the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

involuntary unemployment in economies with efficient risk sharing abstract we study economies where employment lotteries determine random layoffs and incomes for employed and unemployed agents allocate risk efficiently we ask for which specifications are unemployed agents worse off a situation we call involuntary unemployment we show unemployed agents are worse off iff an exogenous increase in wealth decreases aggregate unemployment in a monetary economy we show that in equilibrium the unemployed are worse off iff high inflation implies high unemployment our model also generates nominal wage stickiness as an equilibrium phenomenon but neither involuntary unemployment nor nominal stickiness implies these economies are operating inefficiently or are out of equilibrium

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

optimal disinflationary paths abstract this paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting starting from a steady state with positive inflation a rapid disinflation is desirable when announcements of future monetary policy are fully credible disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility nevertheless the benefits of disinflation still exceed the costs disinflation often fails to be welfare improving however when lost seignorage revenues must be replaced using other distortionary taxes

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

bargaining in legislatures bargaining in legislatures is conducted according to formal rules specifying who may make proposals and how they will be decided legislative outcomes depend on those rules and on the structure of the legislature although the social choice literature provides theories about voting equilibria it does not endogenize the formation of the agenda on which the voting is based and rarely takes into account the institutional structure found in legislatures in our theory members of the legislature act noncooperatively in choosing strategies to serve their own districts explicitly taking into account the strategies members adopt in response to the sequential nature of proposal making and voting the model permits the characterization of a legislative equilibrium reflecting the structure of the legislature and also allows consideration of the choice of elements of that structure in a context in which the standard institution free model of social choice theory yields no equilibrium

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

monetary policy banking and growth i introduction fischer and modigliani 1978 exhaustively list the costs associated with inflation in recent years a growing body of evidence is consistent with the notion that slower output growth may be added to the fischer modigliani list specifically analyses by kormendi and meguire 1985 fisher 1991 degregario 1992 gomme 1993 wynne 1993 barro 1996 and others find a negative correlation between the inflation rate and output growth both across countries and over time 1 moreover the studies consistently find that the growth rate response to a change in the inflation rate is quite large the different studies produce a range of correlation coefficients a country in which the inflation rate is 10 will grow between 1 4 and 3 4 percentage points slower than a country in which the inflation rate is 0 the purpose of this paper is to determine whether a reasonably calibrated model economy can account for the size of the regression coefficients the model economy is a modified version of a member of the ak class in which bank deposits are used to finance capital accumulation in this model economy fiat money is valued because the bank is required to hold reserves against its deposits throughout this paper bank deposits is used in a narrow sense to include only those deposits against which a reserve requirement applies because monetary policy has two tools at its disposal it is possible to conduct two separate policy experiments the results from these experiments particularly the inflation rate experiment sheds light on the potential importance on the share of investment financed through bank deposits researchers have long been interested in the interaction between financing and growth schumpeter 1911 argued that the financial sector more specifically its stage of development affected a country s growth rate 2 cameron 1967 described financial development in scotland england and france in the late 18th and early 19th centuries cameron concluded that scotland and england entered the industrial revolution ahead of france because it had the financial infrastructure capable of financing capital accumulation on the needed scale king and levine 1993 find that countries with more developed financial sectors tend to grow faster than countries with less developed financial sectors it seems natural therefore to investigate whether the means of financing can yield any insights into the inflation growth relationship other researchers have also quantified the effect that movements in the inflation rate has on the growth rate in particular jones and manuelli 1995 use several variants of economies in which people hold fiat money to satisfy a cash in advance constraint they demonstrate that large growth rate effects cannot be accounted for in these model economies in these models inflation does not materially alter capital accumulation rates affecting instead the allocation between the credit good and cash good purchases jones and manuelli find small growth rate effects in an economy in which the tax code has nominally denominated depreciation rates in two papers that focus on inflation and growth chari jones and manuelli 1995 1996 consider economies in which capital accumulation can be financed through either bank deposits or directly as in the economy specified in this paper reserve requirements are applied against bank deposits agents can avoid the inflation tax by using the direct financing means more intensively consequently the growth rate effects are muted in the chari jones manuelli model economies and are too small to account for the size of the regression coefficients reported in kormendi and mcguire fischer and barro in this paper i assume that all investment is financed through bank deposits with this extreme assumption the model economy can account for the size of the growth rate effects observed in the data 3 thus there is a potentially useful lesson learned from the quantitative results in the all bank financing economy and those reported in chari jones manuelli

anticipated inflation and the stock market the relation between fully anticipated inflation and stock prices is analysed in this paper the stock market is modelled within the construct of a choice theoretic intertemporal general equilibrium model where transactions are subject to a cash in advance constraint here a rise of the steady state inflation rate is shown to have a depressing effect on the stock market there are two reasons for this result first the consumption goods value of a given stream of dividends is reduced when inflation rises because the latter acts as a specific tax on dividends and secondly the firm s profits are lowered because the inflation rate distorts the labour leisure choice inflation anticipee et marche boursier l auteur analyse la relation entre l inflation pleinement anticip6e et le prix des actions en bourse a l int6rieur d un modele d 6quilibre g6n6ral de choix inter temporel on insere un march6 boursier dans lequel les transactions doivent etre r6gl6es comptant d avance on voit qu un accroissement du taux d inflation en regime permanent a un effet d6pressif sur le march6 boursier cela tient a deux raisons d abord quand l inflation monte la valeur en termes de biens de consommation d un flux donn6 de dividendes est r6duite parce que l inflation agit comme taxe sp6cifique sur les dividendes ensuite les profits de l entreprise sont r6duits parce que le taux d inflation introduit une distorsion dans la choix entre travail et loisir

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

government debt and optimal monetary and fiscal policy how do different levels of government debt affect the optimal conduct of monetary and fiscal policies and what do these optimal policies imply for the evolution of government debt over time to provide an answer this paper studies a standard monetary policy model with nominal rigidities and monopolistic competition and adds to it a fiscal authority that issues nominal non state contingent debt levies distortionary labor income taxes and determines the level of public goods provision higher government debt levels make it optimal to reduce public spending so as to dampen the adverse incentive effects of distortionary taxes but also strongly influence the optimal stabilization response following technology shocks in particular higher debt levels give rise to larger risks to the fiscal budget and to tax rates this makes it optimal to reduce government debt over time the optimal speed of debt reduction is missed when using first order approximations to optimal policies but is shown to be quantitatively significant in a second order approximation especially when technology movements are largely unpredictable in nature

on the sources of business cycles in the g 7 abstract this paper examines sources of cyclical movements in output inflation and the term structure of interest rates in the g 7 it employs a novel identification approach which uses the sign of the theoretical cross correlation function in response to shocks to catalog orthogonal disturbances we find that demand shocks are the dominant source of output and inflation fluctuations in several of the g 7 countries the proportion of term structure variability explained by different structural sources does not depend on the horizon apart from the us and canada structural shocks are nearly uncorrelated across countries

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

the optimal monetary response to technology shocks i introduction during the past decade many economists adopted the view that shocks to the aggregate production function or technology shocks represent the dominant source of fluctuations in the united states economy as noted by shapiro 1987 a number of elements came together to shape this view most important a series of severe supply shocks hit the economy during the 1970s standard keynesian models with their emphasis on the demand side had great difficulty tracking the economy s response to these shocks the view solidified after kydland and prescott 1982 demonstrated that many features of the business cycle can be replicated in a model where technology shocks are the only source of fluctuations kydland and prescott s work launched the now extensive literature on real business cycles surveyed by mccallum 1989 the observation that supply side disturbances are important in generating business cycles however need not imply that monetary factors play no role in accounting for variations in economic activity greenwood and huffman 1987 and cooley and hansen 1989 add cash in advance constraints to otherwise standard real business cycle models as a simple way of including the nominal sector in these cash in advance models monetary shocks have little effect on the cyclical behavior of real variables these models preserve the emphasis on technology shocks in explaining the business cycle nevertheless the models show how sustained inflation can affect the real economy by acting as a distortionary tax on productive activity the models of greenwood and huffman and cooley and hansen imply that optimal monetary policy involves a steady contraction of the money supply that keeps the nominal interest rate at zero as called for by friedman 1969 this optimal policy makes no attempt to respond to technology shocks instead it simply removes the distortionary inflation tax more recently cho and cooley 1992 yun 1994a and dow 1995 have investigated the effects of introducing various forms of price rigidity into monetary versions of the real business cycle model technology shocks continue to play a major role in these studies but the presence of nominal rigidities allows monetary shocks to affect the business cycle as well in fact these studies show that the addition of price rigidity improves the model s ability to match the cyclical properties of the data this paper complements these studies by deriving the implications of nominal price rigidity for optimal monetary policy i begin by outlining a model that shares the basic features of those cited above including technology shocks a cash in advance constraint and nominal price rigidity in the model both technology and monetary shocks have important effects on aggregate output and employment unlike flexible price cash in advance models for instance the model developed here gives rise to a phillips curve relationship between money and output the model is used to answer the following question does the presence of nominal price rigidity rationalize a monetary policy that responds actively to technology shocks or does the optimality of friedman s constant money growth rule still apply the results show that optimal policy does in fact exploit the monetary authority s ability to influence the real economy when prices are sticky that is the optimal policy is activist on the other hand the results also show that the friedman rule while no longer optimal comes very close to the optimum in welfare terms in this sense the main policy implication of flexible price cash in advance models appears robust to the introduction of nominal price rigidity section ii presents the model section iii describes the key features of its equilibrium section iv derives the optimal activist policy and compares its performance to that of the friedman rule section v concludes ii the model the economic environment infinitely lived households firms and a monetary authority populate an economy where time periods are indexed by t 0 1 2

fiscal policy over the real business cycle a positive theory this paper presents a political economy theory of the behavior of fiscal policy over the business cycle the theory predicts that in both booms and recessions fiscal policies are set so that the marginal cost of public funds obeys a submartingale in the short run fiscal policy can be pro cyclical with government debt spiking up upon entering a boom however in the long run fiscal policy is counter cyclical with debt increasing in recessions and decreasing in booms government spending increases in booms and decreases during recessions while tax rates decrease during booms and increase in recessions data on tax rates from the g7 countries supports the submartingale prediction and the correlations between fiscal policy variables and national income implied by the theory are consistent with much of the existing evidence from the u s and other countries

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

growth opportunities strategic savings and the dot com boom and bust data from the dot com boom bust episode suggest that growth opportunities played an important role in explaining firms financing strategy during this understudied episode the low leverage of this sector was mainly driven by high growth firms which increased their leverage following the crash despite suffering a much larger fall in their market value we present a parsimonious dynamic firm financing model where growth opportunities alone can generate the heterogeneous patterns in the financing and performance between high and low growth information technology firms prior to and following the market crash the calibrated model also sheds light on the role played by monetary policy during that episode jel g32 e22 e5

on modelling the natural rate of unemployment with indivisible labour this analysis investigates modelling the natural rate of unemployment in settings where labour s utilization has some lumpy aspect to it specifically the introduction of various nonconvexities into tastes and technology lead to unemploy ment in general equilibrium equilibria can emerge where 1 those currently unemployed have higher probabilities of being unemployed in the future than those currently employed 2 some agents are jobless while others work overtime and 3 seniority rules seemingly arise whereby old workers cannot be laid off so long as either new workers are being hired or some workers are doing overtime the relative welfare levels of employed and unemployed agents are analysed

optimal structure of fiscal and monetary authorities why are monetary authorities not elected like fiscal authorities are advanced economies pair an elected fiscal authority with an independent monetary authority replicating the advanced economies structure with authorities microfounded by a political economy model shows that this structure is the solution to a constrained mechanism design problem that overcomes time inconsistency and results in the highest possible welfare goal and instrument independence singly and in combination are insufficient to minimize time inconsistency though their combination is necessary

inside money output and inventories in a business cycle this paper describes a dynamic general equilibrium asset pricing model of a competitive monetary economy with a storable good and a cash in advance constraint where output inside money and inventories are endogenously determined inventories allow firms to react to high low productivity states by increasing decreasing production in good bad times in response to a temporary change in the productivity of labor inside money and output are positively and serially correlated with inside money changing before output output fluctuates more than sales and prices fluctuate less in a flexible price model with no storage

central bank independence and the monetary instrument problem we study the monetary instrument problem in a dynamic noncooperative game between separate discretionary fiscal and monetary policy makers we show that monetary instruments are equivalent only if the policy makers objectives are perfectly aligned otherwise an instrument problem exists when the central bank is benevolent while the fiscal authority is short sighted relative to the private sector excessive public spending and debt emerge under a money growth policy but not under an interest rate policy despite this property the interest rate is not necessarily the optimal instrument

central bank independence and macroeconomic performance some comparative evidence this note uses information on a sample of sixteen oecd countries to assess the relationship between central bank independence and macroeconomic performance as previous work suggests politically controlled central banks are more likely to pursue policies that lead to high and variable inflation however the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth unemployment or the ex ante real interest rate copyright 1993 by ohio state university press

a further exploration in the theory of exchange rate regimes in an interesting paper in this journal elhanan helpman 1981 develops a simple two country model to compare the welfare levels that are achieved under different exchange rate regimes in a world characterized by perfect foresight his basic finding is that equilibrium consumption allocations and hence welfare levels are identical under a floating exchange rate system and a one sided peg fixed exchange rate regime this result is due to helpman s assumption that output is determined exogenously which allows a separation of the real and monetary sides of the economy the purpose of this paper is to extend helpman s model by making two alterations in his setup 1 to allow production to be endogenously determined as a function of labor force participation and 2 to allow welfare levels to be dependent on labor service as well as on consumption the main conclusion then obtained is that a country may achieve a higher welfare level under a flexible exchange rate regime than under a fixed exchange rate regime since it is able to choose an optimal rate of inflation or currency depreciation

on the joint determination of fiscal and monetary policy abstract the conduct of fiscal and monetary policy absent commitment depends on the interaction between the objective of smoothing distortions intertemporally and a time consistency problem when net nominal government obligations are positive both fiscal and monetary policies are distortionary and the choice of debt depends on how the anticipated response in future monetary policy affects the current demand for money and bonds there exists a unique steady state with positive net nominal government obligations which is stable and time consistent for any initial level of debt the welfare loss due to lack of commitment is small

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

capacity utilization rates and unemployment rates are they complements or substitutes in warning about future inflation this research examines capacity utilization as a measure of economic slack in the us economy many macroeconomists have questioned the use of capacity utilization as a measure of economics slack on several fronts the first issue revolves around the definition and accuracy of measurement of the capacity utilization rate in the us economy since this research uses existing federal reserve measures of capacity utilization no insights into the definition and measurement issues are offered other than the fact that a consistent role was found for two different fed measures of capacity utilization in explaining inflation the second issue effectively involves the concern as to robustness of the link between the capacity utilization rate and inflation there is indeed reason for the federal reserve to take note of changes in capacity utilization when trying to determine its policy position with regard to inflation clearly the high capacity measure developed in this research offers distinct information about t

a dynamic equilibrium model of inflation and unemployment a stochastic general equilibrium model is constructed which is capable of examining the covariance properties between inflation and unemployment both conditioned and unconditioned upon the state o

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

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances