optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

war debt moral hazard and the financing of the confederacy this paper develops a formal model of war spending and external borrowing and quantifies this model for the case of the american confederacy our proximate objective is to determine why the confederacy undertook little external borrowing we find that the moral hazard associated with war debt seems to have had little effect on the amount of external borrowing that the confederacy undertook rather because the confederacy began the war with large mobilizable resources relative to its expected postwar resource endowment it required little external borrowing to accomplish the optimal amount of consumption smoothing but our results also suggest that unimportance of the moral hazard associated with war debt is not a generic property of war finance copyright 1996 by ohio state university press

pricing free bank notes abstract during the pre civil war period us banks issued distinct private monies called bank notes a bank note is a perpetual risky non interest bearing debt claim with the right to redeem on demand at par in specie this paper investigates the pricing of this private money taking into account the enormous changes in technology during the period namely the introduction and rapid diffusion of the railroad a contingent claims pricing model for bank notes is proposed and tested using monthly bank note prices for all banks in north america together with indices of the durations and costs of trips back to issuing banks constructed from pre civil war travelers guides evidence is produced that market participants properly priced the risks inherent in these securities suggesting that wildcat banking was not common because of market discipline

private information deposit interest rates and the stability of the banking system abstract the regulation of deposit interest rates has received little support from economists the same is true for the original rationale for such regulation that bank competition for deposits generates inherent instability in the banking system this paper develops an adverse selection model of banking in which this rationale is correct moreover in this model instability in the banking system can arise despite the presence of a lender of last resort and despite the absence of any need for deposit insurance however in the world described the regulation of deposit interest rates is shown to be an appropriate response to instability in the banking system finally it is argued that adverse selection models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts

suppressing asset price inflation the confederate experience 1861 1865 i introduction the absorption of treasury notes by the funding process is progressing favorably and will counteract the tendency to a further depreciation of our currency arising from the heavy issues since the 1st of january last richmond dispatch 15 april 1863 during the civil war commodity prices rose in the confederacy while the gold value of confederate currency and bonds declined the rate of asset price inflation lagged behind commodity price inflation however and there was a greater than 2 1 divergence at the time of two confederate financial reforms aimed at encouraging exchanges of currency into bonds these exchanges raised the demand for bonds and boosted bond prices while supporting the gold value of the currency as the supply of money was reduced but the period between the announcement and implementation of these reforms saw upward surges in commodity prices with no matching depreciation in the value of the currency against gold this suggests that the reforms may have channeled inflationary pressures into commodity markets and that an examination of both asset and commodity markets is needed to assess the effectiveness of confederate monetary policy just as bernanke and gertler 1999 criticize the bank of japan for focusing on asset price inflatio n at the expense of the general price level in the 1989 97 period so too may confederate monetary policy have been directed too much toward stabilizing asset markets with less favorable consequences for the prices of other goods and services the bursts of commodity price inflation after the reforms were announced suggest that individuals exchanged money for goods as well as for bonds in the run up to the deadline a real balance effect seems to have operated whereby decreased demand for the old money created excess cash balances that were translated at least in part into an excess demand for goods even after the financial reforms reduced the total money supply the initial surges in commodity price inflation were never fully reversed there was in fact a boost to wealth holdings when the reforms took effect insofar as the stocks of money being retired were exchanged for bonds at par even though these bonds were then trading at a premium in this way consumption expenditures may well have been fueled by the gains on the bonds when the exchange occurred despite uncertainty as to the relative weights that should be attached to bond holdings and money balances as components of private sector net financial assets as discussed for example by pa tinkin 1965 289 90 the changes in the level and market value of bond holdings surely cannot be ignored in the confederate case this is especially so given the existence of a ready market for the bonds received with no restrictions on reselling from the outset confederate currency and bond markets were linked by the fact that note holders enjoyed an imbedded call option on confederate government bonds noninterest bearing confederate treasury notes were issued with the proviso that holders could at their pleasure exchange these notes for 8 government bonds at par this call option would naturally become increasingly valuable if the bonds rose above par and implied that noteholders would be able to participate fully in any bond market rally even while keeping their funds in the form of highly liquid currency the 8 bonds issued under the 1861 100 million loan authorized by the act of 19 august 1861 with a minimum denomination of 100 generally traded at or below par during 1862 however with no deadline for the exercise of the option there was no incentive for holders of confederate treasury notes to actually convert their money into bonds at that time in an attempt to induce and ultimately force early conversion of money into bonds the government instituted three funding acts that limited the time period over which treasury notes could be exchanged for the higher yielding 8 bonds

use of interest bearing currency in the civil war the experience below the mason dixon line this paper examines the case of interest bearing notes in the confederate states of america which were not legal tender but which were said to circulate like other known episodes the confederate experiment does not support the legal restrictions theory of the demand for money there is no evidence that these instruments circulated readily and some evidence that their limited circulation fell short of that of competing noninterest bearing notes characteristics inconsistent with legal restrictions theory the episode displays other characteristics inconsistent with or not encompassed by the major competing explanations of why interest bearing notes do not circulate

misintermediation and macroeconomic fluctuations abstract individuals plan consumption and production for different point in the future using interest rates of various maturities as a guide however the financial intermediaries individuals work through traditionally do not match the maturity structure of their assets and liabilities as a result aggregate production plans and aggregate consumption plans for each period in the future need not coincide the resulting discrepancy will eventually appear as a recession or boom involving an unanticipated change in interest rates and production inside the original intertemporal production possibilities frontier maturity transformation is therefore not an essential function of financial intermediation but rather a mis function one which we call misintermediation

the effects of collective bargaining rights on public employee compensation evidence from teachers firefighters and police widespread public sector unionism emerged only in the 1960s as individual states opened the door to collective bargaining for state and municipal workers in this study the author exploits differences in timing of legislative reforms across states to construct estimates of the causal effects of public sector collective bargaining rights on pay benefits and employment for teachers firefighters and police perhaps surprisingly estimates that allow for state fixed effects and state specific trends show little effect on teachers pay benefits or employment despite significantly increasing union presence among teachers for firefighters the results show a substantial positive effect on wages for police the wage effect was more modest but the workweek was significantly shortened

money is an experience good competition and trust in the private provision of money the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money is studied with commitment trust is automatically achieved and competition ensures efficiency without commitment competition plays no role trust does play a role but requires a bound on efficiency stationary inflation must be non negative and therefore the friedman rule cannot be achieved the quality of money can be observed only after its purchasing capacity is realized in this sense money is an experience good

right to work laws free riders and unionization in the local public sector empirical models of local government unionization reveal substantial reductions in union membership due to right to work laws free riders rather than underlying antiunion sentiments are probably responsible because the unionization models include better measures of sentiments than right to work laws furthermore these laws reduce the probability that bargaining unions form by more than they reduce the probability that nonbargaining associations form in three of five local government functions these results also confirm the importance of free riders because union security clauses that prohibit free riders in states without right to work laws exist only in collective bargaining contracts

inflation is always and everywhere a monetary phenomenon richmond vs houston in 1864 on april 1 1864 the confederate currency reform act reduced the money supply in the eastern confederacy by one third the delayed implementation of the reform west of the mississippi provides a counterfactual view of what may have happened in the east had the reform not been enacted this episode is a natural experiment illustrating the relative importance for prices of war news vs the quantity of money in circulation our analysis of the major eastern and western gold markets richmond and houston strongly suggests that money matters more than war news in the post reform period this abstract was borrowed from another version of this item

lack of divine coincidence in new keynesian models abstract the literature has long agreed that the divine coincidence holds in standard new keynesian models the monetary authority is able to simultaneously stabilize inflation and output gap in response to preference and technology shocks i show that the divine coincidence holds only when inflation is stabilized at exactly zero even small deviations from zero generate policy trade offs i demonstrate this result using the model s non linear equilibrium conditions to avoid biases from log linearization when the model is log linearized a non zero steady state level of inflation gives rise to what i call the endogenous trend inflation cost push shock in the new keynesian phillips curve

can interest bearing money circulate a small denomination arkansan experiment 1861 63 legal restrictions theory suggests that dominance of non interest bearing currency is possible only because legal impediments prevent financial institutions from offering interest bearing alternatives a viable interest bearing medium must be issued in denominations low enough for day to day use however and without historical examples of small denomination interest bearing issues we cannot properly test whether interest bearing currency will circulate as legal restrictions theory predicts civil war arkansas offers a rare instance where large quantities of small denomination interest bearing money were actually issued mostly below 5 the results of this arkansan experiment show that small denomination interest bearing issues can indeed function as the primary medium of exchange

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

turning points in the u s civil war views from the grayback market this paper introduces a new high frequency time series of confederate money prices taken from the newspapers of richmond and leading cities in the eastern confederacy the new grayback series is tested for turning points the empirical analysis suggests that turning points in the confederate grayback market were different from those identified in the union greenback market by willard et al 1996 it appears that war did not always have symmetric effects on northern and southern money prices jel codes n20 n40

union membership in the united states 1973 1981 this paper reports estimates of union membership gathered from may current population surveys from 1973 to 1981 the authors present data by occupation industry selected states and smsas race gender and educational attainment the paper both extends and differs from that by freeman and medoff which presents unionism estimates for the private sector for 1968 75 to facilitate longitudinal analysis this paper reports three year moving averages of occupational and industry data and annual estimates of demographic classifications the data include public sector as well as private sector workers and they exclude workers not covered by the national labor relations act also the authors provide only union membership estimates not estimates on workers covered by union contracts this paper suggests that the percentage of all workers that are unionized in the united states remained fairly constant over the 1973 81 period

bargaining laws as a cause and consequence of the growth of teacher unionism this study analyzes state level data for 1959 78 to determine whether the rapid growth of teacher unionism during those years was primarily a result or a cause of the public sector bargaining laws adopted during the same period the author finds contrary to the view of some scholars that the enactment of laws requiring public sector employers to bargain with majority representatives of their employees was the single most important cause of the growth in the proportion of teachers covered by union contracts although the growth in teacher unionism in turn encouraged the adoption of some new or stronger bargaining laws this effect was relatively weak more important predictors of new bargaining laws included the extent of political patronage in a state and the bargaining laws adopted by neighboring states

seigniorage legal tender and the demand notes of 1861 i introduction shortly after the onset of hostilities at fort sumter the lincoln administration asked congress to authorize the first large scale issue of federal paper currency officially labeled as united states notes they were popularly known as the demand notes of 1861 the administration s action is unremarkable the extraordinary revenue requirements of long and costly wars are often met in part by issuing paper money more surprising and not widely recognized is that this initial issue of paper money carried provisions that largely prevented it from yielding sustainable revenue seigniorage these provisions were largely omitted for the successor currency to the 1861 notes also known as united states notes but popularly as greenbacks as a result its seigniorage potential was greater although seigniorage was limited by other provisions in modern software jargon the greenbacks might be viewed as 1861 notes version 2 0 a version better suited to sustain a flow of seigniorage however the government was unable to replace the latter with the former very quickly resulting in an extended period during which two paper currencies with different properties circulated side by side both with each other and with gold coin this somewhat untidy situation provides an interesting and heretofore underexploited experiment for economists these alternative monies circulated widely with market determined exchange rates for a substantial period during which the amounts of both paper currencies in circulation greatly increased before the 1861 notes were removed from circulation we have collected daily data on these exchange rates and report them as differing gold premiums for the competing paper monies below these data are exploited to calculate the seigniorage cost of the various provisions of the 1861 notes and to provide evidence on alternative theories of expectations formation during this period our paper has three sections the first presents a more extensive discussion than has been previously available of the 1861 notes in the second a simple analytical framework is used to demonstrate and where possible estimate the seigniorage costs of the provisions attached to these notes the third section analyzes the market relationship between gold and the simultaneously circulating 1861 notes and greenbacks prior to the all but complete retirement of the former in 1863 the paper concludes with a summary ii the demand notes of 1861 the major focus of this paper is on the demand notes of 1861 the first large scale federal experiment with paper money 1 we concentrate on these notes for two reasons first little has been written about them mitchell 1902 in his pioneering work on civil war finance devotes only 7 pages to them while devoting 17 pages to fractional currency and minor coins during the war in addition most of his discussion concerns the period prior to suspension more recently calomiris 1988a 1988b 1992 makes reference to the 1861 notes but only as a part of his discussion of greenbacks second the paradox of issuing largely seigniorage free paper money to help finance a war has not been well recognized and hence largely unexplained this conflict between means and ends is interesting in its own right and illuminates some of what is puzzling in the sequence of monetary events over the first half of the civil war as a part of our discussion of the 1861 notes we challenge or extend the existing literature in three ways first we demonstrate that the conclusion of studenski and krooss 1963 141 144 that these notes were only used by the government to pay salaries and hence in their words were a pseudomoney is mistaken examination of the financial press of the day suggests that these notes were not only popular but also circulated widely as money a convincing claim can be made that they were indeed a national currency

public sector unions and municipal employment using 1980 data for a large sample of u s cities the author reexamines recent empirical findings of a positive association between public sector unionization and municipal employment several researchers have interpreted this correlation as evidence that public employee unions successfully exert political pressure to raise the demand for municipal services structural estimates of labor demand and the determinants of police and fire unionization reveal however that economies of scale in union formation are at least partly responsible for any positive association between public sector unionization and municipal employment the author concludes that previous studies overstate the amount of political clout wielded by municipal labor unions

inflation stabilization and welfare the case of a distorted steady state this paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered price setting rotemberg and woodford 1997 and woodford 2002 have shown that under certain conditions a local approximation to the expected utility of the representative household in a model of this kind is related inversely to the expected discounted value of a conventional quadratic loss function in which each period s loss is a weighted average of squared deviations of inflation and an output gap measure from their optimal values zero however those derivations rely on an assumption of the existence of an output or employment subsidy that offsets the distortion due to the market power of monopolistically competitive price setters so that the steady state under a zero inflation policy involves an efficient level of output here we show how to dispense with this unappealing assumption so that a valid linear quadratic approximation to the optimal policy problem is possible even when the steady state is distorted to an arbitrary extent allowing for tax distortions as well as market power and when as a consequence it is necessary to take account of the effects of stabilization policy on the average level of output we again obtain a welfare theoretic loss function that involves both inflation and an appropriately defined output gap though the degree of distortion of the steady state affects both the weights on the two stabilization objectives and the definition of the welfare relevant output gap in the light of these results we reconsider the conditions under which complete price stability is optimal and find that they are more restrictive in the case of a distorted steady state we also consider the conditions under which pure randomization of monetary policy can be welfare improving and find that this is possible in the case of a sufficiently distorted steady state though the parameter values required are probably not empirically realistic

has government any role in money abstract recent interest in monetary reform has been sparked by the emergence of a world irredeemable paper money system in light of this interest we review the current validity of four good reasons friedman advanced in 1960 to rationalize government intervention we conclude that the forces that produced government involvement in the past will persist deregulation of financial intermediaries is desirable on grounds of market efficiency though it is an open question whether government should continue as lender of last resort we expect that the present world fiat money standard will neither degenerate into hyperinflation nor revert to a commodity standard

bargaining laws and unionization in the local public sector this paper analyzes the effects of bargaining law characteristics on rates of unionization in over 10 000 local government departments representing five different government services that were without bargaining units in 1977 duty to bargain laws significantly increased the probability of bargaining union formation between 1977 and 1982 the results of the analysis reject the hypotheses that this effect reflects only underlying union strength the release of pent up demand for unionization or the transformation of nonbargaining unions into bargaining unions the changes in unionization attributable to duty to bargain laws are so large that they account for nearly all of the differences in average unionization rates between states with and without these laws

public sector earnings and the extent of unionization many studies have examined the influence of union density union members as a percentage of all workers on earnings in the private sector but few such studies have looked at the public sector using data from the 1991 current population survey this study estimates the determinants of earnings for state and local government employees in both the union and nonunion sectors the extent of public sector unionization appears to be positively correlated with earnings for both state and local government workers and for those covered and not covered by collective agreements although the effect for non covered employees is smaller than that for covered employees both effects are larger than those typically found in similar estimates for the private sector the authors also find that bargaining structure has some influence on earnings with the most consistent effect being a positive influence of arbitration on the earnings of local government workers

interpreting new evidence about china and u s silver purchases abstract this paper offers a reinterpretation of the influence on china of america s silver policy in the early 1930 s recently compiled evidence about events in china are described and interpreted in light of a model of free banking under a commodity standard our interpretation is that the u s silver purchase program did not set off a chain of bad economic events which eventually forced china off silver and onto a fiat standard rather china was forced off silver by its own government which wanted to make itself the beneficiary of the capital gain associated with the appreciation of silver and to relieve itself of the restrictions that are imposed on government finance by a commodity standard

state collective bargaining laws and public sector pay using the public use microdata sample from the 2005 to 2015 american community survey the authors provide new evidence on how state collective bargaining laws affect public sector wages to isolat

explaining the demand for free bank notes abstract this paper explains why the risky notes of banks established during the free banking era 1837 1863 were demanded even when relatively safe specie gold and silver coin was an alternative free bank notes were demanded because they were priced to reflect the expected value of their backing the empirical evidence supports this explanation specifically in new york wisconsin and indiana the expected value of backing was sufficient for free bank notes to circulate at par which they did in minnesota the backing for notes was very poor they exchanged well below par being treated as small denomination securities

turning points in the civil war views from the greenback market in early 1862 the united states government began issuing greenbacks a legal tender currency that was not convertible into gold the government promised to redeem the greenbacks in gold eventually but speculators understood that the probability of redemption depended on union army military fortunes and political developments that affected the total cost of the war to serve the speculative interest in gold a market emerged for the purpose of trading greenbacks for gold dollars because the market price of a greenback reflected the public s perceptions of future war costs the movement of these prices provides unique insights into how people at the time perceived various events we use daily quotations of the gold price of greenbacks to identify a set of dates during the civil war that market participants regarded as turning points in some cases these dates coincide with events familiar from conventional historical accounts of the war in other instances however market participants reacted strongly to events that historians have not viewed as very significant this abstract was borrowed from another version of this item

the emancipation proclamation confederate expectations and the price of southern bank notes we examine the behavior of a semimonthly series of the confederate dollar price of bank notes these notes traded at par with confederate dollars from october of 1861 until november 5 1862 we use a model of the demand for two currencies to argue that this departure from par results from altered southern expectations after the 1862 congressional elections assured the enactment of the emancipation proclamation previously southerners believed a win or a negotiated settlement would allow a return to the union intact when these expectations changed bank notes appreciated against confederate dollars in addition our empirical work shows that notes appreciated following northern victories

bank panics government guarantees and the long run size of the financial sector evidence from free banking america governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility confidence in these guarantees presumably alters the size of the financial sector but observing the long run consequences of failed guarantees is difficult we look to america s free banking era and compare the consequences of a broken guarantee during the indiana centered panic of 1854 to the panic of 1857 in which guarantees were honored our estimates of a model of endogenous market structure indicate substantial negative long run consequences to financial depth when panics cast doubt upon a government s ability to honor its guarantees

supply shocks and the divine coincidence abstract unlike the conventional view blanchard and gali 2007 point out that supply shocks alone do not create a policy trade off between stabilizing inflation and stabilizing the output gap this paper shows that supply shocks can be a natural source of the trade off by assuming that non produced inputs are used in fixed proportions with output in the production process the results can also be generalized to the case when the elasticity of substitution between non produced inputs and labor is less than unity