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

money and credit as means of payment a new monetarist approach abstract we study the choice of payment instruments in a model with money and credit where sellers must invest in a record keeping technology to accept credit and buyers have limited commitment our model captures the two sided market interaction between consumers and retailers that can generate multiple equilibria limited commitment yields an endogenous debt limit that depends on monetary policy money and credit coexist for a range of parameters and bargaining related hold up problems can lead to inefficiencies in the adoption of monitoring technologies changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants

current account imbalances and financial integration in the euro area abstract while the current account of the euro area as a whole has remained almost balanced in the past two decades several member countries have sizeable deficits or surpluses in this paper we interpret these imbalances as indicators of net capital flows among the euro area countries we distinguish between balances against the euro zone and the rest of the world and examine these for the eu 15 countries we find that for euro members the net flows follow differences in per capita incomes even before the introduction of the euro our results show further that with the introduction of the common currency the elasticity with respect to per capita incomes of net capital flows within the euro area has increased for the members of the euro zone this increase can neither be observed for the flows between the euro members and the rest of the world nor for the flows between the countries that stayed outside the monetary union and the euro zone we interpret this as evidence for increasing financial integration in the euro area there is also some evidence suggesting that the introduction of the euro has led to some financial diversion

banking a new monetarist approach we develop a model where i banks take deposits and make investments ii their liabilities facilitate third party transactions other models have i or ii not both although we argue they are intimately connected we show that they both emerge from limited commitment we describe an environment characterize desirable allocations and interpret the outcomes as banking arrangements banks are essential without them the set of feasible allocations is inferior as a technical contribution we characterize dynamically optimal credit allocations with frictions show they involve backloading and analyse how this interacts with banking we also confront the theory with economic history copyright 2013 oxford university press

money credit and banking in monetary models where agents are subject to trading shocks there is typically an ex post inefficiency since some agents are holding idle balances while others are cash constrained this problem creates a role for financial intermediaries such as banks who accept nominal deposits and make nominal loans in general financial intermediation improves the allocation the gains in welfare come from the payment of interest on deposits and not from relaxing borrowers liquidity constraints we also demonstrate that when credit rationing occurs increasing the rate of inflation can be welfare improving

house prices home equity based borrowing and the u s household leverage crisis us household leverage sharply increased in the years preceding the 2007 eco nomic recession the top panel of figure 1 shows the steady rise in household debt since 1975 which accelerated beginning in 2002 in just five years the household sector doubled its debt balance in comparison the contemporaneous increase in corporate debt was modest the middle panel shows that the increase in household debt from 2002 to 2007 translated into a striking rise in household leverage as mea sured by the debt to income ratio during the same time period corporate leverage declined the dramatic absolute and relative rise in us household leverage from 2002 to 2007 is unprecedented compared to the last 25 years one reason for the rapid expansion in household leverage during this period is that mortgage credit became more easily available to new home buyers mian and sufi 2009 strong house price appreciation from 2002 to 2006 however which may have been fueled by the availability of mortgage credit to a riskier set of new home buyers could also have had an important feedback effect on household lever age through existing homeowners given that 65 percent of us households already owned their primary residence before the acceleration in house prices the feedback from house prices to borrowing may be an important source of the rapid rise in household leverage that preceded the economic downturn our central goals in this study are to estimate how homeowner borrowing responded to the increase in house prices and to identify which homeowners responded most aggressively we examine this home equity based borrowing channel using a dataset consisting of anonymous individual credit files of a national consumer credit bureau agency we follow a random sample of over 74 000 us homeowners who owned their homes as of 1997 at an annual frequency from the end of 1997 until the end of 2008 the bottom panel of figure 1 plots the growth in debt of 1997 homeowners over time and shows that existing homeowners borrow significantly more debt as their house prices appreciate from 2002 to 2006 while the aggregate trend is suggestive

does financial reform raise or reduce saving the effect of financial liberalization on private saving is theoretically ambiguous not only because the link between interest rate levels and saving is itself ambiguous but also because financial liberalization is a multidimensional and phased process sometimes involving reversals using principal components we construct 25 year time series indices of financial liberalization for each of eight developing countries chile ghana indonesia korea malaysia mexico turkey and zimbabwe these are employed in an econometric analysis of private saving in these countries our results cannot offer support for the hypothesis that financial liberalization will increase saving on the contrary the indications are that liberalization overall and in particular those elements that relax liquidity constraints may be associated with a fall in saving

float on a note abstract from 1863 1914 banks in the u s could issue notes subject to full collateral a tax on outstanding notes redemption of notes on demand and a clearing fee per issued note cleared through the treasury the system failed to satisfy a purported arbitrage condition the yield on collateral exceeded the tax rate plus the product of the clearing fee and the average clearing rate of notes the failure is explained by a model in which note issuers choose to issue notes only in trades that produce a low clearing rate high float but in which there are diminishing returns to additional note issue

financial deregulation and household saving the last decade has seen widespread domestic financial deregulation in the industrial world particularly in the united states united kingdom and the nordic countries resulting in an increase in competition both between banks and saving institutions thrifts or building societies as they moved into each others services and within each sector this opened up new financial options particularly for households the sector that was probably most affected by government regulation for example there was a significant increase in equity withdrawals from personal housing wealth in both the united kingdom and united states over the ig8os 2 this period also saw a significant change in household consumption behaviour the most dramatic illustration being the fall in the household saving ratio in those countries where the process of deregulation has gone furthest this paper reports the results from estimating a model of household saving using regional data for the united kingdom with a particular emphasis on the interaction between household saving and financial deregulation the estimates are used to calculate the relative importance of different factors in the fall in personal saving over the i98os i conclude that deregulation lowered the equilibrium level of saving over the i98os probably 2 percentage points per annum as well as making saving significantly more dependent on changes in wealth income and real interest rates there have been a number of earlier empirical studies looking at the interaction between financial deregulation and household behaviour manchester and poterba i 989 miles i 992 and koskela et al i 992 present empirical evidence on the interaction between deregulation the housing market and saving in the united states united kingdom and finland respectively others have estimated saving functions which include variables representing the effects of financial deregulation or have considered the impact of financial deregulation on liquidity constraints in consumption 3 the

a model of tiered settlement networks this paper develops a model of settlement system to study the endogenous structure of settlement networks and the welfare consequences of clearing agent failure the equilibrium degree of tiering is endogenously determined by the cost structure and the information structure the degree of tiering is decreasing in the fixed cost of operating the second tier network and the availability of public credit history furthermore the welfare effects of clearing agent failure can be decomposed into operational inefficiency and the loss of private information

on the coexistence of money and higher return assets and its social role this paper adopts mechanism design to investigate the coexistence of at money and higherreturn assets we consider an economy with pairwise meetings where at money and riskfree capital compete as means of payment as in lagos and rocheteau 2008 the trading mechanism in pairwise meetings is chosen among all individually rational renegotiation proof mechanisms to maximize society s welfare we show that in any stationary monetary equilibrium capital commands a higher rate of return than at money

secondary currency an empirical analysis abstract many cases exist of multiple currency usage throughout history as two leading examples secondary currencies were widespread during both the great depression in the united states and the 2002 recession in argentina what are the determinants of multiple currency usage and what is the effect on economic activity both issues are empirically addressed using individual level surveys collected by the authors in argentina during 2002 and 2003 the evidence supports the theoretically predicted determinants of secondary currency acceptability put forth in monetary theory in particular findings show that the acceptability of the secondary currency increases when the supply of national currency is low the relative transaction cost of the secondary currency is low and the individual trading technologies are less effective moreover the acceptability of the secondary currency has real effects on economic activity among those who use the secondary currency the monthly income gain is more than 15 of the average argentine s monthly income excluding trades of used goods this amounts to a 0 6 increase in gdp

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

optimal money creation in pure currency economies a conjecture in a pure currency economy money is the only durable object and people have private histories in such economies taxation is not feasible and in some of them trade is enhanced through the use of money for economies of that kind in which a nondegenerate distribution of money part of the state of the economy affects trades and real outcomes and in which trades affect the state at the next date the conjecture is that there are transfer schemes financed by money creation that improve ex ante representative agent welfare relative to what can be achieved holding the stock of money fixed jel codes e52 e58 copyright 2014 oxford university press

optimal pricing of payment services abstract payments are increasingly being made with payment cards despite the fact that the cost of clearing a card payment usually exceeds the cost of transferring cash we examine this puzzle through the lens of monetary theory we consider the design of an optimal card based payment system when cash is available as an alternative means of payment we find that a feature akin to the controversial no surcharge rule may be necessary to ensure the viability of the card payment system this rule states that merchants cannot charge a customer who pays by card more than a customer who pays by cash

monetary policy and asset prices a mechanism design approach we investigate the eects of monetary policy on asset prices in economies where assets are traded periodically in over the counter otc markets with bilateral meetings between buyers and sellers the trading mechanism in pairwise meetings is designed to maximize social welfare taking as given the frictions in the environment e g lack of commitment and limited enforcement and monetary policy we show that asset price bubbles emerge in a constrained e cient monetary equilibrium only if liquidity is abundant and the rst best allocation is implementable in contrast if liquidity is scarce assets are priced at their fundamental value in any constrained e cient monetary equilibrium in which case an increase in in ation has no eect on asset prices but it reduces output and welfare finally for low in ation rates the bursting of an asset price bubble can be an optimal response to a shock that reduces assets resalability

an information based theory of international currency abstract this paper develops an information based theory of international currency based on search frictions private trading histories and imperfect recognizability of assets using an open economy search model with multiple competing currencies the value of each currency is determined without requiring agents to use a particular currency to purchase a country s goods strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements while some inflation can benefit the country issuing an international currency the threat of losing international status puts an inflation discipline on the issuing country when monetary authorities interact in a simple policy game the temptation to inflate can lead optimal policy to deviate from the friedman rule the calibrated model can produce a welfare cost of losing international status for the issuing country larger than previous findings though estimates depend critically on inflation rates and information costs

money and credit redux do we need both money and credit in models with explicit roles for payment instruments we show the answer is no if credit is easy money is useless if credit is tight money can be essential but then credit is irrelevant and changes in debt limits are neutral real balances respond endogenously to leave total liquidity constant this is true for exogenous or endogenous policy and debt limits secured or unsecured credit and fairly general preferences and pricing mechanisms while we also show how to overturn some results the benchmark model suggests credit conditions matter less than some people think

endogenous groups and dynamic selection in mechanism design abstract we create a dynamic theory of endogenous risk sharing groups with good internal information and their coexistence with relative performance individualistic regimes which are informationally more opaque inequality and organizational form are determined simultaneously numerical techniques and succinct reformulations of mechanism design problems with suitable choice of promised utilities allow the computation of a stochastic steady state and its transitions regions of low inequality and moderate to high wealth utility promises produce the relative performance regime while regions of high inequality and low wealth produce the risk sharing group regime if there is a cost to prevent coalitions risk sharing groups emerge at high wealth levels also transitions from the relative performance regime to the group regime tend to occur when rewards to observed outputs exacerbate inequality while transitions from the group regime to the relative performance regime tend to come with a decrease in utility promises some regions of inequality and wealth deliver long term persistence of organization form and inequality while other regions deliver high levels of volatility

the cost of inflation a mechanism design approach abstract i apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone in an environment with pairwise meetings the money demand that is consistent with an optimal incentive feasible allocation takes the form of a continuous correspondence that can fit the data over the period 1900 2006 for such parameterizations the cost of moderate inflation is zero this result is robust to the introduction of match specific heterogeneity and endogenous participation decisions

another example of a credit system that co exists with money we study an economy in which exchange occurs pairwise there is no commitment and anonymous agents choose between random monetary trade or deterministic credit trade to accomplish the latter agents can exploit a costly technology that allows limited record keeping and enforcement an equilibrium with money and credit is shown to exist if the cost of using the technology is sufficiently small anonymity record keeping and enforcement limitations also permit some incidence of default in equilibrium

a model of money and credit with application to the credit card debt puzzle many individuals simultaneously have significant credit card debt and money in the bank the credit card debt puzzle is given high interest rates on credit cards and low rates on bank accounts why not pay down the debt while economists have gone to elaborate lengths to explain this observation we argue it is a special case of the rate of return dominance puzzle from monetary economics we analyze the issue by extending standard monetary theory to incorporate consumer debt this seems interesting in its own right since developing models where money and credit coexist is a long standing challenge and it helps put into context recent discussions of consumer debt

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

money intermediation and banking the business of money creation is conceptually distinct from that of intermediation yet these two activities are frequently but not always combined together in the form of a banking system we develop a simple model to examine the question when is banking essential there is a role for money due to a lack of record keeping and a role for intermediation due to the existence of private information both money and intermediation are essential when monitoring costs associated with intermediation are sufficiently low the two activities can be separated from one another however when monitoring costs are sufficiently high a banking system that combines these two activities is essential

current accounts in the euro area an intertemporal approach abstract current accounts have diverged substantially among euro area countries since the creation of the euro this divergence has raised concerns about the sustainability of some member countries external indebtedness this paper uses an intertemporal model of the current account to analyze the fluctuations in current account balances experienced by euro area countries over the last three decades and to disentangle its determinants we find that the model is not rejected for six of the ten euro area countries examined belgium france italy netherlands portugal and spain although it tends to underestimate their current account volatility for these countries we derive the expectations about future income and relative prices which according to the model underlie their current account balances expectations about future growth increased in all southern european countries at the creation of the euro but they diverged considerably by 2005 while in portugal these expectations were below its historical mean by then in spain they were at an historical high

shifts in volatility driven by large stock market shocks abstract this paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns known as structural breaks these shifts are endogenously driven by large return shocks innovations reflecting large pieces of market news these shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model one for the negative shocks and one for the positive shocks the model can be employed to investigate different sources of stock market volatility shifts driven by market news without relying on exogenous information in addition to this it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility the above properties of the model are shown based on a study for the us stock market volatility

efficient propagation of shocks and the optimal return on money abstract we study optimal allocations in an environment in which money is essential due to lack of commitment and anonymity of individuals because the economy features aggregate preference shocks we apply a notion of implementability that allows for allocations with non trivial business cycle dynamics for the propagation of shocks we show that history dependence is predicted by the theory of second best and becomes necessary for optimality when the degree of patience is neither too low nor too high our analysis concludes with a discussion of whether there is a role for the propagation of shocks in alternative economic environments

thousands of models one story current account imbalances in the global economy the global financial crisis has led to a revival of the empirical literature on current account imbalances this paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any firm conclusion we explore three alternative econometric strategies examining all models selecting a few and combining them all out of thousands or indeed millions of models a story emerges the chance that current accounts were aligned with fundamentals prior to the financial crisis appears to be minimal

domestic credit growth and international capital flows during the pre crisis period europe experienced substantial cross country variation in domestic credit growth and cross border capital flows we investigate the inter relations between domestic credit growth and international capital flows during the period 1993 2008 with a special focus on the boom period of 2003 2008 we establish that domestic credit growth in european countries is strongly related to net debt inflows but not to net equity inflows this pattern also holds for an extended sample of 54 advanced and emerging economies

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

the two money theorem in this article i consider environments in which all shocks have finite support and any transfer of resources is ex post voluntary consider an allocation that is achievable when potential trading partners know each others histories the one money theorem says that the allocation is achievable using only one money if that money is divisible and money holdings are observable the two money theorem says that the allocation is achievable using two divisible monies even if money holdings are concealable copyright economics department of the university of pennsylvania and the osaka university institute of social and economic research association

search based models of money and finance an integrated approach many applications in monetary economics of search and bargaining theory use shi trejos wright hereafter stw many applications in finance use duffie g rleanu pedersen hereafter dgp these models share several features and both concern liquidity yet they also differ in stw agents use assets as payment instruments when trading goods in dgp they pay with goods or transferable utility when trading assets we integrate the two this clarifies connections between the literatures and generates novel insights several new results are provided for the baseline stw and dgp models while the integrated structure generates even more interesting outcomes including endogenous transactions patterns and belief based dynamics

on the welfare properties of fractional reserve banking monetary economists have long recognized a tension between the benefits of fractional reserve banking such as the ability to undertake more profitable long term investment opportunities and the difficulties associated with it such as the risk of insolvency for each bank and the associated losses to bank liability holders i show that a specific banking arrangement a joint liability scheme provides an effective mechanism for ensuring the ex post transfer of reserves from liquid banks to illiquid banks so it is possible to select a socially efficient reserve ratio in the banking system that preserves the safety of bank liabilities as a store of value and maximizes the rate of return paid to bank liability holders

incentives communication and payment instruments abstract alternative payment instruments are studied in an economy with private information delayed communication and limited commitment attention is restricted to checks and bank drafts which differ in resource cost and communication characteristics checks are less costly but settlement delays create a limited commitment constraint we find that drafts dominate at low wealths and checks at higher wealths applications to 19th century and modern payment systems are discussed

on the private provision of fiat currency this paper considers whether fiat money can be provided by a revenue maximizing monopolist in an environment where money is essential two questions arise concerning the private supply of money is it feasible and is it optimal concerning the feasibility question i show that the revenue maximizing policy is time consistent if the trading history of the issuer is public information and if money demanders respond to the revelation of defection by playing autarky concerning the optimality question the model suggests that any private organization of the market for fiat currency is suboptimal

euro area current account imbalances a tale of two financial liberalizations abstract this paper explores the extent to financial liberalization in the euro area had a differential impact on members current account positions theoretically it builds on an inter temporal consumption model augmented with household heterogeneity low middle income groups are impatient and constrained whilst high income groups are patient and under no constraint increased access to international credit in previously financially repressed countries implies a relaxation of collateral constraints specifically for the low skilled low middle income group who differently from high income agents borrows to finance current consumption it follows that financial liberalization is associated with deteriorating external positions there where initial levels of financial openness are lowest and the share of the low skilled low middle income group with potentially binding collateral constraints largest the same approach is useful to understand asymmetric current account reversals which relates to suddenly biting collateral constraints in indebted peripheral countries where the great recession hit disproportionally the low skilled

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

search money and capital a neoclassical dichotomy recent work has reduced the gap between search based monetary theory and mainstream macroeconomics by incorporating into the search model some centralized markets as well as some decentralized markets where money is essential this paper takes a further step toward this integration by introducing labor capital and neoclassical firms the resulting framework nests a search theoretic monetary model and a standard neoclassical growth model as special cases perhaps surprisingly it also exhibits a dichotomy one can determine the equilibrium path for the value of money independent of the paths of consumption investment and employment in the centralized market