money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

a theory of commerce abstract the theory of commerce advanced here captures prominent features of retail trade large employment congestion effects anonymous posted prices and quantity discounts this theory is built around a directed search model where buyers preferences are private information the analytical solution is easily inserted in a neoclassical growth framework in this framework the parameters of retail trade are calibrated using commercial margins and employment welfare properties depend on the sellers ability to charge two tier prices with two tier prices the directed search equilibrium is efficient otherwise it is not this contrasts with the full information benchmark where directed search is always efficient

labour market structure and inequality a comparison of italy and the u s markets with rigid labour regulations and centralized wage setting are often thought to be inefficient but egalitarian using a model of off and on the job search and event history individual level data for italy and the u s we show that while the cross sectional wage distributions of young italian males are much more compressed than are the comparable distributions for young white u s males the estimated search model implies that the distribution of lifetime welfare is no more disperse in the u s than it is in italy our model implies that the high frequency of movements between labour market states leads to both a relatively equitable distribution of long run welfare in the u s and a high level of cross sectional inequality

wage mobility in the united states this paper examines the mobility of individuals through the wage and earnings distributions using 1979 1991 data from the national longitudinal survey of youth lifetime wages will be more equally distributed than wages from any single year if individuals change position in the wage distribution over time the results suggest that mobility is predominantly within group mobility reducing wage inequality by 12 26 over a four year horizon a detailed examination of within group mobility using year to year estimates of transition probabilities among quintiles of the distribution reveals similar general patterns across all skill groups mobility declined significantly over the years especially at the lower end of the wage and earnings distributions

a rudimentary random matching model with divisible money and prices abstract we consider a version of kiyotaki and wright s monetary search model in which agents can hold arbitrary amounts of divisible money a continuum of stationary equilibria indexed by the aggregate real money stock exists with all trading occurring at a single price there is always a maximum level of the real money stock consistent with existence of such an equilibrium in the limit as trading becomes faster relative to discounting any real money stock becomes feasible in such an equilibrium in contrast to the original kiyotaki wright model higher equilibrium real money stocks unambiguously correspond to higher welfare in this costless production environment journal of economic literature classification numbers d51 e40

how important is pro social behaviour in the delivery of public services a number of papers have suggested that pro social behaviour in the workplace may be sensitive to the institutional environment but there is little empirical research that attempts to test this directly using data on worker behaviour this is the aim of this paper we show that individuals in the non profit sector are significantly more likely to do unpaid overtime than those in the for profit sector however we find no evidence of adjustment along either the extensive or intensive margins when individuals change sectors the results of our analysis therefore point to selection and we find supporting evidence that individuals do self select on the basis of their propensity to donate labour

public private sector wage differentials in canada evidence from quantile regressions abstract quantile regressions are used to estimate the size of the public sector wage premium in canada we find that public sector rent payments tend to be highest for federal government employees females and individuals at the lower tail of the wage distribution

what have we learned about policy and growth from cross country regressions economists have been seeking to comprehend why some countries are rich and others poor for well over 200 years a better understanding of the national policies associated with long run growth would both contribute to our ability to explain cross country differences in per capita incomes and provide a basis for making policy recommendations that could lead to improvements in human welfare recently economists have used cross country regressions to search for empirical linkages between longrun growth and indicators of national policies e g roger kormendi and philip meguire 1985 robert j barro 1991 the large cross country growth literature has identified various fiscal monetary trade exchange rate and financial policy indicators that are significantly correlated with longrun growth yet levine and david renelt 1992 show that many of these findings are fragile to small alterations in the conditioning information set that is small changes in the right hand side variables produce different conclusions regarding the relationship between individual policies and growth in this paper we take stock of what the profession has learned from cross country regression studies of policy and long run growth i limitations

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

optimal public sector wages i build a dynamic stochastic general equilibrium model with search and matching frictions to determine the optimal public sector wage policy public sector wages are crucial in achieving efficient allocation of jobs high wages induce too many unemployed to queue for public sector jobs in turn raising unemployment the optimal wage depends on the frictions in the two sectors following technology shocks public sector wages should be pro cyclical and deviations from the optimal policy significantly increase the volatility of unemployment

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

the effects of income tax rate uncertainty in a dynamic setting most discussion of income tax policy focuses on the expected efficiency or equity gains that could result from alterations in income tax codes often overlooked is the uncertainty that is generated when taxpayers anticipate a change in the tax laws for example over the last decade the income tax codes in the u s have undergone three significant revisions and while each of these revisions was accompanied by extensive debate concerning the effects of changes in particular statutory provisions the uncertainty generated by such rapid changes in the tax codes received little attention it is likely that the timing of these revisions as well as the revisions themselves were difficult to predict and consequently contributed to the uncertainty facing taxpayers while income tax codes may be subject to a wide variety of changes arguably the most consequential is a change in tax rates given a fixed tax base with a fixed tax base changes in statutory tax rates translate into changes in effective tax rates because changes in effective rates have such a pervasive influence on decision making it seems reasonable to expect that uncertainty regarding future effective tax rates may have serious consequences we explore the impact of this particular form of tax code uncertainty on an individual s saving and portfolio decision making in a dynamic setting throughout our analysis the tax base is unchanging so that we do not bother to distinguish between effective and statutory tax rates in this setting we assume that the timing of tax rate changes is uncertain and that if a change occurs the new tax rate is unpredictable we find that more less risk averse taxpayers will respond to an increase in the likelihood of a change in the tax code or an increase in the variability of future tax rates by increasing decreasing saving we are also able to characterize those situations in which an increase in the likelihood of a change in the tax code or an increase in the variability of future tax rates will depress risk taking there is a growing literature that examines the effects of income tax uncertainty for example auerbach and poterba 3 and bernheim 4 have dealt with uncertainty that alters a firm s taxable income and consequently the effective tax rate faced by the firm auerbach and hines 2 have analyzed corporate investment behavior in the u s by taking into account the possibility that investors anticipate future changes in tax laws models that examine the welfare consequences of uncertain tax rates have been developed by weiss 9 in a static setting and by bizer and judd 5 in a dynamic setting estimates of the welfare costs associated with statutory tax uncertainty in

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

public sector wage policy and labor market equilibrium a structural model we develop and estimate a structural model that incorporates a sizable public sector in a labor market with search frictions the wage distribution and the employment rate in the public sector are taken as exogenous policy parameters overall wage distribution and employment rate are determined within the model taking into account the private sector s endogenous response to public sector employment policies job turnover is sector specific and transitions between sectors depend on the worker s decision to accept alternative employment in the same or different sector by comparing the value of employment in the current and prospective jobs the model is estimated on british data by a method of moments we use the model to simulate the impact of various counterfactual public sector wage and employment policies

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

search inflation and capital accumulation abstract this paper constructs a model to integrate the search monetary theory into a neoclassical growth model with divisible goods and money the model is used to examine the relationship between money growth and capital accumulation the framework uncovers a distinct extensive effect that an increase in the money growth rate increases the frequency of successful trades by increasing the number of agents in the market this positive extensive effect on the number of trades can dominate the conventional negative intensive effects of money growth on individuals labor input and real money balance in which case increasing the money growth rate increases aggregate capital and output

inflation and the dispersion of real wages the eects of inflation on real wage dispersion and welfare are studied in a cash in advance economy with a walrasian goods market but a labor market with search friction in which firms enjoy monopsony power in the labor market firms post wages and both the employed and the unemployed workers search among the posted wages in equilibrium a higher inflation rate reduces the dispersion in real wages this result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980 s and the 1990 s in the u s and the empirical literature linking reduced inflation to greater wage dispersion while higher inflation always lowers consumption output and employment the optimal inflation rate exceeds the friedman rule

money and the gains from trade this article studies the role of money in environments where in each meeting there is a double coincidence of real wants traders who meet at random finance their purchases through current production the sale of divisible money or both it is shown that in the absence of valued money if traders have asymmetric tastes for each other s good they produce and exchange socially inefficient quantities with valued money however traders exchange efficient quantities if the asymmetry of tastes is not too large it is shown that the gains from trade in the monetary economy are strictly greater than those in the corresponding barter economy that the friedman rule holds and that the allocation of resources in the monetary economy converges to the allocation in the barter economy as the growth rate of the money supply is increased

equilibrium in a market with sequential bargaining this paper considers a market where pairs of agents who are interested in carrying out a transaction are brought together by a stochastic process and upon meeting initiate a bargaining process over the terms of the transaction the basic bargaining problem is treated with the strategic approach the paper derives the steady state equilibrium agreements analyzes their dependence on market conditions such as the relative numbers of agents of different types and discusses their relations with the competitive equilibrium outcome and other results in the search equilibrium literature this paper considers a market that operates in the following way pairs of agents who have mutual interest in carrying out a transaction are brought together by a stochastic process when two agents meet they initiate a bargaining process over the terms of the transaction if two agents reach an agreement a transaction takes place and they leave the market of course the bargaining positions and hence the agreement reached in any particular meeting will be affected by the conditions prevailing in the market these will include the chances that each of the negotiating parties have of meeting other partners in the event that the agreement in the current negotiations is delayed also the expected length of time required to achieve an alternative transaction and the expected behavior of alternative partners the study of such a market mechanism is of interest for two reasons firstly it captures some realistic aspects of the trade in certain specific markets e g asset markets such as housing and some labor markets secondly it contributes to an understanding of the micro mechanisms of price formation and their role in shaping market outcomes in both cases the features studied are largely neglected in the traditional market equilibrium analyses the related literature includes the articles by diamond 4 5 diamond and maskin 6 mortensen 8 9 and zusman and bell 13 these articles consider markets of the type described above in which transactions are concluded at pairwise meetings of agents the major difference between our work and these articles is in the approach to the basic bargaining problem in the cited articles it is assumed that a meeting is concluded with an instantaneous agreement which divides the associated surplus in an arbitrary predetermined way when the surplus is assumed to be divided equally the division rule is in fact nash s axiomatic bargaining solution in contrast the present paper treats the basic bargaining problem with the strategic approach see rubinstein 19 which constitutes an attempt to look into the bargaining black box this approach explicitly models the time dimension of the bargaining process describes in detail the bargaining procedure and justifies the agreement as a perfect equilibrium in

what has 20 years of public private pay gap literature told us eastern european transitioning vs developed economies this paper surveys the literature on public private sector pay differentials based on 20 years of research in transitioning countries of eastern europe ee and compares the results with estimates obtained from developed market economies the majority of empirical studies from ee economies found evidence of public sector pay penalties during the period of economic transition from a communist to market based economy in developed economies however the average differential is usually around zero or positive the public sector pay inequality reducing effect relative to the private sector is greater in transitioning economies than in developed economies nevertheless there is evidence that the sign of the public sector pay gap as well as the relative public sector pay distribution change with the progress of economic transition towards those usually observed in developed economies different pay setting arrangements between private and public sectors and competition for workers seem to be major arguments for the existence of systematic pay differences between the two sectors

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

on the dynamics of unemployment and wage distributions postel vinay and robin s 2002 sequential auction model is extended to allow for aggregate productivity shocks workers exhibit permanent differences in ability while firms are identical negative aggregate productivity shocks induce job destruction by driving the surplus of matches with low ability workers to negative values endogenous job destruction coupled with worker heterogeneity thus provides a mechanism for amplifying productivity shocks that offers an original solution to the unemployment volatility puzzle shimer 2005 moreover positive or negative shocks may lead employers and employees to renegotiate low wages up and high wages down when agents individual surpluses become negative the model delivers rich business cycle dynamics of wage distributions and explains why both low wages and high wages are more procyclical than wages in the middle of the distribution

the determinants of black white differences in early employment careers search layoffs quits and endogenous wage growth this paper studies the transition from school to full time employment and subsequent labor mobility during the first five postschooling years for several recent cohorts of black and white male terminal high school graduates using unique data from the 1979 youth cohort of the national longitudinal surveys of labor market experience a constrained optimization model of labor force dynamics is implemented empirically integrating features of models previously described in the literature the estimates of the model provide quantitative evidence on underlying structural differences in labor market constraints faced by blacks and whites for example while blacks have overall a substantially smaller wage return to work experience and face a less disperse wage offer distribution blacks face a higher probability of receiving job offers

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

estimating a structural search model the transition from school to work this paper presents a finite horizon search model that is econometrically implemented using all of the restrictions impli ed by the theory following a sample of male high school graduates fr om the youth cohort of the national longitudinal surveys from graduat ion to employment search parameters are estimated reservation wages and offer probabilities are estimated to be quite low simulations a re performed of the impact of changing the parameters on the expected duration of unemployment copyright 1987 by the econometric society

the variability of velocity of money in a search model abstract we construct a dynamic equilibrium model where there is costly search in the goods market and the labor market incorporating shocks to money growth and productivity we calibrate the model to the us time series data to examine the model s quantitative predictions on aggregate variables and in particular on the variability of consumption velocity of money despite the fact that money is the only asset the model captures most of the variability of velocity in the data it also generates realistic predictions on the moments of other variables and provides persistent propagation of the shocks the model generates these results largely because costly search gives an important role to the extensive margin of trade

money and capital as competing media of exchange we construct a model where capital competes with fiat money as a medium of exchange and we establish conditions on fundamentals under which fiat money can be both valued and socially beneficial when the socially efficient stock of capital is too low to provide the liquidity agents need they overaccumulate productive assets to use as media of exchange when this is the case there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare under the friedman rule fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would

inequality income growth and mobility the basic facts during the 1950s and 1960s mean wages in the united states grew rapidly and the dispersion around this growing mean changed very litde starting in the 1970s and continuing into the 1980s and 1990s these patterns were reversed mean wages grew slowly and inequality increased rapidly these changes in labor markets were reflected in changes in the distribution of family income the mean of the distribution of family income did increase after 1973 in spite of the near constancy of mean real wages as family members increased the number of hours they worked however the increase in inequality of wages was mirrored by an increase in the dispersion of family income a large descriptive literature has documented the rise in inequality while a smaller behavioral literature has sought to delineate the causes of this rise these changes in the distribution of family income a fected rates of poverty directly during the 1950s and 1960s temporary increases in poverty during recessions were more than offset by declines in poverty during economic expansions as long as the poor gained along with everyone else fi om the secular growth in the mean one could be confident that poverty rates would ratchet down this is exactly what happened as poverty rates fell from 22 4 percent in 1959 to 11 1 percent in 1973

critical survey endogenous growth theory a critical assessment a critical assessment is made of endogenous growth theory from the perspective of recent developments within economics as a discipline these include its increasing mathematical formalisation its focus upon microfoundations the casual use of econometrics to test models and the incorporation of factors that have traditionally been outside mainstream economics it is found that the theory focuses upon market imperfections and technological progress in a variety of ways and reconstructs their impact upon the macroeconomy as a growth rather than as a level effect whilst the growth rate is endogenised this leads to the problem of multiple equilibria and extremely complex dynamics the generalisation from exogenous growth theory is however associated with even more extreme assumptions and analytical distance from the socioeconomic processes of growth itself copyright 2000 by oxford university press

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

the public pay gap in britain small differences that don t matter the existing literature on inequality between private and public sectors focuses on cross section differences in earnings levels forward looking agents however care about income and job mobility too which we show are substantially different between the two sectors using data from the bhps we estimate a model of income and employment dynamics allowing for unobserved heterogeneity in the propensity to be employed in eitherjob sector we detect a positive average public premium both in income flows and in the present discounted sum of future income flows we also find that income inequality is lower but more persistent in the public sector there is an ongoing debate as to whether public sector workers experience better or worse pay conditions than their private counterparts a recurring message in the recent literature is that although raw differences can be large most are likely to reflect differences in the composition of the workforce both in terms of observed characteristics such as age and education and in terms of unobserved characteristics nevertheless a look at labour markets in the two sectors suggests that individuals do perceive some differences between the sectors katz and krueger 1991 document the fact that blue collar workers are willing to queue to obtain public sector jobs whereas highlyskilled workers are notoriously hard to recruit and retain in the public sector the focus of most of the literature on public pay gaps is on cross section differences in earnings levels 2 yet the public private differences are arguably equally marked in terms of income mobility income volatility and job loss risk than in terms of mean income levels public sector employers are widely perceived to offer more job security 3 there is also plentiful evidence of relative wage compression in the public sector moreover as we shall point out public sector incomes are substantially more persistent over time than private sector incomes the motivating point of this article is that forward looking agents are likely to care about income and job mobility as well as income levels so that a more general assessment of the existence and magnitude of a public premium should be based on

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

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

inflation price dispersion and market integration through the lens of a monetary search model monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and thus on the level of market integration for less integrated markets the inflation price dispersion nexus is predicted to be asymmetrically v shaped which results in an optimal inflation rate above zero for highly integrated markets with low search costs however the impact of inflation on price dispersion should only be small using price data of the european union member states this paper is the first that tests and confirms these predictions of monetary search theory

the central government private sector wage differential since ehrenberg and schwarz 1986 there has been a plethora of articles investigating the relationship between public and private sector wages this article examines part of this post 1986 literature by reviewing articles that examine central government private sector wage differentials in sum most articles find that there is a premium paid to central government workers although the premium has declined in recent years in developing countries however the differential is usually negative women and minorities tend to do better in the public sector relative to their private sector counterparts the evidence on union premiums between sectors is mixed although the premium tends to be higher in the private sector however public sector union workers do not do much better than private sector union members the magnitude of all of the wage differentials discussed are sensitive to the estimation technique and data source used the most common explanation for the public sector wage premium is economic rent accruing to government workers although the public sector wage determination literature suggests that the differential is due to returns to political and vote producing activities not relevant in the private sector

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

permanent income in general equilibrium abstract this paper reviews recent tests of the permanent income hypothesis this literature suggests that consumption is too sensitive to current income relative to the predictions of the usual partial equilibrium model it is then argued that in general equilibrium attempts to move along a consumption possibilities frontier exhibiting diminishing returns would naturally give rise to endogenous changes in interest rates creating a link between consumption and current income a fully specified general equilibrium example is introduced which does indeed exhibit the same excess sensitivity reported in the literature for precisely this reason

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

nominal bonds and interest rates in this article i integrate the microfoundation of monetary theory with the model of limited participation to analyze the competition between nominal bonds and money the market for government nominal bonds is centralized and walrasian whereas the goods market is modeled as random matches the government imposes a legal restriction that requires all government goods to be purchased with money but not with bonds by contrast private agents can exchange between themselves with both money and bonds i show that an arbitrarily small legal restriction is sufficient to prevent matured bonds from being a medium of exchange i also analyze the effects of monetary policy with and without the legal restriction some of those effects differ significantly from traditional monetary models

market power price adjustment and inflation we study the responses of real and nominal prices to random flutuations in costs and money growth using a monetary search economy in which there are no costs or temporal restrictions on sellers ability to change prices the economy exhibits a form of price stickiness in that the price level may react incompletely to either type of shock as a result of endogenous changes in the average mark up driven by movements in consumers search intensity the average mark up falls as inflation rises a finding consistent with emprical observations as a result of this reduction in market power prices become more responsive to shocks as inflation rises our results are consistent with empirical findings that the degree of price adjustment in response to both cost and money growth shocks is increasing in the average rate of inflation that the variance of inflation increases with its average level and that positive and negative shocks to money growth have asymmetric effects

a reexamination of the federal private wage differential in the united states the federal private wage differential is reexamined with recent data using specifications similar to those used in three previous studies i find that the federal private wage differential has narrowed since the 1974 79 period analyzed in those studies in addition i discover that wage differentials based on specifications used in the literature are biased upward because the previous studies did not control for detailed occupational and locational characteristics of workers corrected point estimates of the wage gap are much smaller than previous estimates in the literature differences in the gap across demographic groups occupations and locations are also discussed

twenty years of rising inequality in u s lifetime labour income values in this paper we study the evolution of lifetime labour income inequality by constructing present value life cycle measures that incorporate both earnings and employment risk we find that even though lifetime income inequality is 40 less than earnings inequality the total increase in lifetime income inequality over the past 20 years is the same as earnings inequality while the total increase is the same the pathways there differ with earnings inequality experiencing a steady increase and lifetime income inequality increasing in spurts particularly in the latter half of the 1990s finally we find the changes in lifetime income inequality are primarily driven by changes in earnings mobility and changes in the earnings distribution itself changes in employment risk and the composition of the sample such as the shift toward attaining more education and the ageing population do not play a large role 2004 the review of economics studies limited

comment on search money and capital a neoclassical dichotomy by s borag uan aruoba and randall wright before giving my general comments on the paper i think that it would be useful to describe the evolution of monetary search models for those who have not followed recent developments in the literature in this way one has a better sense of the contribution made by aruoba and wright 2003 this issue of jmcb most people are familiar with the basic monetary search model developed by kiyotaki and wright 1989 1993 and for many this may be the extent of their knowledge of money search models in this first generation of models goods and money are indivisible and agents can only hold one unit of goods or money the key contribution of the models was to carefully describe the decentralized trading environment that gives rise to a double coincidence of wants problem and to endogenize the decision to accept money as payment for goods and services in all search models assumptions regarding anonymity of trading histories and imperfect record keeping mean that credit is not feasible thus money is essential for trade i e better allocations can be achieved through the use of money than without it while analyzing the decision to accept money as a medium of exchange does not hinge on indivisibilities or inventory restrictions other questions such as how

consumption inequality and income uncertainty this paper places the debate over using consumption or income in studies of inequality growth in a formal intertemporal setting it highlights the importance of permanent and transitory income uncertainty in the evaluation of growth in consumption inequality we derive conditions under which the growth of variances and covariances of income and consumption can be used to separately identify the growth in the variance of permanent and transitory income shocks household data from britain for the period 1968 1992 are used to show a strong growth in transitory inequality toward the end of this period while younger cohorts are shown to face significantly higher levels of permanent inequality

consumer search price dispersion and international relative price fluctuations this article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price lop and relative price fluctuations search frictions lead firms to price discriminate across markets based on the opportunity cost of search which depends on the local wage with productivity and taste shocks estimated from the data deviations from the lop are as volatile and persistent as in the data fluctuations in relative wages real exchange rates and the terms of trade are also consistent with the data

price dispersion inflation and welfare we examine the implications of inflation for both price dispersion and welfare in a monetary search economy in our economy if the degree of buyers incomplete information about prices is fixed both price dispersion and real prices are increasing in inflation as the inflation rate approaches the friedman rule both price dispersion and welfare losses vanish if households choose the number of prices to observe then the optimal inflation rate may exceed the friedman rule as inflation induces search and up to a point raises welfare by eroding market power

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

inventory accumulation in a search based monetary economy abstract this paper explores the implications of a search based model of money for the linkage between steady state inventory accumulation inflation and welfare because individual traders in the search economy do not internalize the positive effects inventory accumulation and search effort have on the aggregate economy they are too low relative to social efficiency it is established that a tax on money balances can alleviate these externalities and improve aggregate welfare it does so by i directly increasing the optimal search intensity choices of the individual trader and ii stimulating the accumulation of inventories through a mundeil tobin type effect an increase in the equilibrium level of inventory accumulation also positively affects search effort the implications for optimal monetary policy are discussed

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

a modified switching regression model for earnings differentials between the public and private using dutch 1986 data the wage differentials between public sector and private sector workers are investigated by employing a variation of the switching regression model this model imposes fewer identification restrictions on the parameters of the model than the standard switching regression model the estimation results show that some categories of public sector workers earn substantially less than private sector workers copyright 1993 by mit press

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

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

public and private sector wages of male workers in germany we analyze several statistical assumptions used in empirical models on public private sector wage structures based on data for germany which contain a large range of background variables usually not available in other studies we investigate the sensitivity of results to various specification and identification assumptions the standard switching regression model is extended to allow for endogeneity of education level experience and hours worked these extensions lead to considerably different parameter estimates we compare conditional and unconditional wage differentials between the public and the private sector for the various specifications these differentials are sensitive to identification assumptions but robust across specifications which do and do not allow for endogeneity of education experience and hours worked

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

government wage differentials a sample selection approach this paper uses the econometrics of sample selection to estimate the net wage differential between workers in the public and private sectors of the united states the results indicate workers self select by systematically locating in the sector which offers them the higher expected wage as a consequence previous research based on the assumption of random allocation between sectors is subject to serious specification bias the present estimation indicates government workers are slightly underpaid taking into account their observed characteristics and the selection process

preferences inflation and welfare abstract this paper systematically examines how degrees of household risk aversion ra and elasticity of intertemporal substitution eis impact the welfare costs of inflation in a heterogeneous agent environment featuring capital and essential money empirical evidence suggests that households have degrees of ra and eis that differ on average from traditional values and display large amounts of dispersion capturing these empirical features of preference values in an otherwise standard model leads to welfare enhancements of inflation due to household substitution of money for capital the analysis also compares the welfare implications for alternative ways to implement monetary policy

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

trade reform policy uncertainty and the current account a non expected utility approach rapid and comprehensive reduction in barriers to international trade has often been followed by a sharp deterioration in the current account the macroeconomic counterpart of the deterioration has typically been a decline in private savings no clear response pattern has been observed for private investment this article observes anticipated policy reversal may explain a decline in private savings for the same reason gradual tariff reduction causes private savings to go up temporarily low tariffs lower the relative price of current goods in terms of future goods and thus tend to depress private savings an anticipated future tariff increase will increase current consumption if the intertemporal substitution elasticity is larger than 1 if consumers internalize the impact of future tariff revenues on their after tax income the savings impact will always be negative even for an intertemporal substitution elasticity below 1 in the standard expected utility approach risk aversion is low when intertemporal substitution is high because the relevant elasticities are each other s inverse

intertemporal choice and consumption mobility the theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption not just about its conditional mean in the paper we study the empirical transition matrix of consumption using a panel drawn from the bank of italy survey of household income and wealth we estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution the transition matrix generated by our estimates matches remarkably well the empirical matrix both in the aggregate and in samples stratified by education our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis jel d52 d91 i30

money and information this paper investigates the role of money in markets in which producers have private information about the quality of the goods they supply when the fraction of high quality producers in the economy is given money promotes the production of high quality goods which improves the quality mix and welfare unambiguously when this fraction is endogenous however we find that money can decrease welfare relative to the barter equilibrium the origin of this inefficiency is that money provides consumption insurance to low quality producers which can result in a higher fraction of low quality producers in the monetary equilibrium finally we find that most often agents acquire more costly information in the monetary equilibrium than in the barter equilibrium consequently money is welfare enhancing because it promotes useful production and exchange but not because it saves information costs

money random matching and endogenous growth a quantitative analysis in this study we develop a search and matching monetary growth model to analyze the effects of inflation on economic growth and social welfare by introducing endogenous economic growth via capital externality into a two sector search and matching model we find that the channel through which inflation affects economic growth in the search and matching model is different from the traditional cash in advance model to facilitate the calibration we obtain an empirical estimate of the effects of inflation on economic growth using panel regressions in the simulation analysis we quantitatively evaluate the welfare effect of inflation in the search and matching endogenous growth model and compare it to a search and matching exogenous growth model we find that the welfare effect of inflation is nonlinear in the endogenous growth model whereas it is linear in the exogenous growth model furthermore we find that the welfare cost of inflation under endogenous growth is up to four times as large as the welfare cost of inflation under exogenous growth

what is a public sector pension worth we measure accruals in defined benefit db pension plans for public and private sector workers in britain using typical differences in scheme rules and sector specific lifetime age wage profiles by sex and educational group we show not just that coverage by db pension plans is greater in the public sector but that median pension accruals as a percentage of salary are more than 6 higher among db covered public sector workers than covered private sector workers this is largely driven by earlier normal pension retirement ages but also by differences in earnings profiles across the sectors

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

duration to first job and the return to schooling estimates from a search matching model this paper investigates the properties of the joint distribution of the duration to the first post schooling full time job and of the accepted wage for that job within a search matchingbargaining theoretic model the model provides an interpretation of the observations on duration to first job and accepted wages that differentiates between behavioural influences and market fundamentals in determining the accepted wage schooling relationship the return to schooling is appropriately measured by differences in the wage offer distribution which depends only on market fundamentals we use data from the 1979 youth cohort of the national longitudinal surveys of labor market experience to follow several school leaving cohorts of young males a model which allows for five types of heterogeneous workers within schooling race groups fits the duration and wage data well for all such groups offer probabilities for all groups are estimated to be close to one mean offered wages are about 1000 less than mean accepted wages and the internal annual rate of return for attending college relative to graduating from high school is 32 for blacks and 17 for whites this paper investigates the properties of the joint distribution of the duration to the first post schooling full time job and of the accepted wage for that job within a search matching bargaining model it is a well established empirical regularity that hazard rates are decreasing with the duration of search unemployment it is also true for the data we use that the sample mean of the accepted wage associated with the first job is not increasing with duration these findings hold for both black and white male youth at all levels of schooling conditional on schooling however the time between leaving school and working at the first full time job is longer for blacks and their accepted mean wage is lower conditional on race the time between leaving school and working at the first full time job is shorter for those with higher levels of schooling and their accepted mean wage is higher interestingly blacks display a similar pattern of duration and accepted wages to whites who are one level of schooling below e g black high school graduates and white high school dropouts

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

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

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

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

is consumption insufficiently sensitive to innovations in income deaton 1986 has noted that if income is a first order autoregressive process in first differences then a simple version of friedman s permanent income hypothesis spih implies that measured u s consumption is insufficiently sensitive to innovations in income this paper argues that this implication of the spih is a consequence of the fact that it ignores the role of the substitution effect in the consumption decision using a parametric version of the standard model of economic growth the paper shows that very small movements in interest rates are sufficient to induce an empirically plausible amount of consumption smoothing since an overall evaluation of the model s explanation for the observed smoothness of consumption requires examining its implications for other aspects of the data the paper also explores some of these

wage differentials employer size and unemployment the unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a continuum of workers search by sequentially sampling from the set of offers is characterized wage dispersion is a robust outcome provided that workers search while employed as well as when unemployed the unique nondegenerate equilibrium distribution of wage offers is constructed for three cases 1 identical workers and employers 2 identical employers and an atomless distribution of worker supply prices and 3 identical workers and an atomless distribution of job productivities copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

taxation and uncertainty while taxes may be certain u s tax policy has certainly not been furthermore intrinsic economic risk makes investment decisions risky therefore a serious examination of the effects of tax policy on dynamic economic behavior should consider both sources of uncertainty this paper presents a simple theoretical and computational model that can analyze both intrinsic risk and uncertain taxation furthermore it will be clear that these techniques will be useful for examining general problems of taxation and risk when studying the impact of past and or proposed tax changes one of two extreme assumptions are usually made either agents are perfectly aware of future tax policy a perfect foresight assumption or they always believe that no change will ever occur a myopic foresight assumption these two assumptions yield substantially different views of recent tax experience as alan auerbach and james hines 1987 demonstrate in a partial equilibrium context both are clearly wrong the myopic specification assumes that individuals believe at each point in time that the current tax law will surely continue forever even after they have been hit repeatedly with tax changes on the other hand it is absurd to think that in say 1977 a significant number of individuals perfectly knew the various tax changes that would occur during the following decade this paper analyzes a dynamic general equilibrium model wherein taxpayers understand the uncertainty in tax policy when making their deci

optimal monetary policy in a new keynesian model with heterogeneous expectations abstract in a world where expectations are heterogeneous what is the design of the optimal policy are canonical policies robust when heterogeneous expectations are considered or would they be associated with large welfare losses we aim to answer these questions in a stylized simple new keynesian model where agents beliefs are not homogeneous assuming that a fraction of agents can form their expectations by some adaptive or extrapolative schemes we focus on an optimal monetary policy by second order approximation of the policy objective from the consumers utility function we find that the introduction of bounded rationality in the new keynesian framework matters the presence of heterogeneous agents adds a new dimension to the central bank s optimization problem consumption inequality optimal policies must be designed to stabilize the cross variability of heterogeneous expectations in fact as long as different individual consumption plans depend on different expectation paths a central bank aiming to reduce consumption inequality should minimize the cross sectional variability of expectations moreover the traditional trade off between the price dispersion and aggregate consumption variability is also quantitatively affected by heterogeneity

on the distribution of money holdings in a random matching model this article studies stationary and nonstationary distributions of money holdings in a random matching model the first part characterizes the stationary distributions of money holdings and derives the optimum quantity of money the second part considers nonstationary distributions of the optimum quantity of money to show that if the production costs are not too large any distribution of the optimum quantity of money converges asymptotically to the uniform distribution

open market operations abstract in an open market operation the central bank swaps currency for bonds we show how injecting money in this way is different from transfers the way policy is usually formulated the model captures liquidity explicitly by modeling the roles of assets in frictional exchange under various specifications for market structure and the acceptability or pledgeability of assets we discuss implications for the fisher and quantity equations the possibility of negative nominal yields liquidity traps and market segmentation when liquidity is endogenized using information theory multiple equilibria emerge with different policy predictions interest on reserves and quantitative easing are discussed

tax rate uncertainty and the sensitivity of consumption to income in an overlapping generations model abstract a well documented feature of u s data is that the aggregate consumption is a smoother process than income an overlapping generations model with a time nonseparable utility function is developed to characterize the effect of income tax uncertainty on the degree of consumption smoothness the model predicts that an increased tax uncertainty combined with tax financed production externality makes the aggregate consumption smoother for a plausible range of intertemporal substitution in consumption a calibration experiment indicates that the observed long term smoothness of aggregate consumption is consistent with the model s predicted consumption process