show that as national economies become more integrated and more opportunities for currency substitution arise currencies of countries with high nominal interest rates would decline substantially the reason is that higher opportunity costs are associated with holding these currencies and thus agents will fully take advantage of currency substitution to reduce their holdings of these currencies reducing the value of these currencies

money creation and the shadow banking system many explanations for the rapid growth of the shadow banking system in the mid2000s focus on money demand this paper asks whether the short term liabilities of the shadow banking system behave like money we rst present a simple model where households demand money services which are supplied by three types of claims deposits treasury bills and asset backed commercial paper abcp the model provides predictions for the price and quantity dynamics of these claims as well as the behavior of the banking system in terms of issuance and the monetary authority in terms of open market operations consistent with the model the empirical evidence suggests that the shadow banking system does respond to money demand

trade and tax reforms in a cash in advance economy we examine the effects of both tariff only and coordinated trade tax reforms on market access government revenue and welfare for a small monetary economy under the assumption that a certain fraction of purchases of each good must be financed with cash held in advance we show that if the cash requirement ratio in the exportable sector is greater than that in the importable then contrary to previous results i a uniform radial reduction of tariffs has ambiguous effects on both welfare and market access ii tariff and consumption tax reforms that leave consumer prices unchanged may be more efficient in improving market access and welfare than a reform that involves only tariffs and iii export and production tax reforms that keep producer prices unchanged may be welfare deteriorating

on a simple rule for the optimal inflation rate in second best taxation abstract the optimal inflation rate is analyzed in the framework of dynamic second best with endogenous factor prices it is shown that when the marginal excess burden of taxation is relatively small the optimal inflation rate is approximated by a simple rule the paper also analyzes the robustness of this rule to the specification of the model money as an input in utility or production

transactions costs inflation and the variety of intermediation services a general equilibrium model with fixed costs of financial intermediation and costs of transacting with intermediaries is constructed this model is used to show that ignoring fixed costs of in termediation is not innocuous in tobin baumol type transactions cost models of money demand deflation is optimal in spite of the fact that an increase in inflation reduces nominal interest rates and may increase the transactions costs incurred by all groups of economic agents changes in reserve requirements have ambiguous effects the authors obtain novel results due to the fact that the variety of intermediation services is affected by government intervention copyright 1987 by ohio state university press

asymmetnc taxation and the theory of the competitive firm under uncertainty this paper examines the implications of the asymmetries in the tax treatment of corporate profits and losses for the theory of the competitive firm under uncertainty it is shown that the tax asymmetry introduces a curvature into the firm s target function which affects its behaviour in the short run in long run industry equilibrium however most of the effects disappear at the firm level but still remain at the industry level

effects of inflation on the pattern of international trade this paper integrates a transactions based model of money with a real trade model and examines how steady state inflation affects the direction and size of international trade the effects of inflation work through changes in supplies of labour and capital which are chosen jointly with production and consumption by utility maximizing households if production exhibits constant returns to scale in domestically mobile factors then it is unlikely that the economy will produce both of the two traded goods for certain rates of inflation small changes can have dramatic effects on the direction of trade for other rates of inflation the volume of trade is affected when money is held for transactions purposes and factor supplies are endogenous changes in inflation can cause changes in the pattern of trade that do not reflect real underlying changes in comparative advantage

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

international status seeking trade and growth leadership we study a two country endogenous growth model where the utility of agents in developing countries is affected by consumption gaps with advanced economies international status seeking tends to revert growth differentials in favour of the developing country preferences with endogenous status desire generate convergence in growth rates in the presence of structural gaps and convergence in income levels if productivity differences disappear this process is driven by declining terms of trade and faster capital accumulation of the status seeker the model predictions are shown to be consistent with the stylized facts that characterized the growth performance of east asian economies

economic exchange during hyperinflation historical evidence indicates that hyperinflations can disrupt individuals normal trading patterns and impede the orderly functioning of markets to explore these issues we construct a theoretical model of hyperinflation that focuses on individuals and their process of economic exchange in our model buyers must carry cash while shopping and some transactions take place in a decentralized setting in which buyer and seller negotiate over the terms of trade of an indivisible good since buyers face the constant threat of incoming younger hence richer customers their bargaining position is weakened by inflation allowing sellers to extract a higher real price however we show that higher inflation also reduces buyers search increasing sellers wait for customers as a result the volume of transactions concluded in the decentralized sector falls at high enough rates of inflation all agents suffer a welfare loss

corporate taxation incumbency advantage and entry abstract it is the purpose of this paper to show that corporation tax may affect industrial structure analyzing the effects of corporation tax we demonstrate that it tends to favour incumbents over entrants we further show that the effect of this advantage on an incumbent s output depends on his profit or loss history an incumbent with a past profit is likely to produce a greater output thereby partially or fully crowding out an entrant s output in contrast an incumbent with a past loss is more likely to produce a smaller output making entry easier

ethnicity and conflict an empirical study this paper examines the impact of ethnic divisions on conict the empirical specication is informed by a theoretical model of conict esteban and ray 2011 in which equilibrium conict is related to just three distributional indices of diversity ethnic polarization ethnic fractionalization and a greenberg gini index constructed across ethnic groups our empirical ndings verify that these distributional measures are signicant correlates of conict the underlying theory permits us to use these results to make inferences about the relative importance of public goods in conict as well as the extent of within group cohesion in conictual activity these eects are further strengthened as we introduce country specic measures of group cohesion and the relative importance of public goods and combine them with the distributional measures exactly as specied by the theory

linking conflict to inequality and polarization in this paper we study a behavioral model of conflict that provides a basis for choosing certain indices of dispersion as indicators for conflict we show that a suitable monotone transform of the equilibrium level of conflict can be proxied by a linear function of the gini coefficient the herfindahl hirschman fractionalization index and a specific measure of polarization due to esteban and ray jel classification d74 d31

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

anticipated monetary policy in a cash in advance economy this paper analyses the effects of perfectly foreseen monetary policy within the framework of a standard cash in advance economy anticipated monetary policy is shown to have real effects by influencing inflationary expectations in a cash in advance economy an increase in the anticipated rate of inflation reduces the return to labour supply and induces a substitution away from time spent in the labour market the paper analyses the implication of this substitution for the time paths of output prices interest rates real and nominal and stock market prices

the challenge of monetary theory departing from custom i want to address a problem that needs to be solved rather than one that has been solved i do not have much to contribute to its solution but i believe that the problem is important and want to focus attention on it in general terms the problem is to find appropriate conceptual foundations for monetary economics i believe that we do not as yet have a suitable theoretical framework for studying the functioning of a monetary system the main obstacle to the development of such a framework is our habit of thinking in terms of frictionless organized i e walrasian markets the problem is partly a problem of language the central concepts of economics demand supply and price are concepts that presuppose a system of centralized walrasian markets we are used to thinking in terms of these concepts and we tend to apply them rather automatically to the market for money frequently without realizing that the market for money must be a rather non walrasian market if indeed it can be called a market at all more or less all the models of monetary economics that are being used in practice proceed in this way using artifical adaptations of the walrasian centralized markets model to accommodate money without actually giving an account of what the role of money in the economy is the problem is one of pure economic theory however it bears on many important questions of applied economics and economic policy to study the relation between money income and prices we need a framework which gives a satisfactory account of the relation between the monetary system and the price mechanism to study the effects of central bank open market

the optimal rate of inflation and taxation abstract we investigate the optimal rate of inflation in a finitely lived individual model using the optimal commodity tax framework the inefficiency in dynamic allocation of the economy should be taken into account in optimal monetary policy the optimal rate of inflation may be positive when the steady state capital labor ratio is relatively smaller than the first best level

the dynamic effects of tax law asymmetries under the laws of most countries a distinction is made between gains and losses by businesses losses that must be carried forward are subjept to two penalties a loss of interest and expiration previous examinations have focused on the higher expected tax payments such a tax system without full loss offset imposes on risky projects this paper presents a dynamic analysis of the impact of taxation on investment when gains and losses are treated asymmetrically the results demonstrate how firm characteristics and the timing of taxes can influence behaviour under current u s tax law a distinction is made between gains and losses by businesses for corporations gains are taxed at what is essentially a flat rate of 46 while losses do not necessarily qualify for a refund at the same rate to obtain an immediate refund the taxpayer must have had taxable income during the three previous years in excess of the current loss any losses that cannot be carried back in this fashion must be carried forward subject to two implicit penalties such loss carryforwards earn no interest and they expire after fifteen years similar provisions apply in other countries hence businesses investing in risky projects for which the probability of having to carry losses forward is positive can expect to pay higher taxes than they would under a system with full loss offset i e the immediate refund of taxes for losses incurred many corporations

the economics of the to and fro migrant some welfare theoretical considerations the effects of international to and fro migration on the economic welfare of the migrants and the nonmigrants in the host and home countries are examined a to and fro migrant is defined as a worker who changes residence from origin to destination without any systematic tendency to remain in any of the two permanently the study is based on the theoretical framework developed by krauss the results indicate that to and fro emigration from a source country to a recipient country increases the economic welfare of the migrants and the nonmigrants residing in the host country but it tends to decrease the welfare of the nonmigrants residing in the source country in general the migration also tends to be pareto optimal from a world point of view excerpt

target2 and central bank balance sheets the euro area s target2 payments system has featured heavily in academic and popular discussions of the euro crisis some of this commentary has described the system as being responsible for a secret bailout of europe s periphery another common theme has been that the system has built up large credit risks for germany should the euro break up this paper discusses the target2 system focusing in particular on how it impacts the balance sheets of the central banks that participate in the system it discusses the factors driving target2 balances considers some counterfactual cases in which euro area monetary policy operated differently examines the risks to germany and considers proposals for settlement of these balances

in defense of the finance constraint simple models of monetary trade commonly impose a finance constraint on expenditure it is often suggested that this finance constraint is artificial a result of money s being the only asset of the absence of credit and of the special time structure of such models this paper shows that the finance constraint on aggregate expenditure remains in force when other assets and credit are introduced and when the time structure is generalized to allow overlapping income periods of differing lengths most of the objections to the finance constraint are shown to involve fallacies of composition there are economists to whom a constraint of the form pc m in units t must appear unthinkable r e lucas jr 1980

uncertainty inflation and welfare this paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk in a microfounded search theoretical monetary model we calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness we show that in the presence of imperfect insurance the estimated long run welfare costs of inflation are on average 40 to 55 smaller compared to a complete markets representative agent economy and that inflation induces important redistributive effects across households

avoiding the inflation tax i study the effects of inflation on the purchasing behavior of buyers in the lagos wright monetary economy the standard framework fails to capture the long standing intuition that when inflation increases agents try to spend their money holdings speedily i propose a simple realistic extension in which buyers can rebalance their money holdings only sporadically i e not every period i show that in such a case higher inflation can induce buyers to spend their money faster by frontloading their consumption and searching more intensively for transactions these trade distortions have traditionally been associated with the economic costs of inflation

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

heterogeneous consumers segmented asset markets and the real effects of monetary policy this paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects specifically i develop a flexible price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings because varieties of consumption bundles are purchased sequentially newly injected money disseminates slowly throughout the economy via second round effects the model predicts a short term inflation output trade off a liquidity effect countercyclical markups and procyclical wages after monetary shocks among other correlations of financial variables it also reproduces the empirical negative relationship between changes in the money supply and markups

inventory accumulation in a search based monetary economy abstract this paper explores the implications of a search based model of money for the linkage between steady state inventory accumulation inflation and welfare because individual traders in the search economy do not internalize the positive effects inventory accumulation and search effort have on the aggregate economy they are too low relative to social efficiency it is established that a tax on money balances can alleviate these externalities and improve aggregate welfare it does so by i directly increasing the optimal search intensity choices of the individual trader and ii stimulating the accumulation of inventories through a mundeil tobin type effect an increase in the equilibrium level of inventory accumulation also positively affects search effort the implications for optimal monetary policy are discussed

how does a devaluation affect the current account abstract this paper explores how an exchange rate devaluation affects the current account in a sticky price inter temporal optimizing model the main issue addressed is how the features of international pricing affect the response of the current account when prices are all set in the producer s currencies the effect of a devaluation on the current account depends on the conventional marshall lerner conditions this is fundamentally an a temporal condition depending on the elasticity of substitution between home and foreign goods however when prices are all set in consumer s currencies the response of the current account depends upon the size of the inter temporal elasticity of substitution of consumption across time periods this represents an inter temporal condition when pricing to market is partial the effect of devaluation on the current account depends on the strength of the a temporal elasticity relative to the inter temporal elasticity

exchange rate based stabilizations under real frictions the role of endogenous labor supply abstract this paper studies exchange rate based stabilization programs in the context of a model of a small open economy where labor supply is endogenous agents derive utility from both consumption and leisure in environments where consumption is subject to a cash in advance constraint a cut in the rate of devaluation lowers the nominal interest rate and hence alters the optimal mix of consumption and leisure the paper shows that in the presence of adjustment costs of investment a perfectly credible cut in the devaluation rate causes simultaneously a consumption and output boom a cumulative current deficit a sustained real appreciation of the domestic currency and an increase in labor supply over time it is also shown that an imperfectly credible stabilization program in this environment would have effects similar to the perfectly credible program but generate richer dynamics such as an initial boom in output followed by a recession which begins prior to the end of the program the model has clear welfare implications in that permanent reductions in inflation are unambiguously welfare enhancing

homogeneity and the transactions demand for money the paper presents the properties of money demand implied by the frenkel jovanovic 1980 inventory model without approximation the money demand function is implicitly defined by the first order condition of the model from the implicit function we show that the elasticities of money demand satisfy a set of homogeneity conditions we also show that increasing transactions cost increases the cash flow elasticity the interest elasticity in absolute value and the uncertainty elasticity but decreases the transactions cost elasticity if the ratio of cash flow uncertainty to the transactions variable is small then the interest elasticity is greater than 1 2 in contrast it lies between 71 and 1 2 when the approximation method is applied

agricultural supply response in the argentinean economy este trabajo tiene como objetivo estimar la forma reducida de una funcion de oferta agropecuaria de la economia argentina en el marco de un modelo de equilibrio general los resultados de la estimacion de la oferta agropecuaria con datos que cubren los anos 1939 1984 muestran que hay una elasticidad precio de oferta de largo plazo de aproximadamente 1 3 que es estadisticamente significativa y que la convergencia al estado estacionario se logra en aproximadamente nueve anos esta estimacion de la elasticidad de oferta agropecuaria es aproximadamente tres veces mas grande que estimaciones previas con modelos de equilibrio parcial

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

the behavior of money velocity in high and low inflation countries this paper presents a general equilibrium model of money demand where the velocity of money changes in response to endogenous fluctuations in the interest rate the parameter space can be divided into two subsets one where velocity is constant as in standard cash in advance models and another one where velocity fluctuates as in baumol 1952 the model provides an explanation of why for a sample of 79 countries the correlation between the velocity of money and the inflation rate appears to be low unlike common wisdom would suggest the reason is the diverse transaction technologies available in different economies

optimal monetary policies and policy interdependence in the world economy the literature on strategic policy interactions has focused on the implications of alternative strategic policy interactions cooperative versus noncooperative for equilibrium macroeconomic policies given the state of the world economy this paper asks how changes in world economic conditions alter equilibrium policies given the nature of policy interdependence among nations the paper considers a world economy comprised of two countries operating under a system of flexible exchange rates both governments act noncooperatively and choose the rate of growth of their money supply so as to maximize the utility of their country s residents given the rate of growth of the other country s money supply the resulting nash equilibrium rates of growth of the home and foreign money supplies are determined and the dependence of international differences in money growth and inflation rates on international differences in technology jel e52 e60 f41 f42 the international transmission of monetary and fiscal policies has been studied a great deal by economists however policy interdependence how one country s policies depend on the policies enacted by other countries has only recently begun to be explored hamada s 1976 paper was one of the first major contributions in this regard hamada considered a world economy comprised of n countries operating under a fixed exchange rate system in which policymakers set domestic credit growth so as to maximize an objective function depending on inflation and the rate of accumulation of international reserves using this framework hamada demonstrated that in equilibrium optimal domestic credit policies are generally not pareto efficient when they are chosen noncooperatively but are pareto efficient when they are set cooperatively in subsequent work hamada 1979 1985 has elaborated on this and various other aspects of cooperative and noncooperative monetary policies under both fixed and flexible exchange rates many others have followed hamada s lead by comparing the properties of cooperative and noncooperative monetary policies eichengreen 1985 for instance considers discount rates as the instrument of monetary policy and examines issues of leadership and cooperation during the interwar years under the gold standard oudiz and sachs 1985 have used simulation methods to

economic backwardness in political perspective government policies and institutions shape economic incentives and via this channel have a first order impact on economic development why then do many societies adopt policies that discourage investment and maintain institutions that cause economic backwardness perhaps politically powerful groups elites are not in favor of economic growth but why it would appear that economic growth would provide more resources for these groups to take over or tax increasing their economic returns so why don t powerful groups always support economic development in this paper we develop a theory of inefficient government policies and institutions all else equal politically powerful groups would welcome superior institutions and technologies but in practice all else is not equal because superior institutions and technologies may reduce their political power and make it more likely that they will be replaced at the center of our theory is therefore the idea that changes in institutions or the introduction of new technologies often create turbulence eroding the political advantages and future economic rents of incumbent elites alternatively new technologies may enrich competing groups increasing their threat to incumbents these considerations make politically powerful groups fear losing power and oppose economic and political change even when such change will benefit society as a whole to understand the mechanism at work and its potential applications consider a concrete example industrialization in the nineteenth century bairoch 1982 estimates that between 1830 and 1913 world manufacturing output increased by a factor of 5 see table 1 panel a nevertheless this process was highly uneven across regions and countries bairoch also calculates that over the same period manufacturing output in developed countries europe and north america increasedbyafactorofover10 whereasitdeclinedinthe third world among developed countries there were

international migration non traded goods and economic welfare in the source country a comment abstract labor emigration redistributes income in a two factor two good economy where one good is internationally non traded labor s nominal wage rises as nominal capital payments fall recent research has shown that the prices of non traded goods rise causing society s welfare to decline here the induced change in the real income of each factor is considered separately there is an ambiguity with regard to the real income of non emigrating labor if labor spends a relatively small fraction of income on the non traded good its real income may rise even though society suffers the loss of welfare

trade in nominal assets monetary policy and price level and exchange rate risk in a previous paper trade in risky assets i have analyzed the pattern of international trade in risky real assets between barter economies relying on the law of comparative advantage and using autarky asset price differences to predict the pattern of asset trade in this paper the analysis is extended to international trade in nominal assets assets with returns paid in currencies between monetary economies the risk chracteristics of real returns on nominal assets depend on price level and exchange rate risk and therefore on monetary policy it is examined how different combinations of monetary policies and exchange rate regimes affect nominal assets return risk characteristics their autarky perices and hence their trade pattern when countries differ with respect to their outputs or their attitudes towards risk when world asset markets are incomplete different monetary policies and exchange rate regimes have dramatic effects on risk characteristics of home and foreign currency bonds and on the trade pattern in these assets as well as on aggregate capital and current accounts

economic backwardness and social tension we propose that relative economic backwardness contributes to the build up of social tension and non violent and violent conflict we test our hypothesis using data on organized mass movements and armed civil conflict the findings show that greater economic backwardness is consistently linked to a higher probability of onset of violent and especially non violent forms of civil unrest we provide evidence that the relationship is causal in instrumental variables estimations using new instruments including mailing speeds and telegram charges around 1900 the magnitude of the effect of backwardness on social tension increases in the two stage least squares estimations

inflation and welfare in the steady state this is a paper on expected inflation and welfare in steady state equilibrium the demand for money is an inventory demand with an endogenous payment period the clower constraint is not imposed higher inflation reduces welfare by reducing consumption as people devote more of their real income to maintaining lower average money holdings high inflation does not necessarily promote an increase in the capital stock the mundell tobin effect is absent the policy conclusion is standard deflate at the rate of time preference because capital is held socially optimal consumption falls short of its golden rule level if inside money is allowed it drives out fiat money and welfare is again at a maximum

the spirit of capitalism and stock market prices in existing theory wealth is no more valuable than its implied consumption rewards in reality investors acquire wealth not just for its implied consumption but for the resulting social status max m weber 1958 refers to this desire for wealth as the spirit of capitalism the authors examine both analytically and empirically implications of weber s hypothesis for consumption savings and stock prices when investors care about relative social status propensity to consume and risk taking behavior will depend on social standards and stock prices will be volatile the spirit of capitalism seems to be a driving force behind stock market volatility and economic growth copyright 1996 by american economic association

the service sector monopolistic competition and the impact of emigration abstract a framework is developed in which the service sector is characterized by the production of slightly differentiated commodities under conditions of monopolistic competition the impact of labor emigration is then examined and found to be welfare worsening for the non migrants

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

dynamics of a floating exchange rate regime we study the full equilibrium dynamics of a two country world economy with a floating exchange rate traded and nontraded goods and explicit modeling of the use of money the resulting exchange rate equation depends on several details of the economic structure such as the supply structure and propensities to spend on various goods although real exchange rate movements have the usual association with the current account the ordinary exchange rate may appreciate or depreciate when there are deficits on current account even when the quantities of money do not change deviations from purchasing power parity and the fisher equation are shown to be the rule rather than the exception

general equilibrium tax incidence under imperfect competition a quantity setting supergame analysis the incidence of various taxes is analyzed in a model with competitive and oligopolistic sectors friedman s grim trigger strategies support collusion with firms producing output to maximize joint profits subject to the constraint that no firm desires to cheat the sustainable level of output depends on the capitalized value of future retaliation therefore tax induced changes in the net return to capital the discount rate affect the output mix through their impact on the sustainability of collusion this collusive pricing effect is isolated and analyzed one result is that a general factor tax on capital but not labor is shifted

optimal inflation and the government revenue mix abstract this paper examines the question of optimal inflation and taxation as a government optimal control problem by inclusion of bond finance and portfolio decisions by private agents in a perfect foresight framework it is shown that i optimal steady state inflation is independent of government revenue requirements ii inflation and tax rates do not necessarily move together in optimum

a note on the optimum quantity of money abstract it is shown that a rise in perfectly anticipated inflation enhances welfare across steady states however this result does not invalidate optimum quantity of money rather it is the problem of inappropriately using steady states to make welfare comparisons thus non steady state analysis is necessary to evaluate the full effect of inflation

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously