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

sunspots currency substitution and inflationary finance abstract this paper explores some issues surrounding inflationary finance of government deficits in a two country world with currency substitution each country s monetary policy is assumed to be subordinate to fiscal policy private agents knowing that the monetary authorities cannot commit themselves to fixed policy rules substitute among the two monies each monetary authority is then forced to accomodate the actions of the fiscal authorities and private agents by setting monetary growth rates consistent with their decisions this framework offers some interesting insights into the behavior of nominal exchange rates and their co movements with relative money supplies and government deficits

determinants of the equilibrium real exchange rate n b professor neary was based at university college dublin and queen s university ontario canada when this article was first published the full text of this article is not available in ora at this time citation neary j p 1988 determinants of the equilibrium real exchange rate american economic review 78 1 210 215

can currency competition work abstract can competition among privately issued fiat currencies work only sometimes and partially to show this we build a model of competition among privately issued fiat currencies a purely private arrangement fails to implement an efficient allocation even though it can deliver price stability under certain technological conditions although currency competition creates problems for monetary policy it is possible to design a policy rule that uniquely implements an efficient allocation

international borrowing and time consistent fiscal policy we discuss optimal fiscal policy in open economies using an open economy version of a model used in the recent work by lucas and stokey an optimal allocation smooths out the tax distortions associated with financing a given sequence of government consumption and it also smooths out private consumption of goods and leisure by borrowing lending on the international capital market in periods with high low government consumption the main question we ask is how the optimal policy can be made time consistent when usccessive governments reoptimize with respect to current and future tax rates but most honor the government debt obligations we show that this requires government debt of sufficiently rich maturity to be issued first we treat a case with capital controls where only the government can borrow and lend abroad the there is a unique restructuring scheme for the domestic debt that is necessary to give succeeding governments incentives to continue following the optimal policy here we interpret and extend lucas and stokey s results for a small economy this scheme is also sufficient for time consistency but in an economy large enough to affect its terms of trade it is also necessary to follow a unique restructuring scheme for the government s and the country s foreign debt when there are no capital controls time consistency is no longer a problem in a small economy in a large economy what matters is total government debt and total foreign debt but not their composition and again there are unique maturity structures necessary and sufficient for time consistency an interesting observation is that in the distorted world we consider relaxing the capital controls actually deteriorates welfare

strategic behaviour and the rules for international taxation of capital this paper examines the welfare of a capital exporting or source country and a capital importing or host country under tax credit and tax deduction systems for the international taxation of capital because the two tax systems may create quite different strategic incentives for the countries the authors compare the equilibria in the tax setting game played by the two countries under each system they find that the tax credits system introduces an antitrade bias into the equilibrium contrary to initial impressions and that both capital exporting and capital importing countries will prefer the tax deductions scheme to tax credits copyright 1989 by royal economic society

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

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

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

the behavior of the exchange rate in the genetic algorithm and experimental economies this paper studies the behavior of the exchange rate in the kareken wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm the analysis shows that a stationary monetary equilibrium of the kareken wallace model is not stable under the genetic algorithm dynamics the fluctuations in the genetic algorithm exchange rate are driven by fluctuations in the portfolio fractions which change over time in response to the inequality between the rates of return on two currencies further both the genetic algorithm simulations and the experiments with human subjects were characterized by continuing fluctuations of the exchange rate with first period consumption values close to a stationary value

on the value of virtual currencies nous construisons un modele d analyse pour cerner les facteurs qui influent sur le taux de change des monnaies virtuelles trois elements importent tout d abord l utilisation actuelle d une monnaie virtuelle comme moyen de paiement ensuite la decision d investisseurs prospectifs d acheter de la monnaie virtuelle et de controler ainsi l offre de ce type de monnaie enfin les facteurs qui determineront ensemble l adoption d une monnaie virtuelle par les consommateurs et son acceptation par les commercants

nobel laureate robert e lucas jr architect of modern macroeconomics in 1995 robert e lucas was awarded the nobel memorial prize for economic science this review places lucas s work in a historical context and evaluates the effect of this work on the economics profession lucas s central contribution is that he developed and applied economic theory to answer substantive questions in macroeconomics economists today routinely analyze systems in which agents operate in complex probabilistic environments to understand interactions about which the great theorists of an earlier generation could only speculate this sea change is due primarily to lucas

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

some simple bitcoin economics abstract we provide a model of an endowment economy with two competing but intrinsically worthless currencies dollar bitcoin dollars are supplied by a central bank to achieve its inflation target while the bitcoin supply grows deterministically our fundamental pricing equation implies in its simplest form that bitcoin prices form a martingale mutual impatience implies absence of speculation price volatility therefore does not invalidate the medium of exchange function bitcoin block rewards are not a tax on bitcoin holders they are financed with a dollar tax we discuss monetary policy implications bitcoin production taxation welfare and entry and characterize the range of equilibria

assets general equilibrium and the neutrality of money when government liabilities including money are held in private portfolios only as stores of value and do not provide additional services such as liquidity real variables are not affected by changes in the money supply due to the government s trading in real assets open market operations this neutrality of monetary policy fails if the government either trades in nominal assets or it distributes subsidies and levies taxes the ability of monetary policy to affect real variables is an important issue and has been the subject of numerous theoretical and empirical studies the most useful theoretical framework within which to address the problem is a model of asset markets where the demand for money or other government liabilities is determined by rational portfolio choice tobin 1958 these assets may of course provide additional services such as transactions and liquidity we assume here however that these services do not exist the standard argument for the effectiveness of monetary policy goes as follows changes in the supply of money affect the price level and hence the distribution of returns to money as an asset as individuals realign their portfolios and prices adjust to maintain market clearing the equilibrium holdings of physical assets change in this case money is not neutral we shall argue however that as long as changes in the supply of money are effected through the government s trading in real assets this argument is in general not valid it is well known that the effectiveness of monetary policy depends on the method of injection of new money into the economy two procedures are used by the government to effect changes in the supply of money it either trades in assets nominal or real open market operations or it distributes subsidies and levies taxes we show here that open market operations in real assets capital or indexed bonds have no effects on real variables in a general equilibrium model with market clearing the argument which can also be applied to the management of the public debt is presented in a most general framework in the next section it does not depend on the existence of a complete system of contingent securities or on an operative bequest motive furthermore it is compatible with incomplete and differential information the result is similar to the modigliani miller theorem in corporate finance that an argument along these lines can be employed to demonstrate the irrelevance of open

the real exchange rate under various systems of international capital taxation international organizations such as the organization for economic co operation and development oecd and the european community ec have promoted to varying degrees the liberalization of capital movements among their member countries the code of liberalization of capital movements an agreement drawn in 1982 by the oecd sets different degrees of capital liberalization among its member countries depending on the nature of capital transactions e g direct or portfolio investment the treaty of rome 1957 recommended among other things the liberalization of capital movements among the ec countries chapter iv articles 67 72 by and large capital movements in the ec have been liberalized since 1990 the remaining restrictions in the capital markets of some member countries such as greece ireland portugal and spain were to be eliminated by the end of 1992 2 these developments in the world capital markets have prompted a renewed interest among trade theorists regarding the response of key economic variables e g national income employment and welfare to the liberalization of capital movements with capital becoming more mobile internationally capital flows in a country depend among other things on the domestic and the foreign capital tax rate and on the prevailing system of taxing net repatriated capital earnings in the capital exporting countries frequently capitalexporting countries tax the net repatriated capital earnings according to a system i of tax credits under which tax payments by foreign capital invested in a capital importing country are credited toward its tax liability to the source capital exporting country 3 ii of tax deductions under which

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

a model of bimetallism bimetallism has been the subject of considerable debate was it a viable monetary system was it desirable in our model the amounts of each metal are split between coined metal satisfying a cash in advance constraint and uncoined metal yielding utility the ratio of the monies in the cash in advance constraint is endogenous bimetallism is feasible we find a continuum of steady states indexed by the constant exchange rate of the monies bimetallism is not desirable among steady states welfare under monometallism is higher than under any bimetallic equilibrium long run trends in gold and silver production placed limits on the maintenance of bimetallism at any given ratio but its sudden collapse in 1873 remains a puzzle

a strategy for launching the euro abstract this paper analyzes the constraints european union law places on the 1 january 1999 choices of irrevocably fixed conversion rates between the euro and the currencies of emu members states current eu legislation notably the maastricht treaty requires that the bilateral currency conversion factors implied by the 1 january 1999 choices equal closing market exchange rates on 31 december 1998 given that legal constraint there still exist several strategies for choosing the relative prices of emu member currencies against the euro unfortunately most of these have potentially damaging side effects one approach based on official stage 2 offers of contingent euro forward contracts with value dates at the start of stage 3 allows a highly credible preannouncement of the bilateral currency conversion factors to be set at the start of emu that approach assumes however that no prospective emu members can withdraw between their selection in may 1998 and the start of stage 3

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

currency areas and monetary coordination we integrate a monetary search model into open economy macro to analyze the gains from coordinating on inflation search frictions and local congestion lead to a determinate exchange rate between two currencies relative prices deviate from the law of one price because the deviations depend on the cross country differential in money growth each country is tempted to inflate to exploit the deviations policy coordination reduces inflation and improves welfare for all countries in contrast to traditional models the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country s currency

nonfundamental uncertainty and exchange rates this paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals this is demonstrated in the context of a two currency one good model with three agent types and cash in advance constraints a crucial feature is that the type i agents for i 1 2 must satisfy a cash in advance constraint by holding currency i while type 3 agents can satisfy it by holding either currency it is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist

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

tariffs transfers and the real exchange rate the deviation of exchange rates from purchasing power parities ppp s has recently become the subject of theoretical and empirical attention the massive body of data collected and presented by the international comparisons project icp under the direction of kravis heston and summers khs 9 11 has permitted new empirical investigation of an old topic and has stimulated the construction of theoretical models to account for observed patterns in the icp project and the related literature the focus is on the ratio of the exchange rate to the ppp the concept of this ratio is closely related to the concept of the real exchange rate which is defined as the actual exchange rate multiplied by the ratio of an index of foreign prices to an index of domestic prices the term real exchange rate a term widely employed in both economics journals and in the financial press is frequently used to describe changes over time in a particular country and its calculation requires only time totime changes in exchange rates and price indexes the ratio of the exchange rate to the ppp on the other hand refers to a comparison of the levels of the exchange rate and the ppp at a moment in time and its calculation requires the availability of a ppp survey of the kind performed by the icp the purpose of the present paper is to analyze the effects of tariffs and transfers on the real exchange rate of a small country in this theoretical endeavor we shall hold constant the prices in foreign countries in this context it can easily be seen that the real exchange rate and the ratio of the exchange rate to the ppp are identical concepts provided that the expenditure weights used in the index of domestic prices are the same as those used in the calculation of the ppp

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

inflation expectations and qualitative government policy in ecuador 1970 1982 abstract a model of constrained money demand for a dominated domestic currency is specified it is found that the model traces the evolution of the course of inflation when applied to the experience of ecuador and provides an interpretation for the differing statistical relationship between money and prices during the estimation period

international asset pricing with time varying risk premia abstract recent empirical evidence that forward exchange rates are biased predictors of future spot rates can also be interpreted as evidence against the hypothesis of a constant risk premium consequently reconciliation of this evidence with efficient international capital markets requires the existence of time varying risk premia this paper modifies kouri s 1977 asset pricing model to allow time varying exected returns on assets eliminates the assumption of a risk free real asset and derives the characteristics of the risk premia in the forward market as well as the equilibrium yield relationships among the equities and riskless nominal bonds of all countries

money time preference and external balance in monetary economies international differences in rates of time preference do not in general lead to long run trade imbalances in sharp contrast with butter s 119811 results on non monetary overlapping generation economies this claim is documented within the context of a simple two country framework in which new immortal families enter each economy over time with the two countries differing only in their subjective discount rates even if consumers are more impatient at home than abroad trade is balanced in the long run in the presence of valued fiat currencies in constant supply and the current account is indeterminate this abstract was borrowed from another version of this item

costly optimization an experiment abstract an experimental technique is developed and used to examine how human subjects make choices when optimization is costly the total cost of making a choice is defined to include two parts 1 the direct cost of making the decision and 2 the indirect cost of making a choice that is not best among the available alternatives the total cost of choice for subjects in the experimental economy ranged from 15 to 42 percent of the economy s resources the hypothesis that agents are rational on average was strongly rejected while the hypothesis that agents are rational in the long run fared better

growth trade and international transfers abstract this paper analyzes the simplest neoclassical economy in which agents have finite lives and there is sustained per capita growth the growth rate of the world economy depends upon countries savings propensities and common technology trade can reverse an economy s autarkic growth trajectory and a country with a high savings rate runs a current account surplus if a surplus country expands aggregate demand while a deficit country contracts analogously world growth increases an appropriate international policy can change the path of the world economy from stagnation to growth

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

state currencies and the transition to the u s dollar clarifying some confusions farley w grubb s recent papers on the early u s monetary system would be important contributions to the common currency area literature were not most of their historical assertions questionable and their key assumption that the medium of exchange can be inferred from the unit of account dubious we contend that after 1781 most americans eschewed government paper money in favor of full bodied coins and convertible bank liabilities and that contrary to grubb s claim bankers did not foist the constitutional clause banning state emissions onto an unsuspecting public

efficient investment incentives in the presence of capital flight abstract this paper examines the efficiency of quantity restrictions on capital exports and the accompanying set of taxes when a government can effectively tax foreign source income then it is not efficient to impose restrictions on capital exports and the optimal tax rates on foreign source and domestic source income are the same an efficient allocation of domestic savings between foreign and domestic investment is obtained however when the government cannot tax foreign source income it is optimal to impose such a restriction so as to induce overinvestment in domestic capital

limited commitment and the legal restrictions theory of the demand for money this paper addresses the rate of return puzzle of monetary theory similarly to the legal restrictions theory of the demand for money we assume that government bonds are subject to a minimum purchase requirement differently from this theory however we assume that intermediaries when issuing private notes cannot commit to always redeem them first we study an environment with legal restrictions to intermediation and show that cash and interest bearing bonds both circulate in the economy then we drop the legal restrictions and show that also with active intermediation under limited commitment there is an equilibrium with rate of return dominance a positive interest rate provides the intermediaries with the incentive to issue and redeem their notes

adverse incentives in the taxation of foreigners abstract sovereign policymakers will opt for too much of the public good if their tax falls partially on foreigners they myopically calculate that an increase in public spending is only partially financed by a decrease in home consumption the rest comes from foreign consumption which they do not care about this paper presents an example with seignorage taxes in a two country model with cash in advance constraints the inefficiency is characterized by an inflation bias too much public spending and large fiscal deficits curiously the countries most able to impose such taxes seem to have abstained from doing so

tariffs terms of trade unemployment and the real exchange rate the less developed countries ldcs have been subjected to major exogenous shocks and drastic domestic policy changes in recent years these shocks include changes in the terms of trade and or a policy shift away from the pervasive protectionism of the previous decades the implementation of trade liberalization programs is likely to follow in many more developing countries a large body of theoretical and empirical literature has developed which attempts to analyze the consequences of these changes utilizing models which explicitly incorporate the main structural and institutional characteristics of the ldc economies the behavior of the real exchange rate defined in various ways but most commonly as the relative price of tradeables to non tradeables has been identified as being of central analytical and policy importance while the literature on this subject recognizes the key link between the real exchange rate and domestic wages the analytical models used generally suffer from serious limitations in terms of their characterization of the labor markets the models used in the literature can be categorized into two groups a flex price models that give rise to full employment and b models that assume full or partial wage rigidity thereby generating some form of unemployment conventional wisdom suggests that a rise in import tariffs or an improvement in the terms of trade would always lead to an appreciation of the real exchange rate however it is shown by clague 3 and edwards and van wijnbergen 11 that the above result does not necessarily hold in more general models however these analyses were restricted to models with flexible wages wage rigidity is often ascribed to the existence of some form of wage indexation or other forms of government inter

a more robust definition of subjective probability the goal of choice theoretic derivations of subjective probability is to separate a decisionmaker s underlying beliefs subjective probabilities of events from their preferences attitudes toward risk classical derivations have all relied upon some form of the marschak samuelson independence axiom or the savage sure thing principle which imply that preferences over lotteries conform to the expected utility hypothesis this paper presents a choice theoretic derivation of subjective probability in a savage type setting of purely subjective uncertainty which neither assumes nor implies that the decisionmaker s preferences over lotteries necessarily conform to the expected utility hypothesis copyright 1992 by the econometric society

expectations and the nonneutrality of lucas abstract this paper was written to kick off the conference celebrating the anniversary of lucas s expectations and the neutrality of money it recalls the state of macroeconomics in the late 1960 s cites some technical and substantive precursors of lucas s idea and explores the legacies of the equilibrium concept monetarism fiscalism and standards proposed in lucas s paper

gmm estimates of currency substitution between the canadian dollar and the u s dollar this paper investigates the empirical strength of currency substitution between the canadian dollar and the u s dollar euler equations implied by a small open economy money in the utility function model are estimated and tested by hansen s generalized method of moments procedure the major empirical finding is that both the elasticity of currency substitution and the share of u s currency in the production of canadian liquidity services are economically small even though the combined domestic and u s real balances appear to provide statistically significant economizing on transactions costs copyright 1994 by ohio state university press

optimal tax and tariff policies with tax credits abstract this paper examines the optimal tax and tariff policies for a small open economy when mobile capital receives a tax credit for taxes paid to the host country for a capital importing country a tax on capital equal to the source country tax rate to capture tax revenue combined with a subsidy to encourage capital imports is the optimal policy results are also derived for cases in which only one of the instruments can be varied for a capital exporting country that cannot reduce its capital tax rate a subsidy to the sector using exported capital is desirable

moneyspots extraneous attributes and the coexistence of money and interest bearing nominal bonds it is folklore among monetary theorists that under laissez faire without ad hoc assumptions that favor money over bonds there do not exist equilibria in which government issued fiat money coexists with nominal default free interest bearing government bonds with similar physical characteristics this proposition is the basis for the strongest version of the rate of return dominance puzzle in this paper i show that if as has been the case throughout monetary history the physical object used as fiat money is heterogeneous in an extraneous attribute then there exist equilibria in which money coexists with interest bearing bonds

bitcoin 1 bitcoin 2 an experiment in privately issued outside monies the value of bitcoin depends upon self fulfilling beliefs that are hard to pin down we demonstrate this for the case where bitcoin is the only form of money in the economy and then generalize the message to the case of multiple bitcoin clones and or a competing sovereign currency some aspects of the indeterminacy we describe would no longer hold if bitcoin were an interesting bearing object

macroeconomic policy evaluation and optimal control theory a critical review of some recent developments abstract this survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design this literature focuses on strategic interactions between governments and private agents engaged in dynamic non cooperative games and emphasizes such issues as precommitment credibility and reputation as important and endemic aspects of optimal policy design a dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single stage full information games without commitment this may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium the type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players beliefs under uncertainty included here are separating and pooling equilibria involving notions of learning signalling and information revelation additional dimensions exist in stochastic systems which introduce other forms of uncertainty optimal control and game theory have also been applied to international macroeconomic policy design with emphasis on the potential costs and benefits of non cooperative and cooperative behaviour between countries and problems of international policy coordination

optimal and time consistent exchange rate management in an overlapping generations economy abstract this paper analyzes exchange rate management in a simple overlapping generations model this framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage when the chief concern is to provide a desirable store of value a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate the same is true when the government is concerned with maximizing total expected seigniorage although more intervention is typically desirable when generating seigniorage is the major objective when seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value a national currency may not be viable in the absence of exchange controls such controls may be justified in this situation

nominal prices and interest rates in general equilibrium endowment shocks the outstanding problem of neoclassical monetary theory has been to determine the effect of changes in the money stock on nominal prices and interest rates the classic result is that in the absence of money illusion contracts fixed in nominal terms and other such impedimenta money is neutral thus a doubling of the money stock results in a doubling of the nominal price level and in no change in nominal interest rates except at most for a temporary liquidity effect while the price level is rising to its new level during the adjustment period the nominal interest rate might temporarily drop this neutrality result has conventionally been proved in a static framework in intertemporal models it is necessary to distinguish between static neutrality and dynamic neutrality if a model displays dynamic neutrality fluctuations in the money stock immediately induce a proportional change in the nominal price level and no change in nominal interest rates or any real variable this property is different from and stronger than static neutrality which in dynamic models states only that if the money stock at all dates is doubled so will be the price level at all dates the effects of exogenous shocks in the monetary growth rate on nominal prices and interest rates are analyzed a representative individual rational expectations framework is adopted and a demand for money is generated by entering money in the utility function the effects of monetary shocks on inflation and interest rates are shown to depend on the autocorrelation of the monetary growth rate for example under serial independence the inflation rate equals the monetary growth rate and the nominal interest rate is nonrandom while under positive negative autocorrelation the nominal interest rate is affected positively negatively by positive growth rate shocks i am grateful to the staff of the federal reserve bank of philadelphia to the finance groups at the university of southem california and virginia polytechnic institute and to c j lacivita dan peled john seater and jon sonstelie for valuable comments on earlier drafts

self confirming price dispersion in monetary economies abstract in a monetary economy we show that price dispersion arises as an equilibrium outcome without the need for costly simultaneous search or any heterogeneity in preferences production costs or search technologies a distribution of money holdings among buyers makes sellers indifferent across a set of posted prices leading to a non degenerate price distribution this price distribution in turn makes buyers indifferent across a range of money balances rationalizing the non degenerate distribution of money holdings we completely characterize the distribution of posted prices and money holdings in any equilibrium equilibria with price dispersion admit higher maximum prices than observed in any single price equilibrium and feature an increasing density of prices in contrast to existing theories price dispersion reduces welfare by creating mismatch between posted prices and money balances inflation exacerbates this welfare loss by shifting the distribution towards higher prices

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations