trade interdependence the international financial institutions and the recent evolution of sovereign debt renegotiations abstract this paper analyzes the effect of a debtor country s pattern of trade with commercial creditors home countries on the outcome of debt rescheduling negotiations the analysis reveals that a debtor country with more market power has greater leverage in a three way debt rescheduling negotiation that includes the debtor country its creditors and the international financial institutions ifis the paper also considers the effects of the ifi sovereign debt policy on the bargaining power of the parties in debt rescheduling negotiations two bargaining frameworks analyzed and compared in the paper represent the negotiation mechanism at different stages of the ifi sovereign debt policy evolution

bank runs liquidity costs and investment distortions abstract in this paper we extend the diamond and dybvig 1983 model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank run equilibria we provide weaker necessary conditions for runs we then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions banks might choose to offer contracts that prevent runs but under some conditions the second best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments

bank runs and investment decisions revisited we examine how the possibility of a bank run affects the deposit contract offered and the investment decisions made by a competitive bank cooper and ross 1998 have shown that when the probability of a run is small the bank will offer a contract that admits a bank run equilibrium we show that in this case the bank will chose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur in other words precautionary or excess liquidity will not be held this result allows us to determine how the possibility of a bank run affects the level of illiquid investment chosen by a bank we show that when the cost of liquidating investment early is high the level of investment is decreasing in the probability of a run however when liquidation costs are moderate the level of investment is actually increasing in the probability of a run

temporary boycotts as self fulfilling disruptions of markets abstract this paper demonstrates how equilibrium involving anticipated boycotts and actual boycotts can occur even though consumers are negligible and only care about the price they pay and the timing of purchase the model is a two period durable goods monopoly game with demand uncertainty first a non boycott equilibrium is characterized under regularity assumptions ruling out multiplicative uncertainty there are additional equilibria in which the firm sets a low price in period 0 based on the anticipation that consumers will boycott whenever the price exceeds a threshold also the augmented game with a publicly observed sunspot has equilibria in which boycotts occur on the equilibrium path with positive probability

an overlapping generations model for monetary policy analysis abstract we integrate an overlapping generations structure into the standard lagos and wright 2005 framework and show that mild inflation can be welfare improving the reason behind this result is that inflation induces young agents to reduce their savings and to increase their consumption which overpowers the utility loss of old agents however the beneficial effect disappears for higher inflation rates such that the optimal inflation rate is one at an intermediate level

measuring the liquidity effect this paper measures the effect on the federal funds rate of an open market operation the paper deals with simultaneous equations bias by developing a proxy for the errors the federal reserve makes in forecasting the extent to which treasury operations will add or drain reserves available to private banks these errors induce fluctuations in bank reserves which have measurable consequences for the federal funds rate the paper estimates that a reduction in nonborrowed reserves of 30 million if sustained for an entire fourteen day reserve maintenance period will cause the federal funds rate to rise by ten basis points copyright 1997 by american economic association

pre play research in a model of bank runs se estudia un modelo de corrida bancaria en el que los depositantes no llegaron a un consenso sobre la accion a elegir pero pueden informarse acerca de las intenciones de los otros jugadores la propiedad de equilibrio indeterminado reaparece en el juego con adquisicion de informacion en el escenario bajo analisis el equilibrio con niveles positivos de adquisicion de informacion resulta en mayores probabilidades de quiebra del banco la correlacion en las senales aumenta el espacio de parametros para el cual existen equilibrios con niveles positivos de adquisicion de informacion y mayor probabilidad de quiebra del banco

demand deposit contracts and bank runs with present biased preferences abstract this paper extends the diamond dybvig model of bank runs by incorporating hyperbolic discounting the main question is how consumers myopic decisions affect the possibility of a bank run and the bank s optimal contract under hyperbolic discounting consumers deposit preferences differ from their withdrawal preferences therefore the bank needs to consider two separate preferences when designing the optimal banking contract making it more difficult to design a run safe banking contract this difference in preferences could increase the possibility of a bank run in equilibrium although the bank can design a run proof contract the ex ante welfare through banking services will be lower under hyperbolic discounting due to its tighter incentive compatibility constraint

fiscal requirements for dynamic and real determinacies in economies with private provision of liquidity a monetarist assessment we study the impact of fiscal policies on the inherent links between inflation unemployment and asset prices in an environment where firms provide liquidity and the central bank follows a constant money growth rate rule firms other than hiring workers also supply private assets that are not only useful as a store of value but also as collateral when firms are not taxed and public debt is scarce the economy is non ricardian so that real indeterminacies can be observed moreover labor market characteristics do not affect the demand for government liabilities however when agents face public and private asset scarcity labor market conditions then impact asset prices and inflation we further show that irrespective of the type of asset scarcity agents face when firms are taxed non ad valorem not only the level of tax revenues but also its composition matter for real allocations moreover we show that labor market conditions directly affect the dynamics of all government liabilities and inflation

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

financial fragility and over the counter markets abstract this paper studies the interaction between financial fragility and over the counter otc markets i model the financial sector as a large number of investors divided into different groups which i interpret as financial institutions and a large number of dealers financial institutions and dealers trade assets in an otc market a la duffie et al 2005 and lagos and rocheteau 2009 investors receive privately observed preference shocks and financial institutions use the balanced team mechanism proposed by athey and segal 2013 to implement an efficient risk sharing arrangement among their investors when the market is liquid in the sense that search and bargaining are small frictions i show that the economy is likely to have a unique equilibrium and therefore is not fragile when these frictions are severe a run equilibrium exists investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same conditional on bank runs existing the welfare impact of the search friction is ambiguous during runs trade is inefficient and as a result a friction that reduces trade during runs has the potential to improve welfare this result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare

optimal fiscal and monetary policy in customer markets a growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics we investigate whether the existence of such customer relationships has important consequences for the conduct of both long run and short run policy our central result is that when consumers and firms are engaged in long term relationships the optimal rate of price inflation volatility is very low even though all prices are completely flexible this finding is in contrast to those obtained in first generation ramsey models of optimal fiscal and monetary policy which are based on walrasian markets echoing the basic intuition of models based on sticky prices unanticipated inflation in our environment causes a type of relative price distortion across markets such distortions stem from fundamental trading frictions that give rise to long lived customer relationships and makes pursuing inflation stability optimal

the role of independence in the green lin diamond dybvig model abstract green and lin study a version of the diamond dybvig model with a finite number of agents independence independent determination of each agent s type and sequential service for special preferences they show that the ex ante first best allocation is the unique equilibrium outcome of the model with private information about types via a simple argument it is shown that uniqueness of the truth telling equilibrium holds for general preferences and in particular for a constrained efficient allocation whether first best or not the crucial assumption is independence

sovereign debt structural adjustment and conditionality abstract the lack of a proper enforcement mechanism for sovereign debt generates a commitment failure as a result a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure formalizing this argument we show that conditionality helps the repayment of sovereign debt in certain circumstances it can eliminate debt overhang especially when it is coupled with concessionary lending of sufficient magnitude it is however unable to restore first best when it is anticipated by lenders conditionality may get international financial institutions and sovereign debtors into a trap where the debt overhang persist debt rescheduling takes place periodically and conditionality continues indefinitely

optimal monetary policy in a phillips curve world abstract in this paper we study optimal monetary policy in a model that integrates the modern theory of unemployment with a liquidity model of monetary transmission two policy environments are considered period by period optimization time consistency and full commitment ramsey allocation when the economy is subject to productivity shocks the optimal policy is pro cyclical we also characterize the long term properties of monetary policy and show that with commitment the optimal inflation rate is inversely related to the bargaining power of workers both results find empirical support in the data

a bank runs model with a continuum of types abstract we consider a bank runs model a la diamond and dybvig 1983 3 with a continuum of agent types indexed by the degree of patience much of our understanding based on the two type model must be modified the endogenous determination of a cutoff type is central to the analysis in the case where the bank can credibly commit to a contract the optimal contract results in socially excessive early withdrawals in every equilibrium of the post deposit subgame thus even at the best equilibrium the socially efficient outcome is not achieved and agents behavior exhibits features of a bank run in the case where commitment is not possible there are strictly more early withdrawals and strictly lower welfare than the full commitment equilibrium

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

evaluating theories of bank runs with heterogeneity restrictions this paper empirically tests theories of bank runs we use a structural panel var to extract runs from deposit market data identification exploits cross sectional heterogeneity in deposit insurance we identify bank runs as adverse deposit market supply shocks hitting uninsured banks harder compared to insured conditional on a run we study the behavior of uninsured banks with bad and good fundamentals we find that both experience runs but deposit outflows at the former are more severe panic effects which affect all uninsured deposits alike irrespective of fundamentals dominate in the aggregate insured banks partially absorb the outflow of uninsured deposits

liquidity effects monetary policy and the business cycle this paper presents a flexible price quantitative general equilibrium model with the property that a positive money supply shock drives the nominal interest rate down and aggregate employment output and the real wage up these implications are broadly consistent with postwar u s data the two key features of the model that are responsible for its properties are 1 money shocks have a heterogeneous impact on agents and 2 ex post inflexibilities in production give rise to a very low short run interest elasticity of money demand in our model the extent of the drop in the interest rate after a positive money supply shock depends on the degree to which production is ex post inflexible given sufficient ex post inflexibility the model conforms well with the view widely held within the u s federal system that the short run interest rate elasticity for total reserves is very close to zero copyright 1995 by ohio state university press

a search model of unemployment and inflation in this paper i introduce money in the standard labor matching model mortensen and pissarides 1999 pissarides 2000 a double coincidence problemmakes fiat money necessary as a medium of exchange in the long run a rise inthe rate of money growth leads to higher inflation and higher unemployment sothe long run phillips curve is not vertical the optimal monetary growth ratedecreases with the workers bargaining power the level of unemploymentbenefits and the payroll tax rate

bank runs as an equilibrium phenomenon a standard demand deposit contract in which individuals are entitled to their full deposit at any time provided the bank is solvent is analyzed in a context in which there are no exogenous events on which agents condition their behavior and a unique equilibrium involving a bank run with positive probability is shown to exist

investment incentives new money debt relief and the critical role of conditionality in the debt crisis external debt depresses investment and lowers economic growth below its potential through its negative effect on liquidity and expected profitability these effects can pull a country into a downward spiral in which both the debtor country and creditors lose this article considers the possibilities for revising contracts between a debtor and its creditors once a debt crisis has erupted the framework that we develop shows how various combinations of new money and cuts in debt and debt service affect a debtor country s welfare its debt repayments and the earnings of its creditors the analysis distinguishes between debtor countries that are willing and able to precommit credibly to an adjustment program and those that are not this distinction provides the basis for a discussion of conditional lending by the international financial institutions to provide incentives and sanctions that make credible a debtor s promises to invest copyright 1990 by oxford university press

linking trade and external debt strategies abstract despite the productive inefficiencies generated by policies of export promotion and of import substitution such development strategies can improve welfare when used in conjunction with a debt strategy export promotion can increase the availability of foreign finance and import substitution can reduce debt service when the latter strategy is optimal partial debt forgiveness increases the creditor group s payoff import substitution is more profitable with a large inherited debt high world interest rate low terms of trade and when creditors fail to reduce inherited debt

the time varying cost channel of monetary transmission abstract this paper studies the time varying role of the cost channel of monetary transmission i e the supply side effect of monetary policy based on firms costs of holding working capital for that purpose we provide rolling window estimates of an augmented new keynesian phillips curve and show that the cost channel exhibits important time varying dynamics we find as a general pattern that the cost channel was most important in the pre volcker period and less important in the volcker greenspan era recently however the cost channel regained importance since the cost channel is based on the transmission of policy impulses through bank lending it is likely that the time varying cost channel reflects the cyclical nature of financial frictions

bank run psychology abstract banks are inherently susceptible to panics and bank runs due to the problem of maturity mismatch resulting in both a stable equilibrium in which the bank survives and an unstable equilibrium in which a bank run occurs understanding equilibrium selection in this setting is extremely important for safeguarding financial stability in this paper one new potential factor that determines whether a bank runs gets triggered or not is experimentally studied namely the psychological state of the depositor prior to participating in an experimental bank run game subjects are either induced with fear sadness or happiness using an autobiographical emotion induction task the findings suggest that the presence of background fear significantly increases the likelihood of withdrawal and a subsequent bank run in addition women are shown to be significantly more likely to withdraw then men but only in the fear induction treatment

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

bank runs as coordination failures an experimental study we use experimental methods to investigate what factors contribute to breakdowns in coordination among a bank s depositors subjects in our experiment decide whether to leave their money deposited in a bank or withdraw it early a bank run occurs when there are too many early withdrawals we explore the effects of adding uncertainty about fundamental withdrawal demand and of changing the number of opportunities subjects have to withdraw our results show that i bank runs are rare when fundamental withdrawal demand is known but occur frequently when it is stochastic and ii subjects are more likely to withdraw when given multiple opportunities to do so than when presented with a single decision for the multiple opportunity case we evaluate individual withdrawal decisions according to a set of simple cutoff rules we find that the cutoff rule corresponding to the payoff dominant equilibrium of the game which involves bayesian updating of probabilities explains subject behavior better than other rules

search for a monetary propagation mechanism abstract this paper examines a monetary propagation mechanism in an economy where exchanges in goods and labor markets involve costly search it is shown that an increase in the money growth rate increases steady state employment and output when the money growth rate is low but reduces steady state employment and output when the money growth rate is already high the model produces persistent hump shaped responses in employment and output to money growth shocks even when the shocks have no persistence the model also generates desirable features in job vacancy sales inventory and the velocity of money all these features emerge here in an economy with perfectly flexible prices and wages journal of economic literatureclassification numbers e40 e30

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

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

rescheduling of sovereign debt forgiveness precommitment and new money to meet contractual obligations on their external debt lenders generally responded by rescheduling these debts rather than declaring them to be in default but further commercial lending to these sovereigns has virtually ceased these borrowers now face an enormous debt overhang while their lenders face substantial losses on their international loan portfolios among the many proposals for addressing this crisis the relative desirability of debt forgiveness and new lending has been the focus of considerable debate the baker plan of 1985 emphasized additional funding coupled with growth oriented domestic policies rather than debt reduction lenders were encouraged to provide additional funds new money to help the impaired and indebted economies grow their way back to creditworthiness however lenders were reluctant to offer new funds that would increase the sovereign s debt burden without some assurance that future repayment would be likely with debt generally recognized as providing borrowers with a disincentive for investment 1 the emphasis has now shifted to the need for debt forgiveness on the part of the lenders and a commitment to internal adjustment by the borrowers both parties are viewed as benefitting by a reduction of the inherited debt and possibly the provision of additional funds if the sovereign borrower can commit itself to adopting policies that reduce internal consumption and

optimal diamond dybvig mechanism in large economies with aggregate uncertainty abstract this paper characterizes the direct mechanism which implements the constrained optimal outcome in a version of diamond and dybvig 1983 with aggregate uncertainty and a continuum of agents using this result numerical examples where the best direct mechanism has a bank run equilibrium are easily obtained

a neoclassical model of the phillips curve relation this paper integrates the modern theory of unemployment with a limited participation model of money and asks whether such a framework can produce correlations like those associated with the phillips curve as well as realistic labor market dynamics the model incorporates both monetary and real shocks the response of the economy to monetary policy shocks is consistent with recent evidence about the impact of these shocks on the economy

a model of financial fragility abstract this article presents a dynamic stochastic game theoretic model with two essential features first agents hold diversified portfolios that link their financial positions to those of other agents second shocks to fundamentals at the initial date cause some portfolio losses agents who incur losses reallocate their portfolios thereby breaking some linkages in the pareto efficient symmetric equilibrium studied two related types of financial crisis can occur in response one occurs gradually as losses spread breaking more links the other type occurs instantaneously when forward looking agents preemptively shift to safer portfolios to avoid future losses from contagion an economy is more fragile the earlier its last remaining link breaks from such a crisis journal of economic literature classification numbers c7 e00 e3 e44 g1

deposit competition and financial fragility evidence from the us banking sector preliminary and incomplete please do not cite without permission we develop and estimate an empirical model of the u s banking sector using a new data set covering the largest u s banks over the period 2002 2013 our model incorporates insured depositors and run prone uninsured depositors who have rich preferences over dierentiated banks banks compete for deposits in the spirit of matutes and vives 1996 and can endogenously default we estimate demand for uninsured

interest rates and financial fragility abstract how do the interest rates banks earn on their assets affect the susceptibility of the banking system to a self fulfilling run by depositors i study this question in a version of the model of diamond and dybvig 1983 with limited commitment and a non trivial portfolio choice i show that the relationship between these interest rates and financial fragility is often non monotone for example a small increase in the return on illiquid investment or a small increase in the term premium may raise banks susceptibility to a run while a larger increase would make the banking system more stable the same is true for changes in short term rates holding the longer term rates fixed i provide a precise characterization of these comparative statics of financial fragility

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

run equilibria in the green lin model of financial intermediation abstract we study the green lin model of financial intermediation e j green p lin implementing efficient allocations in a model of financial intermediation j econ theory 109 2003 1 23 under a more general specification of the distribution of types across agents we derive the efficient allocation in closed form we show that in some cases the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism in these cases the mechanism also admits an equilibrium in which some but not all agents run on the intermediary and withdraw their funds regardless of their true liquidity needs in other words self fulfilling runs can arise in a generalized green lin model and these runs are necessarily partial with only some agents participating

economic growth liquidity and bank runs abstract we construct an endogenous growth model in which bank runs occur with positive probability in equilibrium in this setting a bank run has a permanent effect on the levels of the capital stock and of output in addition the possibility of a run changes the portfolio choices of depositors and of banks and thereby affects the long run growth rate these facts imply that both the occurrence of a run and the mere possibility of runs in a given period have a large impact on all future periods a bank run in our model is triggered by sunspots and we consider two different equilibrium selection rules in the first a run occurs with a fixed exogenous probability while in the second the probability of a run is influenced by banks portfolio choices we show that when the choices of an individual bank affect the probability of a run on that bank the economy both grows faster and experiences fewer runs

equivalence between the diamond dybvig banking model and the optimal income taxation model abstract it is shown that the diamond dybvig journal of political economy 96 1983 768 banking model with a continuum of types of agents has the same analytical structure as the standard optimal income taxation model review of economic studies 38 1971 175 review of economic studies 43 1976 261 insights from the income taxation literature immediately imply that a bank run equilibrium exists in the banking model as long as the long term project is sufficiently costly to liquidate

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

inflation and unemployment in the long run we study the long run relation between money measured by inflation or interest rates and unemployment we first document in the data a positive relation between these variables at low frequencies we then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory providing a unified theory for analyzing labor and goods markets the calibrated model shows that money can account for a sizable fraction of trends in unemployment we argue it matters qualitativelynand quantitatively whether one uses monetary theory based on search and bargaining or an alternative ad hoc specification

financing vs forgiving a debt overhang abstract this paper examines the tradeoffs facing creditors of a country whose debt is large enough that the country cannot attract voluntary new lending if the country is unable to meet its debt service requirements out of current income the creditors have two choices they can finance the country lending at an expected loss in the hope that the country will eventually be able to repay its debt after all or they can forgive reducing the debt level to one that the country can repay the post 1983 debt strategy of the imf and the us has relied on financing but many current calls for debt reform call for forgiveness instead the paper shows that the choice between financing and forgiveness represents a tradeoff financing gives the creditors an option value if the country turns out to do relatively well creditors will not have written down their claims unnecessarily however the burden of debt distorts the country s incentives since the benefits of good performance go largely to creditors rather than itself the paper also shows that the tradeoff itself can be improved if both financing and forgiveness are made contingent on states of nature that the country cannot affect such as oil prices world interest rates etc

curse or blessing has the impact of debt relief lived up to expectations a review of the effects of the multilateral debt relief initiatives for low income countries as the multilateral debt relief initiatives draw to a close this article reviews the impacts of debt relief to low income countries lics building on both the theoretical and empirical literature

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

liquidity uncertainty and intermediation the paper performs a welfare comparison between demand deposit and equity contracts in the presence of intrinsic aggregate uncertainty in this framework the welfare dominance of deposit contracts emerges under corner preferences it is shown that aggregate uncertainty creates high price volatility of ex dividend equity claims traded in a secondary market and the resulting consumption allocations offer less risk sharing opportunities to risk averse consumers than tailor made deposit contracts the contingency of early payoffs on depositors withdrawal order reinforces the welfare performance of deposit contracts whereas costly liquidation of productive long term investments deteriorates their welfare performance relative to equity contracts

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

the role of countercyclical monetary policy when firms set nominal prices in advance optimal monetary policy insulates aggregate output against shocks to demand it can do so however by following the constant money growth rule advocated by milton friedman it need not respond to the shocks in an actively countercyclical way in addition to the extent that output fluctuations are driven by shocks to supply money growth should be procyclical

deposit contract design with relatively partially honest agents abstract the efficient outcome of a deposit contract model is uniquely implementable with relatively partially honest agents while it is never uniquely implementable only with materially self interest agents

equilibrium bank runs we analyze a banking system in which the class of feasible deposit contracts or mechanisms is broad the mechanisms must satisfy a sequential service constraint but partial or full suspension of convertibility is allowed consumers must be willing to deposit ex ante we show by examples that under the so called optimal contract the postdeposit game can have a run equilibrium given a propensity to run triggered by sunspots the optimal contract for the full predeposit game can be consistent with runs that occur with positive probability thus the diamond dybvig framework can explain bank runs as emerging in equilibrium under the optimal deposit contract

banks and markets in a monetary economy abstract modern financial sectors consist of banks asset markets and a central bank this paper builds a model where these institutions provide different financial services and their interaction supports efficient allocations when one institution is missing equilibria are by construction inefficient the paper analyzes how interest rates and asset prices depend on the structure of the financial sector and characterizes the central bank policy that supports efficient allocations the analysis relies on the difference between liquidity and real shocks and relates the notion of liquidity used in this paper to the one adopted in other studies

aid instability as a measure of uncertainty and the positive impact of aid on growth this article contributes to the literature on aid and economic growth we posit that uncertainty measured as the instability of aid receipts will influence the relationship between aid and investment how recipient governments respond to aid and will capture the fact that some countries are especially vulnerable to shocks when we account for uncertainty which is negative and significant we find that aid has a significant positive effect on growth largely due to its effect on the volume of investment the finding that uncertainty of aid receipts reduces the effectiveness of aid is robust when the regression is estimated for the sub sample of african countries these findings hold although the effectiveness of aid appears weaker than for the full sample

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

bailouts and financial fragility how does the belief that policymakers will bail out investors in the event of a crisis affect the allocation of resources and the stability of the financial system i study this question in a model of financial intermediation with limited commitment when a crisis occurs the efficient policy response is to use public resources to augment the private consumption of those investors facing losses the anticipation of such a bailout distorts ex ante incentives leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility prohibiting bailouts is not necessarily desirable however it induces intermediaries to become too liquid from a social point of view and may in addition leave the economy more susceptible to a crisis a policy of taxing short term liabilities in contrast can correct the incentive problem while improving financial stability

the role of search frictions in the long run relationships between inflation unemployment and capital abstract this paper explores the long run relationships between inflation unemployment and capital accumulation by proposing a model with search frictions in both goods and labor markets this framework allows us to identify a negative extensive margin effect of inflation on the number of firms demanding capital and a positive intensive margin effect of inflation on the capital demanded per firm the two effects together generate a hump shaped relationship between long run inflation and aggregate capital these results are consistent with our empirical evidence from a cross section of 76 countries which suggests a non monotonic relationship between inflation and investment to gdp ratio in the long run our calibrated results are also consistent with empirical findings from the u s data on the effect of inflation on capital stock unemployment and the real interest rates

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment

ambiguous policy announcements we study the effects of an announcement of a future shift in monetary policy when agents face knightian uncertainty about the commitment capacity of the monetary authority households are ambiguity averse and are differentially exposed to inflation due to differences in wealth in response to the announcement of a future loosening in monetary policy only wealthy households creditors will act as if the announcement will be fully implemented due to the potential loss of wealth from the prospective policy easing and when creditors believe the announcement more than debtors their expected wealth losses are larger than the wealth gains that debtors expect hence the economy responds as if aggregate net wealth falls which attenuates the effects of the announcement we study the quantitative properties of the model in a liquidity trap after allowing for a realistic characterization of households wealth portfolio