optimal pricing of intraday liquidity abstract this paper presents a general equilibrium model where intraday liquidity is needed because the timing of payments is uncertain a necessary and sufficient condition for an equilibrium to be efficient is that the nominal intraday interest rate be zero even when the overnight rate is strictly positive because a market for liquidity may not achieve efficiency this creates a role for the central bank i allow for the possibility of moral hazard and study policies commonly used by central banks to reduce their exposure to risk i show collateralized lending achieves the efficient allocation while for certain parameters caps cannot prevent moral hazard

financial development income inequality and the redistributive effects of monetary policy abstract how should financial systems be designed to limit income inequality does the redistributive impact of inflation depend on the extent of financial development should optimal monetary policy vary across countries with different levels of financial development in order to address these questions we develop a monetary growth production model with heterogeneous agents in our economy optimal policy needs to weigh the effects of policy across two groups capital owners and individuals who hold liquid assets in this environment we compare various economies that are identical in every aspect except for their level of financial development interestingly we generally find that economies at the highest stages of financial development economies in which money bonds and claims to capital are traded experience the highest amount of capital formation and social welfare as long as inflation is low yet regardless of the extent of financial development there are generally redistributive consequences from inflation moreover the model tends to predict that economies with relatively small stock markets produce the highest levels of income inequality empirical work examining the role of money growth and the implications of financial development across countries is consistent with predictions from the model

public opinion and foreign aid cuts in economic crises economic crises generally lead to reductions in foreign aid however the widely held view that budgetary constraints caused by economic crises reduce aid is inaccurate because donor government outlays actually tend to increase we develop an argument that aid cuts occur because voters place a lower priority on aid during economic downturns and politicians respond by cutting aid using data from eurobarometer we demonstrate that economic downturns lead to reduced public support for helping the poor abroad these findings are robust across a large number of alternative specifications our findings have implications for how advocates may prevent aid reductions during economic recessions

aid and growth what meta analysis reveals abstract recent literature in the meta analysis category where results from a range of studies are brought together throws doubt on the ability of foreign aid to foster economic growth and development this article assesses what meta analysis has to contribute to the literature on the effectiveness of foreign aid in terms of growth impact we re examine key hypotheses and find that the effect of aid on growth is positive and statistically significant this significant effect is genuine and not an artefact of publication selection we also show why our results differ from those published elsewhere

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

money and loans agents expect to trade with each other infinitely often but face a temporal absence of a coincidence of wants when they meet only loans and or money can facilitate exchange in small close knit economies enduring trade relationships are valued and loans are optimal in larger economies with limited communication information concerning repayment of loans diffuses too slowly to deter agents from reneging unless loans are severely restricted in magnitude money has no such redeemability problems but if clower constraints bind loans help supplement money purchases so that both become essential roles of various institutions and the historical evolution of media of exchange are explained

liquidity risk and banks asset composition implications for monetary policy monetary growth models in which the government is a net debtor demonstrate that inflation adversely affects capital formation through the crowding out effect interestingly the results are at odds with empirical evidence in particular recent studies point to an asymmetric relationship between inflation and the real economy across countries specifically inflation and output are negatively correlated in poor countries in contrast inflation is associated with higher levels of economic activity in advanced economies i present a monetary growth model with public debt where the exposure to risk is inversely related to the level of income in this setting i demonstrate that the effects of monetary policy depend on the level of capital of the economy in poor countries banks portfolios consist primarily of government liabilities therefore a higher rate of money creation inhibits capital formation in these economies in contrast banks devote more resources toward productive uses in advanced countries consequently monetary policy generates a tobin effect

money as the mechanism of exchange abstract the existence and use of money remained an embarrassing puzzle for monetary analysis we observe over man s history that social groups without generally accepted media of exchange exhibit poor survival characteristics most social groups do not use assets or commodities at random in the execution of exchanges one observes that a small subset of assets is dominantly used in transactions these transaction dominating assets are usually referred to as money the literature contains many suggestive attempts to explain the emergence and role of money the classic writers made passing references in somewhat pictorial language to the extension markets and increasing labor productivity induced by the use of a general medium of exchange this idea has never been systematically developed however karl brunner 1971

one or two monies abstract the set of incentive feasible allocations is examined in a dynamic quasi linear environment where agents lack commitment and have private information over their idiosyncratic characteristics when record keeping is available the first best allocation is implementable in a set of sufficiently patient economies when record keeping is limited to one money this set is strictly smaller except when private information is absent when record keeping is expanded but limited to two monies the set of economies for which the first best is implementable corresponds to that of record keeping even when private information is present we further demonstrate that two monies are a perfect substitute for record keeping

who benefits from aid for trade comparing the effects on recipient versus donor exports recent studies offer an ambiguous picture on the effectiveness of foreign aid in strengthening the export capacity of recipient countries moreover the literature on aid for trade aft has often neglected that exporters in the donor countries may be among the main beneficiaries we hypothesize that aft is as much in the self interest of donor countries as it may have promoted the exports of recipient countries we simultaneously estimate and compare the effects of aft on trade in both directions we find that aft increases recipient exports to donors as well as recipient imports from donors the first effect tends to dominate the latter which contradicts the skeptical view that donors grant aft primarily to promote their own export interests

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

payment economics studying the mechanics of exchange abstract the five papers that follow this essay were presented at the federal reserve bank of richmond s conference on payment economics held october 23 24 2000 in williamsburg virginia the conference was motivated by the convergence of lines of research in monetary and banking theory that are focused on the institutional arrangements that facilitate exchange at the same time central bank policymakers concerned about the efficiency implications of their involvement in and regulation of clearing and settlement arrangements increasingly seek an economic understanding of these activities it appears that a distinct and coherent field of inquiry is emerging focused on the mechanics of exchange this field which we call payment economics studies both the instruments agents use to make payments and the central role of bank intermediation in facilitating the use of private liabilities in exchange

are trade preferences more effective than aid in supporting exports evidence from the everything but arms preference scheme this study examines the effect of the everything but arms eba trade preferences regime on exports from african caribbean and pacific countries acp to the european union eu with this aim an augmented gravity model is estimated for exports from the 79 acp countries to the eu 15 for the time period 1995 to 2005 using panel data techniques the model estimates are used to quantify the effect of the eba preferences on the acp ldcs export performance and to compare it with the impact of official development assistance in addition to their separate effects the combined impact of eba and aid flows is examined the main results do not confirm a positive effect of the eba regime on exports otherwise the combined effect of eba and aid on exports is positive supporting an eu development strategy that includes both sorts of assistance aid and trade preferences

institutional quality and the effectiveness of aid for trade abstracttrade policy barriers and high transaction costs hinder developing countries from taking the full advantages of the global trading system in order to help developing countries overcome the

redemption costs and interest rates under the u s national banking system interest rates under the u s national banking system 1863 1914 appear to imply that banks failed to exploit an arbitrage opportunity for two reasons yields on government bonds exceeded the tax rate on note issue by approximately 150 basis points and short term interest rates varied seasonally this paper examines whether note redemption costs can explain observed interest rates we present a model in which redemption costs create a spread between the tax rate on note issue and bond yields and in which temporary seasonal fluctuations in currency demand generate seasonal movements in short term interest rates calibration of the model to actual data lends support to the model s implications further interest rates are shown not to vary seasonally when banks do not incur the costs of note redemption the banking system that existed in the united states between 1863 and 1914 the so called national banking system is unique in u s history under this system private commercial banks national banks were permitted to issue payable on demand liabilities banknotes that were required to be fully collateralized by government bonds and that carried an explicit government guarantee against noteholder loss should the issuing bank fail banks were taxed based on the quantity of their notes in circulation and each bani had to redeem its own notes at par in lawful money specie or greenbacks the national banking system gave rise to a national currency because each bank was required to accept the notes of other national banks at par a bank holding notes issued by another bank could redeem those notes at par in lawful money through redemption centers established by the u s treasury with the costs of redemption borne by the issuing bank during the period of the national banking system observed interest rates were characterized by two features first yields on intermediated government bonds ex

inside and outside money as alternative media of exchange we study a random matching model of money in which a subset of people called bankers have known histories and the rest called nonbankers have unknown histories earlier we showed that if there are no outside assets then an optimal arrangement has bankers issuing objects banknotes that are used in trades involving nonbankers here the same model is used to compare such exclusive use of inside money to the exclusive use of outside money we show that the set of implementable outcomes using outside money is a strict subset of the set using inside money

competition for aid and trade policy this paper considers the optimal allocation of a given amount of foreign aid between two recipient countries it is shown that given consumer preferences a country following a more restrictive trade policy would receive a smaller share of the aid if the donor country maximises its own welfare in allocating aid if on the other hand the donor country allocates aid in order to maximize the sum of the welfare of the two recipient countries the result is just the opposite finally we analyze the situation where the recipient countries compete with each other for the given amount of aid it is shown that this competition tends to lower the level of optimal tariffs in the recipient countries

can stock volatility be benign new measurements and macroeconomic implications we find nonsynchronized movements of two new measures of financial market uncertainty good and bad volatility which are based on the maximum and minimum stock prices within a month good bad volatility is associated with better worse expectations about the future economic situation and clearly signals acceleration deceleration in economic activity the var results indicate that i output employment and stock price plummet rapidly in response to a bad volatility shock while their responses to a good volatility shock are modest and ii bad volatility shocks explain the bulk of economic activity and stock price fluctuations in the medium run

aid volatility and real business cycles in a developing open economy this article analyzes the impact of the unpredictability of foreign aid on macroeconomic fluctuations in the recipient country i build a small open economy business cycle model that accounts for foreign aid shocks with no preference shocks the model is calibrated to reflect the structural empirical regularities of cote d ivoire a typical aid dependent developing country the parameters of the exogenous shocks are estimated using bayesian methods and time series data for cote d ivoire the model produces business cycle patterns that are consistent with the data and key stylized facts specifically the excess volatility of consumption with respect to output is successfully replicated the results suggest that the unpredictability of foreign aid contributes to explain the volatility of business cycles in the recipient economy and has negative welfare effects

optimal fiduciary monetary systems abstract in a fiduciary monetary system there is a social agreement to quote prices and denominate financial instruments in terms of a specific paper liability of the government what are the best terms for this paper instrument i investigate a system where the terms involve not only paying market interest rate on the monetary instrument as proposed by many economists earlier but also indexing the returns to the price level the result is a homeostatic monetary system with a highly stable price level in the face of shifts in money demand and other disturbing influences the paper examines the performance of the new fiduciary standard in equilibrium and disequilibrium models

optimal multiperiod contracts and the gain from enduring relationships under private information informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts in an illustrative risk sharing model even relatively short two period contracts can be mutually beneficial if there is private information though one period contracts suffice otherwise further contracts which are pareto optimal relative to the environment and the information structure are defined and partially characterized an example illustrates how otherwise inefficient intertemporal tie ins can be used optimally to mitigate incentive problems the obvious borrowing lending schemes are not private information pareto optimal in these period by period actions are not sufficiently constrained discounting affects the form of the optimal contract but none of these qualitative conclusions

impacts of tangible and intangible elements of aid for trade on the globalisation of developing countries the aid for trade initiative was launched by the wto in 2005 to help developing countries build their supply side capacity and trade related infrastructure to improve their capacity in the global market this study investigates the impacts of both the tangible and intangible elements of this initiative on the economic social and political globalisation of recipient countries intangible elements of aid for trade aid for trade policy and regulation may be considered as the software of aid for trade while tangible elements aid for economic infrastructure and building productive capacity are the hardware countries that receive aid for trade can use both types of elements to succeed in globalisation this research hypothesises that the tangible elements of aid for trade have a singular effect on the overall level of globalisation since they are expected to only increase the level of economic globalisation moreover we expect that the intangible elements of aid for trade will have multiple effects on the overall level of globalisation as they have an impact on not only economic aspects but also social and political aspects of it using the dataset of aid for trade from 2002 to 2015 we find that the intangible elements of aid for trade have increased the recipients level of overall globalisation

aid and trade a donor s perspective abstract one reason donors provide foreign aid is to support their exports to aid recipient countries time series data for germany suggests an average return of between us 1 04 1 50 for each us dollar of aid spent by germany although this is well below previous estimates the value is robust to different specifications and econometric approaches interestingly we find strong evidence of crowding out between bilateral donors in the sense that bilateral aid from other eu members significantly reduces exports from germany to the recipients the evidence suggests that in the long run aid causes exports and not vice versa we discuss the implications these findings might have for aid volumes and allocation

liquidity risk and financial competition implications for asset prices and monetary policy abstract this paper studies the implications of banking competition for capital markets and monetary policy in particular i develop a two sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential banks insure depositors against such risk and invest in the economy s assets in this setting i compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector unlike previous work banks can have market power in both deposits and capital markets compared to a perfectly competitive financial sector i demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation assets prices and the degree of risk sharing furthermore multiple steady states can emerge and the economy becomes subject to poverty traps more importantly market power in financial markets may overturn the tobin effect present under a perfectly competitive financial sector this necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

economic organization with limited communication this paper presents formal stylized representations of communication accounting systems oral assignment portable object written message and telecommunication systems are considered the environments that allow this formalization are characterized by spatial separation private information and a need to keep track of past actions transfers and shocks in environments that have spatial separation and private information beneficial multilateral arrangements can depend critically on agents ability to communicate to one another values of contemporary shocks and to keep track of histories of past transfers or past announced shocks this paper formalizes this idea and focuses on com

optimal foreign aid and tariffs this paper investigates the optimal choice of foreign aid when trade policies are decided in a non cooperative fashion three alternative scenarios depending on the timing of the actions and on whether aid is tied are analyzed it is shown that in the case where aid is decided before tariffs untied aid can lead to the reduction of the recipient s optimal trade tax when the donor can tie the aid to a reduction in the recipient s tariff the optimal aid level is always positive and the world can always achieve a pareto efficient equilibrium

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

the erosion of colonial trade linkages after independence high trade between countries with colonial ties may be explained by government policies that establish preferential access or as a consequence of networks formed through social interactions using bilateral trade data from 1948 to 2003 we examine the eect of independence on post colonial trade the severing of formal colonial relations can lead to an immediate reduction in trade as preferential access is eliminated as well as a gradual reduction corresponding to the deterioration of trading networks our results reveal that independence reduces colonial trade with its colonizer metropole the reduction cumulates over a 30 year period and the disruption is particularly severe for hostile separations we also find that overall colonial trade falls subsequent to independence but to a lesser extent than trade with the metropole

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

tied aid and the paradoxes of donor enrichment and recipient impoverishment it is part of received doctrine that in a two country world without hindrance of commodity taxes or other distortions and with market stability assured international transfers necessarily harm the donor and benefit the recipient 2 however in the case of most non private international aid those conditions fail donors often require that aid be spent in a manner not closely related to private preferences in the recipient countries indeed not closely related to any well behaved preferences and they normally finance the aid by means of distorting taxation hence one cannot rule out by appeal to standard theorems the possibility that aid perversely leaves the donor better off and or the recipient worse off let us say that aid is tied in the recipient if it is spent inefficiently in terms of individual preferences and that aid is tied in the donor if it is financed inefficiently thus whether aid is tied is a question of how it is spent or financed it is not a question of the numeraire in terms of which aid is accounted nor of the form in which it is offered 3 evidently the definition of tying is uncommonly broad for example aid may be tied in the recipient not because the donor attaches strings but because the government of the recipient is incompetent or unrepresentative moreover the definition is relevant however the aid is applied whether to private or public goods whether to consumption or investment goods we follow the literature on the transfer problem in assuming that aid is spent on private consumption goods like hospital services and powdered milk this is a matter of convenience and continuity only 4 in the present note we seek to rework the economics of foreign aid under novel assumptions in particular allowance will be made for the possibility that aid is tied in whole or in part in the donor or in the recipient it will be verified that the donor may benefit and the recipient suffer and that these outcomes are com

aid and trade this paper surveys the recent theoretical and empirical literature that explores the relations between aid and trade and asks about the complementarity or substitution effects at work we distinguish between the effects of aid on trade flows and on trade policies of the donor as well as the recipient countries special focus is given on trade facilitation or aid for trade

does aid cause trade evidence from an asymmetric gravity model anderson and vanwincoop developed what has become the standard framework for framing and interpreting empirical work using the gravity model their framework relies heavily on an assumption of symmetry among countries for issues related to north south trade this assumption is problematic in this paper we develop an asymmetric extension of the anderson vanwincoop framework appropriate to the analysis of north south trade where northern countries produce differentiated goods and southern countries homogenous ones in addition we use an appropriately extended version of baier and bergtrand and taylor linear expansion thus permitting its estimation using good old ols the result is an empirical model that i is better suited to the analysis of north south trade ii is easy to estimate and compute comparative statics not requiring a customised nls routine and given the way the south is included iii provides a simple explanation of zero trade flows between some country pairs a fact still not fully explained in the literature as an illustration of its use we examine the empirical link between foreign aid and trade

the aid effectiveness literature the sad results of 40 years of research abstract the aid effectiveness literature ael consists of empirical macroeconomic estimates of the effects of development aid by the end of 2004 it comprised 97 econometric studies of three families of related effects each family has been analyzed in a separate meta analysis the ael is an ideal subject for meta analysis as it uses only a few formally similar models to estimate the same underlying effects it is also an area with strong beliefs often generated by altruism when this whole literature is examined a clear pattern emerges after 40 years of development aid the preponderance of the evidence indicates that aid has not been effective we show that the distribution of results is significantly asymmetric reflecting the reluctance of the research community to publish negative results the dutch disease effect on exchange rates provides a plausible explanation for the observed aid ineffectiveness

optimal monetary rules under persistent shocks abstract the tug o war for supremacy between inflation targeting and monetary targeting is a classic yet timely topic in monetary economics in this paper we revisit this issue within the context of a pure exchange overlapping generations model in which spatial separation and random relocation create an endogenous demand for money we study ar 1 shocks to both real output and the real interest rate irrespective of the nature of the shocks the optimal inflation target is always positive under monetary targeting shocks to output necessitate negative money growth rates for shocks to real interest rates money growth rates may be either positive or negative depending on the elasticity of consumption substitution also for output shocks monetary targeting welfare dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk in sharp contrast for shocks to the real interest rate we prove that monetary targeting and inflation targeting are welfare equivalent only in the limit as the shocks become i i d the upshot is that persistence of the underlying fundamental uncertainty matters depending on the nature of the shock policy responses need to be either more or less aggressive as persistence increases

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

on the complementarity of money and credit i propose a model where agents choose to conduct their business using two payment instruments money and bilateral credit a friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit money and credit complement each other with anticipated inflation complementarity implies that the credit to money ratio decreases with inflation

good volatility bad volatility signed jumps and the persistence of volatility abstract using estimators of the variation of positive and negative returns realized semivariances and high frequency data for the s p 500 index and 105 individual stocks this paper sheds new light on the predictability of equity price volatility we showthat future volatility is more strongly related to the volatility of past negative returns than to that of positive returns and that the impact of a price jump on volatility depends on the sign of the jump with negative positive jumps leading to higher lower future volatility we show that models exploiting these findings lead to significantly better out of sample forecast performance

aid infrastructure and fdi assessing the transmission channel with a new index of infrastructure official development assistance oda and foreign direct investment fdi are widely perceived to be alternative means of supplementing domestic savings and promoting economic development in low and middle income countries however possible complementarities of aid and fdi have received limited attention so far it remains open to debate whether aid could render recipient countries more attractive to fdi by removing specific bottlenecks that prevent higher fdi inflows in particular we raise the hypothesis that aid specifically targeted at economic infrastructure helps developing countries attract higher fdi inflows through improving their endowment with infrastructure in transportation communication energy and finance by performing 3sls estimations we explicitly account for dependencies between three structural equations on the allocation of sector specific aid the determinants of infrastructure and the determinants of fdi we find strong and robust evidence that aid in infrastructure is effective in improving the recipient countries endowment with infrastructure in sharp contrast other aid is not effective in improving infrastructure infrastructure consistently proves to be an important determinant of developing countries attractiveness to fdi consequently only targeted aid promotes fdi indirectly through the infrastructure channel in addition aid in infrastructure has direct effects on fdi it appears that foreign investors anticipate longer term effects of aid on the country s endowment with infrastructure and expect aid financed infrastructure to serve them particularly well

fluctuations in uncertainty this review article tries to answer four questions i what are the stylized facts about uncertainty over time ii why does uncertainty vary iii do fluctuations in uncertainty matter and iv did higher uncertainty worsen the great recession of 2007 2009 on the first question both macro and micro uncertainty appears to rise sharply in recessions on the second question the types of exogenous shocks like wars financial panics and oil price jumps that cause recessions appear to directly increase uncertainty and uncertainty also appears to endogenously rise further during recessions on the third question the evidence suggests uncertainty is damaging for short run investment and hiring but there is some evidence it may stimulate longer run innovation finally in terms of the great recession the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in gdp

intermediaries and payments instruments abstract we study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium we show that with arbitrarily small transactions costs only the liabilities of intermediaries will circulate and not those of other private sector agents therefore our model connects intermediation activity with the issuance of payments media a connection that has not been made in earlier literature we use our model to suggest a resolution of the banknote underissue puzzle of cagan in d carson ed banking and monetary studies richard d irwin publishing homewood il 1963

monetary stability and liquidity crises the role of the lender of last resort we study an economy where agents are subject to liquidity demand shocks and banks arise endogenously to insure consumers against these shocks in this environment we evaluate the desirability of a lender of last resort who can provide liquidity loans to banks in distress in the absence of a lender of last resort the economy has a unique stationary equilibrium the introduction of unlimited and costless lender of last resort services allows the economy to achieve a steady state allocation that is pareto optimal however this economy also displays a continuum of hyperin ationary equilibria we then explore restrictions on the provision of lender of last resort services that rule out such monetary instability while preserving some of the e ciency obtained by unrestricted lender of last resort services when the lender of last resort charges an interest rate on liquidity loans the economy has a unique steady state equilibrium and when the interest rate charged is high enough no hyperin ationary equilibria arise finally when the lender of last resort faces an upper bound on loanable funds there is again a unique long run equilibrium and when the upper bound on loanable funds is small enough hyperin ationary equilibria are ruled out

global dynamics in macroeconomics an overlapping generations example abstract in this paper we present some techniques used in the dynamical systems literature that let us characterize the stable and unstable manifolds of a given dynamical system as a result we can study how an economy behaves as it moves far away from the steady state in an environment where economic agents do not face uncertainty the underlying idea behind these methods is to compute the manifolds nonlocally by exploiting an invariance condition that analytically describes these manifolds in order to illustrate these techniques we present a general equilibrium model under two different policy regimes demonstrating that local and global dynamics of an economic system can be substantially different

does aid for trade enhance export performance investigating on the infrastructure channel today there are few empirical studies assessing the effectiveness of aid for trade on trade pe rformance furthermore existing works do not test channels by which this impact is transiting we address this question using an empirical analysis constructed in two steps following a model of export performance we first test if institutions and infrastructure our two potential channels of transmission are indeed determinants of export performance secondly we test the impact of aid for trade sectoral flows on the determinants that were highlighted in the first part we show that the infrastructure channel appears to be highly significant in the first step whereas the institutional one turns out to have limited impact on developing countries exports furthermore in our second step aid for infrastructure seems once instrumented to have a strong and positive impact on the infrastructure level our results indicate that a 10 increase in aid to infrastructure commitments per capita leads to an average increase of the exports over gdp ratio for a developing country of 2 34 it is also equivalent to a 2 71 reduction of the tariff and non tariff barriers this highlights the very high economic impact of aid for trade throughout the channel of infrastructures

why inside money matters this note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash in advance constraint fiat money can be used to implement a pareto optimum only with type specific taxation by contrast if credit contracts are enforceable the same allocation can be reached in equilibrium without type specific policy we argue that the advantages of inside money and the fact that they depend on the capacity of the economy to enforce the repayment of debt direct us toward the study of the institutional infrastructure underlying self enforcing inside money equilibria

does aid for trade diversify the export structure of recipient countries the importance of aid for trade as a tool for facilitating trade economic growth and social development has received attention since the concept was introduced in 2005 while one of the main targets of aid for trade is export diversification reflecting the fact that the exports of many developing countries are concentrated in a small range of items there have not been many efforts to measure the effect of aid for trade on export structure this study therefore attempts to trace the relationship between aid for trade and 133 aid recipients export structure between 1996 and 2013 using the herfindahl hirschman index to measure the degree of export concentration the findings suggest that total aid for trade has reduced the concentration level in the short run in the long run on the other hand aid for trade has had no significant effect on export structure of recipient countries only aid for building productive capacity which is one of the three categories of aid for trade contributes to lower concentration yet this change is not caused by an increase in export diversity but by the redistribution of shares of existing products of a similar sophistication level

private money creation and the suffolk banking system while much has been written on the history of the suffolk banking system somewhat surprisingly to our knowledge no attempt has been made to formally model its monetary consequences in this paper we attempt to fill this gap

uncertainty shocks and unemployment dynamics in u s recessions abstract what are the effects of uncertainty shocks on unemployment dynamics we answer this question by estimating non linear smooth transition vars with post wwii u s data the relevance of uncertainty shocks is found to be much larger than that predicted by standard linear vars in terms of i magnitude of the reaction of the unemployment rate to such shocks and ii contribution to the variance of the prediction errors of unemployment at business cycle frequencies the ability of different classes of dsge models to replicate our results is discussed

aid dutch disease and manufacturing growth abstract we examine the effects of aid on the growth of manufacturing using a methodology that exploits the variation within countries and across manufacturing sectors and corrects for possible reverse causality we find that aid inflows have systematic adverse effects on a country s competitiveness as reflected in the lower relative growth rate of exportable industries we provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows we conjecture that this may explain in part why it is hard to find robust evidence that foreign aid helps countries grow

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

liquidity risk economic development and the effects of monetary policy abstract empirical evidence indicates that monetary policy is not super neutral in many countries in particular in high inflation economies inflation is negatively related to economic activity by comparison inflation may be positively correlated with output in low inflation countries we present a neoclassical growth model with money in which the incidence of liquidity risk is inversely related to aggregate capital formation interestingly there may be multiple monetary steady states where the effects of monetary policy vary in poor economies the financial system is highly distorted and higher rates of money growth are associated with less capital formation in contrast in advanced economies a tobin effect is observed since inflation exacerbates distortions from a coordination failure in the low capital steady state individuals become much more exposed to liquidity risk consequently optimal monetary policy depends on the level of development

monetary policy and banking structure in this paper i examine the differences in optimal monetary policy in various banking systems in particular i compare two monetary economies one with a competitive banking system and the other with a monopolistic one in addition the optimality of the discount window policy is considered it is shown that the friedman rule is the optimal monetary policy in a monopolistic banking economy and the zero inflation policy is optimal in a competitive banking economy under appropriate parameters in addition the combination of the friedman rule and the discount window policy can achieve efficient allocation in both banking systems

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

the evolution of cash transactions some implications for monetary policy this paper considers the implications for monetary policy of a decreasing demand for outside money it finds that even perpetual declines in the demand for base money pose no threat to the traditional methods employed for conducting monetary policy the effects of such reductions in the demand for central bank liabilities however do depend on how monetary policy is conducted four monetary policy regimes are analyzed with a policy of nominal interest rate targeting a secular decline in the volume of cash transactions unambiguously leads to accelerating inflation a policy of maintaining a fixed composition of government liabilities leads to accelerating decelerating inflation if agents have sufficiently high low levels of risk aversion inflation targeting produces falling nominal and real interest rates while a policy of fixing the rate of money growth can easily lead to indeterminacy and endogenous oscillation in interest rates it is argued that a policy of fixing the composition of government liabilities has several advantages if it is known that agents are not too risk averse and that the asymptotic demand for base money is small if this information is not known then interest rate or inflation targeting have an advantage because their consequences are not sensitive to such environmental features

the value of inside and outside money abstract we study dynamic economies in which agents may have incentives to hold both privately issued a k a inside and publicly issued a k a outside circulating liabilities as part of an equilibrium our analysis emphasizes spatial separation and limited communication as frictions that motivate monetary exchange we isolate conditions under which a combination of inside and outside money does and does not allow the economy to achieve a first best allocation of resources we also study the extent to which the use of private circulating liabilities alone or the use of public circulating liabilities alone can address the frictions that lead to monetary exchange

the demand for bank reserves and other monetary aggregates the paper starts with haslag s 1998 model of the bank s demand for reserves and reformulates it with a cash in advance approach for both financial intermediary and consumer this gives a demand for a base of cash plus reserves that is not sensitive to who gets the inflation tax transfer it extends the model to formulate a demand for demand deposits yielding an m1 type demand and then includes exchange credit yielding an m2 type demand based on the comparative statics of the model it provides an interpretation of the evidence on monetary aggregates this explanation relies on the nominal interest as well as technology factors of the banking sector e31 e13 o42

sectoral shifts labor market sorting and aggregate fluctuations a model of sectoral reallocation is constructed where intersectoral friction is not caused by search or mobility costs instead a sectoral disturbance has a negative effect on production possibilities because it reduces the value of previous sorting in the labor market in equilibrium a measure of sectoral dispersion is positively correlated with the unemployment rate an increase in the incidence of sectoral disturbances increases unemployment at cyclical peaks and at cyclical troughs copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the impact of foreign aid on migration revisited abstract while policymakers hope to stem migration flows by giving foreign aid existing empirical evidence points in the opposite direction by loosening budget constraints aid tends to encourage people to emigrate in this paper we revisit the aid migration link using a substantially extended and adjusted econometric approach based on a gravity model of international migration in contrast to the previous literature we obtain evidence of a negative relationship between the total aid a country receives and emigration rates this even holds for the poorer part of recipient countries which suggests that the budgetary constraint channel does not play a significant role in shaping migration decisions the most plausible explanation for these contrasting results is that unlike in previous studies we use migrant flows rather than migrant stocks as the dependent variable in substantive terms the limited importance of the budgetary constraint channel might reflect that positive welfare effects of foreign aid tend to manifest themselves in improved public services for the poor rather than higher incomes which is in line with the reorientation of foreign aid towards social sectors under the millennium development goals

private and public circulating liabilities abstract legal and technological changes have made private banknote issue or its electronic equivalent possible we construct a model where private liabilities circulate either by themselves or alongside outside money we provide results on existence and multiplicity of equilibria and characterize dynamics near steady states our results support friedman in that circulating private liabilities are associated with endogenous volatility but implementing friedman s advice the government should ban private currency substitutes causes significant inefficiency the proposal of hayek that the government should leave currency creation to the market also is often constrained suboptimal both public and private circulating liabilities are required for optimality journal of economic literature classification numbers e3 e4 e5

sub optimality of the friedman rule in townsend s turnpike and stochastic relocation models of money do finite lives and initial dates matter abstract the friedman rule a widely studied prescription for monetary policy is optimal in townsend s turnpike model of money it is not so in the overlapping generations version of his stochastic relocation model of money we investigate these monetary models in the light of this disparity to this end we create a modified version of the turnpike model that generates the same stationary monetary equilibria as does the two period overlapping generations model with random relocation we exploit this equivalence to explain the aforementioned disparity we also discuss the importance of whether or not the economy has an initial date

dollarization and the inflation threshold this paper analyzes the relationship among inflation dollarization financial intermediation and real activity empirical evidence suggests non linearity in the eects of inflation on financial intermediation and real activity i e the existence of an inflation threshold evidence also suggests that one way in which inflation aects financial intermediation in high inflation economies is through the substitution of dollars under the mattress for savings in domestic banks our model captures these empirical regularities inflation and real activity are positively related at low levels of inflation when the inflation rate exceeds certain threshold however agents substitute in their portfolios dollars a non productive asset of constant value that also provides liquidity services for deposits issued by domestic banks this substitution reduces the scale of financial intermediation and the capital investment in the economy as a consequence at high levels of inflation the levels of capital stock and output become negatively related to the inflation rate

aid and the supply side public investment export performance and dutch disease in low income countries contemporary policy debates on the macroeconomics of aid often concentrate on short run dutch disease effects ignoring the possible supply side impact of aid financed public expenditure in the simple model of aid and public expenditure presented here public infrastructure generates an inter temporal productivity spillover which may exhibit a sector specific bias the model also provides for a learning by doing externality through which total factor productivity in the tradable sector is an increasing function of past export volumes an extended computable version of this model is used to simulate the effect of a step increase in net aid flows the simulations show that beyond the short run when conventional demand side dutch disease effects are present the relationship between enhanced aid flows and real exchange rates output growth and welfare is less straightforward than simple models of aid suggest public infrastructure investment that generates a productivity bias in favor of non tradable production delivers the largest aggregate return to aid but at the cost of deterioration in the income distribution income gains accrue predominantly to skilled and unskilled urban households leaving the rural poor relatively worse off under plausible parameterizations of the model the rural poor may also be worse off in absolute terms