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

rational household labor supply traditionally household behavior is derived from the maximization of a unique utility function in this paper we propose an alternative approach in which the household is modeled as a two member collectivity taking pareto efficient decisions the consequences of this assumption are analyzed in a three good model in which only total consumption and each member s labor supply are observable if the agents are assumed egoistic i e they are only concerned with their own leisure and consumption it is possible to derive falsifiable conditions upon household labor supplies from both a parametric and nonparametric viewpoint if alternatively agents are altruistic restrictions obtain in the nonparametric context useful interpretation stems from the comparison with the characterization of aggregate demand for a private good economy

efficient responses to targeted cash transfers we estimate and test the restrictions of a collective model of household consumption using z conditional demands in the context of a large conditional cash transfer program in rural mexico the model can explain the impacts of the program on the structure of food consumption we use two plausible and novel distribution factors the random allocation of a cash transfer to women and the relative size and wealth of the husband s and wife s family networks our structure does better at predicting the effect of exogenous increases in household income than an alternative unitary structure we cannot reject efficiency of household decisions

a search theoretic model of legal and illegal currency abstract using a search theoretic model of money we explore the conditions under which two currencies domestic and foreign will co exist despite legal restrictions on the use of foreign currency for internal trade we study how changes in government policy i e its enforcement of currency laws through fines or the rate of enforcement affects the acceptability of illegal currency the equilibrium value of both currencies and the implicit exchange rate first we construct a model with indivisible goods to show conditions under which legal currency is fully acceptable but illegal currency circulates with varying acceptability we then introduce bargaining to determine prices in legal and illegal currency we show that some enforcement polices can create multiple equilibria while others will not also some methods of enforcement are capable of driving the illegal currency out of circulation while others are not

the distribution of money and prices in search equilibrium this article considers a search theoretic model of monetary exchange agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings determining endogenously the distributions of money and of prices i show that money is neutral if changes in the money supply are accomplished via proportional transfers however within the class of lump sum transfers an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low but when inflation is high enough the opposite effects occur

currency competition a partial vindication of hayek abstract this paper establishes the existence of equilibria for environments in which outside money is issued competitively such equilibria are typically believed not to exist because of a classic overissue problem if money is valued in equilibrium an issuer produces money until its value is driven to zero by backward induction money cannot have value in the first place this paper shows that overissuance is not a problem if agents believe that if an issuer produces more than some threshold number of notes then only those notes issued up to the threshold will be valued additional notes will be worthless this result is very general applying to any monetary economy in which equilibria with and without valued money exist if the money supply is finite the paper also compares the allocation achieved by a monopolist to that achieved with competitive issuance in both a search and an overlapping generations environment the results depend on the environment considered but two general conclusions arise first it is ambiguous whether competitive issuers can achieve a more desirable allocation than a monopolist second with competitive issuance a licensing agency can always improve on pure laissez faire and achieve the efficient allocation in the long run

indirect effects of an aid program how do cash transfers affect ineligibles consumption cash transfers to eligible households indirectly increase the consumption of ineligible households living in the same villages this effect operates through insurance and credit markets ineligible households benefit from the transfers by receiving more gifts and loans and by reducing their savings thus the transfers benefit the local economy at large looking only at the effect on the treated underestimates the impact one should analyze the effects of this class of programs on the entire local economy rather than on the treated only and use a village level randomization rather than selecting treatment and control subjects from the same community

the impact of progresa on food consumption abstract in this article we used data from the mexican poverty alleviation program called progresa programa de educacion salud y alimentacion to examine whether eligibility for a cash transfer provided by the program conditional on children s regular school attendance and regular visits to health centers is also associated with increased consumption of food we used a longitudinal sample of approximately 24 000 households from 506 communities a distinguishing characteristic of this sample was that some of the communities were randomly selected for participation in progresa while the rest were introduced into the program at later phases exploiting this feature in our analysis we found that eligible households in the villages covered by progresa increased caloric acquisition compared with eligible households not receiving these benefits by november 1999 median beneficiary households in treatment localities obtained 6 4 more calories than did comparable households in control localities perhaps eve

the connection between public transfers and private interfamily transfers abstract this paper investigates the anti poverty effectiveness of public transfers taking private transfer responses into account widespread altruistically motivated private transfers would neutralize the distributional impact of public transfers but exchange motivated transfers can reinforce the effects of public transfers on the distribution of economic well being the common technique for gauging anti poverty effectiveness subtracting public transfers from other income and measuring the poverty rate counterfactual yields results that are close to a more complex procedure that takes private transfer responses into account and some of the empirical findings suggest an exchange rather than altruistic motive for private transfers indicating that the effects of public transfers can be magnified by private behavior this is an exact reversal of the prediction that public transfers merely supplant private ones

on high inflation and the allocation of resources abstract this paper formalizes some of the disruptive effects of inflation on the organization of markets rapid inflation induces buyers to speed up purchases which thus inhibits the selection of more adequate trading partners through search this blurs distinctions across firms of different productivities and leads to resource misallocations as inflation causes efficient and inefficient firms to be less distinguishable the incentives to engage in cost reduction are dampened and lower growth results the model could provide a rationale for the large number of bankruptcies and large turnover rates following successful inflation stabilization programs like those of israel bolivia and argentina

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

dollarization and currency exchange abstract we use a dual currency money search model to study dollarization agents hold portfolios consisting of two currencies one of which is risky we use numerical methods to solve for the steady state distributions of currency portfolios transaction patterns and value functions as risk increases agents increasingly use the safe currency as a medium of exchange dollarization occurs furthermore the safe currency trades for multiple units of the risky currency this type of currency exchange and the corresponding nominal exchange rate are often observed in black market or unofficial currency exchange markets in developing countries due to decentralized trading a distribution of exchange rates arises whose mean and variance change in predictable ways when currency risk increases

inflation output and welfare this paper studies the effects of anticipated inflation on aggregate output and welfare within a search theoretic framework we allow money holders to choose the intensities with which they search for trading partners so inflation affects the frequency of trade as well as the quantity of output produced in each trade we consider the standard pricing mechanism for search models i e ex post bargaining as well as a notion of competitive pricing if prices are bargained over the equilibrium is generically inefficient and an increase in inflation reduces buyers search intensities output and welfare if prices are posted and buyers can direct their search search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates the friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates

inflation and welfare in retail markets prior production and imperfectly directed search this paper considers the effect of monetary policy and inflation on retail markets goods are dated and produced prior to being retailed buyers direct their search on price and general quality buyers match specific tastes are private information sellers set the same price for all buyers some of whom do not value the good highly enough to buy it the market economy is typically inefficient as a social planner would have the good consumed under free entry of sellers the friedman rule is optimal policy when the upper bound on the number of participating sellers binds moderate levels of inflation can be welfare improving

inflation and welfare a search approach this paper extends recent findings in the search theoretic literature on monetary exchange regarding the welfare costs of inflation we present first estimates of the welfare cost of inflation using the welfare triangle methodology of bailey 1958 and lucas 2000 we then derive a money demand function from the search theoretic model of lagos and wright 2005 and we estimate it from u s data over the period 1900 2000 we show that the welfare cost of inflation predicted by the model accords with the welfare triangle measure when pricing mechanisms are such that buyers appropriate the social marginal benefit of their real balances for other mechanisms welfare triangles underestimate the true welfare cost of inflation because of a rent sharing externality we also point out other inefficiencies associated with noncompetitive pricing which matter for estimating the cost of inflation we then illustrate how endogenous participation decisions can mitigate or exacerbate the cost of inflaion and we provide calibrated examples in which a deviation from the friedman rule is optimal finally we discuss distributional effects of inflation

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

inflation and dollarization in a dual currency search theoretic model abstract we examine the effect of an inflation tax in a dual currency economy where a weak domestic currency circulates alongside a strong foreign currency we show that in a domestic hyperinflation the foreign currency actually loses value but becomes the dominant medium of exchange

is the allocation of resources within the household efficient new evidence from a randomized experiment i study whether households make pareto efficient intrahousehold resource allocation decisions combining randomized variation in women s income generated by the evaluation of the mexican progresa program with variation attributable to localized rainfall shocks as distribution factors in the collective model i find evidence favoring pareto optimality more specifically female specific income changes have positive effects on children s goods expenditures whereas changes due to rainfall shocks have a smaller influence on household public goods expenditures the evidence is consistent with female partners having greater sensitivity to own income changes and norms that oblige women to devote their earnings to meet collective consumption needs

on the efficiency of monetary exchange how divisibility of money matters abstract we use alternative assumptions about the divisibility of goods and money and the ability of agents to use lotteries on money to investigate to what extent the indivisibility of money is the cause for the typically inefficient production and consumption decisions in search theoretic models of money our framework potentially generates three types of inefficiencies the no trade inefficiency where no trade takes place even though it would be socially efficient to trade and the too much trade and too little trade inefficiencies where the quantities produced and exchanged are either larger or smaller than what the solution to a social planner s problem would mandate it is shown that while the no trade and the too much trade inefficiencies are caused by the indivisibility of money the too little trade inefficiency remains even when money is divisible unless it is sufficiently valued

trade linked canada united states household environmental impact analysis of energy use and greenhouse gas emissions abstract we compare energy use and greenhouse gas ghg emissions associated with total household expenditures and activities in canada and us in 1997 the first detailed estimate of environmental burdens for canadian households we estimate direct burdens from published government data and indirect burdens using an industry by commodity bi national economic input output life cycle assessment model developed in this study comparing 30 expenditure and two activity categories per capita us household expenditures were 70 higher while per capita household energy use and ghg emissions were only 10 and 44 higher respectively energy use dollar of expenditure was higher in most canadian categories while the average ratio of ghg emissions energy use was higher in the us 65 vs 50 kg eq co 2 gj due largely to a higher proportion of electricity from nonrenewable sources indirect environmental burdens represented 63 69 of total burdens and 62 70 of total burdens were associated with household operation and transportation key drivers of differences between energy profiles were higher per capita electricity use by canadian households and higher us household private health care expenditures and motor fuel use energy intensive production for export represented a higher proportion of canadian production resulting in less agreement between consumption and production based analyses for canada than us

on the timing of production decisions in monetary economies in most macroeconomic models inflation tends to be harmful in this paper we show that by simply changing the timing of production decisions by firms from on demand to in advance some inflation can boost welfare as long as goods are sufficiently perishable the main conclusion from this research is that by effectively hiding the strategic interaction between supply and demand assuming production on demand is not without loss of generality

a theory of a generally acceptable medium of exchange and barter abstract this paper develops a model that accounts both for the existence of money defined as a generally acceptable medium of exchange and for the survival of some barter exchange in economies in which money exists in contrast to jones 1976 seminal article in which individuals are restricted to fix trading strategies before entering the market the present model assumes that individuals have conditional trading strategies that allow them to effect exchange according to the types of trades they encounter in the market the analysis shows how decentralized market forces generate money and lead to a unique level of monetization

time inconsistency and the long run effects of inflation recent work by laibson 1997 identifies that individuals time discount factors evolve over time this leads to a time inconsistency problem in which savings are distorted this paper studies the long run effects of inflation in the presence of a time inconsistency problem

food and cash transfers evidence from colombia we study food engel curves among the poor population targeted by a conditional cash transfer programme in colombia after controlling for the endogeneity of total consumption and for the price variability across villages our estimates imply that an increase in consumption by 10 would lead to a decrease of 1 in the share of food however quasi experimental estimates of the impact of the programme show that the share of food increases this result is not inconsistent with the hypothesis that the programme could increase the bargaining power of women inducing a more than proportional increase in food consumption

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

rational expectations business cycles in search equilibrium we examine the rational expectations equilibrium paths of the model of search and barter in diamond s aggregate demand management in search equilibrium for some initial positions there are two equilibrium paths converging to different steady states with the high activity path pareto dominating the low activity path with some parameters there is also a continuum of equilibrium paths converging to another steady state moreover there can be cycles that are equilibrium paths even though the environment is stationary

a contribution to the pure theory of money abstract this article analyzes a general equilibrium model with search frictions and differentiated commodities because of the many differentiated commodities barter is difficult in that it requires a double coincidence of wants and this provides a medium of exchange role for fiat currency we prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment rate of return dominance liquidity and the welfare implications of fiat money are discussed

currency competition in a fundamental model of money abstract we study how two fiat monies one safe and one risky compete in a decentralized trading environment the currencies equilibrium values their transaction velocities and agents spending patterns are endogenously determined we derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases we also examine when the reverse spending pattern is optimal traders generally favor dealing in the safe currency unless trade frictions and the currency risk is low as risk increases or trading becomes more difficult the transaction velocity and value of the safe money increases

government transaction policy media of exchange and prices abstract we study government transaction policies in search theoretic models of money we model government as a subset of agents who are subject to the same random matching technology and other constraints as private agents but who behave in an exogenous way regarding which objects they accept in trade and at what price the objective is to see how these policies affect private agents strategies and hence the set of equilibria we analyze how the effects depend on factors like the size of government the intrinsic properties of money and the availability and efficacy of substitutes like barter or foreign currency journal of economic literature classification numbers c78 e31 e42

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

friedman meets hosios efficiency in search models of money this article studies optimal monetary policy in an economy with endogenous search decisions we show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades the friedman rule eliminates the first inefficiency and the hosios rule the second a monetary equilibrium attains the social optimum if and only if both rules are satisfied when they cannot be satisfied simultaneously optimal monetary policy achieves only the second best we analyse the conditions under which the second best monetary policy exceeds the friedman rule

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

consumption smoothing migration and marriage evidence from rural india a significant proportion of migration in low income countries particularly in rural areas is composed of moves by women for the purpose of marriage we seek to explain these mobility patterns by examining marital arrangements among indian households in particular we hypothesize that the marriage of daughters to locationally distant dispersed yet kinship related households is a manifestation of implicit interhousehold contractual arrangements aimed at mitigating income risks and facilitating consumption smoothing in an environment characterized by information costs and spatially covariant risks analysis of longitudinal south indian village data lends support to the hypothesis marriage cum migration contributes significantly to a reduction in the variability of household food consumption farm households afflicted with more variable profits tend to engage in longer distance marriage cum migration the hypothesized and observed marriage cum migration patterns are in dissonance with standard models of marriage or migration that are concerned primarily with search costs and static income gains

all in the extended family effects of grandparents aunts and uncles on educational attainment while a substantial body of research analyzes the relationship between family background and schooling the influences of extended family members have received little attention extended family members can affect schooling by serving as role models by sanctioning or encouraging particular patterns of behavior and by introducing adolescents to experiences and interactions not available through parents siblings or peers this paper shows that older extended family members aunts uncles and grandparents independently affect the schooling of their younger relatives this finding can shed light in many areas for example gender differences in relationships with extended family members may partly explain schooling differences among siblings extended family members may also account for intergenerational influences not directly tied to observed nuclear family characteristics in the policy arena countervailing extended family influences may lower achievement gains from programs that move adolescents to more advantageous neighborhoods and schools on the other hand if adult extended family members can improve adolescent choices nonparent adult mentors in programs such as big brothers big sisters may also provide effective guidance for teens