currency and credit in a private information economy in an environment with private information spatial separation and limited communication a currency like object and more standard named credits can be distinguished the credit objects can be used among agents in an enduring relationship that is among agents with known trading histories whereas the currency like object must be used among relative strangers in this environment collectively determined pareto optimal rules make the level of the currency like object and the mix of currency to named credits responsive to individual needs and to economywide states total indebtedness is determined by the number of lenders that is by preference or demand shocks and the mix of currency to credits is determined by transaction patterns among the agents

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

trade credit in a monetary economy abstract this paper examines the importance of financial and technological stochastic trends in the context of a stochastic dynamic general equilibrium monetary economy with multiple means of payment in contrast to earlier empirical work we find support for both a long run substitution condition between money trade credit and interest rates as well as a long run transactions demand for alternative payments media consistent with real business cycle frameworks

inflation taxation and welfare with externalities and leisure this paper examines how inflation taxation affects resource allocation and welfare in a neoclassical growth model with leisure a production externality and money in the utility function switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income but increases consumption labor capital and output the net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution while it is always negative without the externality it is likely to be positive with a strong externality and elastic intertemporal substitution

welfare costs of inflation and interest bearing money this work extends the lucas analysis of the welfare cost of inflation to an economy with interest bearing deposits lower and upper bounds to lucas measure of the welfare cost of inflation are also provided the upper bound is shown to lie between lucas measure of the welfare cost of inflation and the area under the money demand curve starting with martin bailey in 1956 the literature on welfare costs of inflation has recently been enriched by contributions among others by lucas 1993 2000 dotsey and ireland 1996 and gillman 1993 1995 it remains yet to adequately integrate the banking sector in this process this work extends lucas analysis of the welfare cost of inflation developed in the mccallumgoodfriend 1987 framework to an economy with interest bearing deposits lower and upper bounds to lucas measure of the welfare cost of inflation are also provided the upper bound is shown to lie between lucas measure and the area under the money demand curve which characterizes bailey s method 1956 for calculating the welfare cost of inflation

do legislators votes reflect constituency preference a simple way to evaluate the senate u s senators frequently vote against the preference of their constituency assuming that such a preference exists both of a state s senators represent the same constituency whenever they split their votes one or the other is necessarily going against the constituency preference for the sample of defense related votes analyzed above misrepresentation either observable vote splitting or unobservable vote matches that go against the constituency preference occurred at least 37 percent of the time at least 46 percent on one vote although party differences accounted for more than two thirds of the vote splitting a substantial number of splits remained besides a party difference for a state s senatorial pair is itself problematical

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

shirking and sorting in a political market with finite lived politicians this paper analyzes principal agent slack in the context of a political market composed of voters challengers and incumbents the introduction of a last period via finite livedness in combination with voters imperfect information about politicians preferences causes time varying shirking behavior on the part of politicians political markets eventually sort out those politicians with significantly deviant policy preferences potentially providing a solution to the last period problem and enabling politicians to make credible commitments in the extreme sorting can insure that it is not worthwhile for potential shirkers to run for office a systematic relationship between political shirking and number of terms in office may exist and depends on how quickly sorting takes place we show that evidence of little if any shirking is quite consistent with politicians having diverse and strongly held policy preferences in addition if sorting is a significant feature of political markets cross sectional studies will tend to oversample little and non shirking politicians compared to longitudinal studies reinterpretations of existing empirical work are also discussed

money and crime in a cash in advance model a cash in advance model in which holding money is risky is constructed to study the coexistence of multiple means of payment and monetary policy implications in steady state equilibrium the marginal rate of substitution of cash goods for credit goods depends on the crime rate as well as the nominal interest rate credit may be in use although the return on money is not positive with theft a money injection reduces the crime rate and makes cash more preferable for a greater variety of goods inflation improves welfare however without theft inflation makes credit more preferable and decreases welfare in general the friedman rule is not optimal

production based asset pricing in monetary economies with transactions costs a general equilibrium asset pricing model for a monetary economy with capital accumulation fin and endogenous financial structure is constructed in which there is a meaningful between monetary policy inflation taxes investment decisions and private financial arrangements a differential stochastic liquidity premium applies in equilibrium to consumption and investment purchases a production version of the capital asset pricing model is constructed the presence of endogenous financial arrangements is shown to play a key role in explaining potential distortions in the equilibrium risk premia associated with technological uncertainty numerical work indicates 1 that return anomalies are potentially large and 2 that the model has implications for empirical implementations for the partial equilibrium production based asset pricing models such as cochrane 1991 1996 and braun 1993 copyright 1996 by the london school of economics and political science

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

a non perpetual shirking model we provide a finite horizon counterpart to the shapiro and stiglitz model of unemployment to show how workers effort falls as they approach the end of an employment spell the model provides a reason for wages rising more rapidly than productivity

money as the mechanism of exchange abstract the existence and use of money remained an embarrassing puzzle for monetary analysis we observe over man s history that social groups without generally accepted media of exchange exhibit poor survival characteristics most social groups do not use assets or commodities at random in the execution of exchanges one observes that a small subset of assets is dominantly used in transactions these transaction dominating assets are usually referred to as money the literature contains many suggestive attempts to explain the emergence and role of money the classic writers made passing references in somewhat pictorial language to the extension markets and increasing labor productivity induced by the use of a general medium of exchange this idea has never been systematically developed however karl brunner 1971

a general equilibrium model of congressional voting in this paper we specify a model in which congressmen constituents and campaign contributors simultaneously decide on behavior constituents and contributors desire to influence the voting behavior of congressmen congressmen on the other hand want to be elected and vote accordingly we empirically test this model using roll call voting on eight bills dealing with economic regulation and find support for the model our results indicate that part of the voting behavior of congressmen may be explained by noneconomic factors we also find that unions and businesses as campaign contributors are sometimes influential unions are more often influential than is business ideological factors are also important in explaining voting

monopolistic competition increasing returns to scale and the welfare costs of inflation abstract this paper introduces monopolistic competition and increasing returns to scale into a monetary real business cycle rbc model to re estimate the welfare costs of inflation we first calibrate the model and show that it is capable of generating the observed aggregate fluctuations even when there are no shocks to the fundamentals in particular we demonstrate that this model matches the stylized u s business cycles facts as well as two more standard models then we find that in this model the scale parameters and the intensity of competition significantly affects the welfare cost of inflation specifically the cost is considerably higher than that in a standard rbc model with competitive markets and constant returns moreover the stronger the increasing returns and the less intense the competition the higher the welfare costs these results are confirmed in a number of model specifications

transaction services inflation and welfare this paper is motivated by empirical observations on the comovements of currency velocity inflation and the relative size of the credit services sector we document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money our model makes two new contributions first we show that direct evidence on the appropriately defined credit service sector for the united states is consistent with the welfare cost measured using an estimated money demand schedule second we provide estimates of the welfare cost of inflation that have some new features

inflation and the misallocation of resources gil mehrez this paper analyzes the effects of inflation on the resource allocation between the financial sector and the manufacturing sector we develop a model with heterogeneous workers who can be employed either in the manufacturing sector which produces a consumption good or the financial sector which provides liquidity services a rise in inflation reduces the demand for labor in the manufacturing sector and increases the demand for financial services this induces a shift of resources from the manufacturing sector to the financial sector and reduces consumption opportunities an empirical investigation using 55 countries strongly supports the result that higher inflation increases the relative size of the financial sector jel e i introduction in the analysis of the real effects of inflation it is widely accepted that the effects depend on the source of inflation on whether the inflation is anticipated or unanticipated and on whether the institutional structures associated with a rigid tax system or inadequate financial markets have been adjusted to neutralize the consequences of inflation although the effects of unanticipated inflation are fairly well known the effects of anticipated inflation under adequate tax systems and financial markets are not yet fully developed this is surprising given the dislike of the public policy makers and economists toward inflation there are three channels through which inflation may affect welfare first inflation causes consumers to shift the timing of their shopping closer to the receipt of income and creates incentives for shop owners to decrease their inventories the shoe leather effect bailey 1956 second inflation acts as a tax on consumption cooley and hansen 1989 1991 and investment degregorio 1992 due to a cash in advance constraint hence higher inflation decreases employment consumption and investment third inflation increases the use of costly credit karni 1974 gillman 1993 english 1996 and aiyagari et al 1999 this article focuses on the effects of inflation on the allocation of resources between the manufacturing sector and the financial sector of an economy higher inflation shifts resources from the manufacturing sector to the financial sector as agents decrease their money holdings in favor of transaction services monetary substitution such as credit cards interest bearing checking accounts foreign currency accounts or other very short term interest bearing assets that need to be managed on a regular basis the resulting effect on the size of the financial sector has been documented since the 1920s for example bresciani turroni 1937 reported that the number of bank employees in germany increased during the hyperinflation period of 1920 1923 from 30 000 to 60 000 and then declined by nearly one half after the fall in inflation in 1924 more recent episodes of high inflation provide further evidence for example the share of the banking sector in gdp in israel nearly doubled in the early 1980s a perio d of high inflation and declined substantially following the stabilization of 1985 marom 1982 kleiman 1989 we develop a two sector model with heterogeneous workers in which the allocation of resources is determined endogenously and depends on the inflation rate among other factors higher inflation increases the relative size of the financial sector as firms find it optimal to devote more resources to monetary substitution and manage their transactions more efficiently in addition to the decrease in output due to the shift of resources higher inflation also increases wages in the financial sector relative to wages in the manufacturing sector english 1996 and aiyagari et al 1998 propose a similar argument our approach differs from these articles in several ways first we investigate the effect of inflation on relative wages and on the allocation of skills across the two sectors in general

a banking explanation of the us velocity of money 1919 2004 the paper shows that us gdp velocity of m1 money has exhibited long cycles around a 1 25 per year upward trend during the 1919 2004 period it explains the velocity cycles through shocks constructed from a dsge model and annual time series data ingram et al 1994 model velocity is stable along the balanced growth path which features endogenous growth and decentralized banking hat produces exchange credit positive shocks to credit productivity and money supply increase velocity as money demand falls while positive goods productivity shock raises temporary output and velocity the paper explains such velocity volatility at both business cycle and long run frequencies with filtered velocity turning negative starting during the 1930s and the 1987 crashes and again around 2003 results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times

political shirking and the last term problem evidence for a party administered pension system studies of political shirking have disagreed both over whether the voting behavior of members of congress changes in their last term and over the manner in which last term shirking can be controlled through electoral sorting or through a pension system this paper presents evidence that members of congress who leave the house to run for statewide office do alter their voting behavior between the two sessions of their last house term and that this change includes an ideological shift toward their state party delegations the results suggest that a party driven pension system influences the voting of house members who aspire to higher office but that the pension system is not sufficient to control the last term shirking likely to occur if term limitations were imposed on house members

existence and uniqueness of equilibrium in distorted dynamic economies with capital and labor abstract in this paper we provide a set of sufficient conditions under which recursive competitive equilibrium exists and is unique for a large class of distorted dynamic equilibrium models with capital and elastic labor supply we develop a lattice based approach to the problem the class of economies for which we are able to obtain our existence and uniqueness result is considerably larger than those considered in previous work we conclude by applying the new results to some important examples of monetary economies often used in applied work journal of economic literature classification numbers c62 d51 d90 e10

a quantitative analysis of inflation as a tax on the underground economy abstract inflation rates are more dispersed and are persistently higher in developing countries this paper quantifies the importance of the public finance motive for inflation in the presence of a tax evading sector the underground economy the approach is motivated by the observation that the underground economy is especially large in poor countries the analysis builds on a general equilibrium monetary model with two production sectors where income in one of the sectors cannot be taxed a benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate the model is first calibrated to the u s economy and is then used for a cross country simulation the resulting relationships between the size of an underground economy inflation rate income tax rate and the share of seigniorage in the government revenue rationalize the cross country data quantitatively well

a critical review and an extension of the political shirking literature after substituting actual and real changes for proposed and nominal changes in budgetary and employment levels it is clear that the size and scope of the federal leviathon had not been reduced over 1982 83 it is also clear that the agencies which witnessed real budget cuts over this period were of minor importance in terms of the total u s budget future research on why only small agencies receive real budget cuts will provide us with a better understanding of the budgetary process

the welfare costs of moderate inflations in the recent past the view that a little bit of inflation was good for the economy was widely held the phillips curve in its earlier incarnations implied that moderate inflation was worth tolerating because it would permit lower unemployment this justification for tolerating inflation has long since been abandoned by economists and policymakers because both theory and experience showed it to be false nevertheless one legacy of this era seems to be a fairly widespread tolerance for moderate inflation recently there has been much discussion of removing this inflationary bias by passing legislation that would require the federal reserve to target zero inflation in this paper we examine some of the consequences of achieving that goal we appraise the revenue and welfare costs of policies designed to reduce moderate inflation rates to zero much has been written about why government policies may have an inflationary bias in this paper we don t address the issue of what motivates governments to inflate implicit in our analysis however is the notion that one important motive for inflation is the revenue raising potential of the inflation tax it would be difficult to argue that the inflation tax constitutes an important revenue source for the united states one indirect and very imperfect measure of this would be contributions by the federal lleserve to the treasury in recent years those rebates have amounted to

on inflation as a regressive consumption tax abstract evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed we build a monetary growth model consistent with key features of cross sectional household data and use this framework to study the distributional impact of inflation at the aggregate level our model economy behaves similar to standard monetary growth models within the representative agent abstraction inflation has however important distributional effects since it is effectively a regressive consumption tax thus neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy

welfare costs of inflation in a dynamic economy with search unemployment abstract we present a monetary general equilibrium model with labor market frictions in the form of search unemployment which is calibrated for the us economy interestingly both employment and output may even increase with the rate of inflation depending on the elasticity of labor supply considering the transition dynamics following a change in the monetary policy the optimal quarterly inflation rate is found to amount to approximately 0 6 in the benchmark case a reduction of the inflation rate from its current level to its optimal value only results in small welfare gains equal to 0 08 of total consumption

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

the optimal inflation path in a sidrauski type model with uncertainty abstract in this paper it is shown that in a sidrauski type model with uncertainty the chicago rule remains valid as a prescription for the average rate of inflation although there is a systematic difference between the perfect foresight and the uncertainty case quantitatively however the difference turns out to be very small the paper shows how to calculate the optimal monetary policy as a function of the state variables using the method of parameterized expectations in terms of expected utility the optimal policy is as good as the simple policy that reduces the money supply at the rate of time preference

attendance rates political shirking and the effect of post elective office employment attendance rates political shirking and the effect of post elective office employment i introduction political shirking the degree to which a politican s actions deviate from the wishes of his constituents can take many different dimensions economists e g amacher and boyes 1978 davis and porter 1989 dougan and munger 1989 kalt and zupan 1984 lott 1987d nelson and siberberg 1987 and peltzman 1984 have debated whether shirking exists in how a politician votes when he does vote this divergence is measured through some particular special interest voting ratings e g american conservative union americans for democratic action etc however shirking can obviously take as many forms as there are outputs that a politician produces besides how he votes he also produces services for his constituents involving everything from being personally available to listen to the constituents grievances to ensuring effective handling of case work by his staff see for example fiorina 1977 fenno 1978 and cain et al 1987 1 one dimension that has not been sufficiently examined is the extent to which politicians shirk by failing to vote on pending legislation 2 no attention has been given to which mechanisms will make this particular type of shirking relatively more costly most economists agree that opportunitic behavior by politicians is limited by the threat of reelection e g amacher and boyes 1978 barro 1973 kalt and zupan 1984 nelson 1976 and telser 1976 3 by implication the level of shirking should be the greatest when a politician decides to leave office however this opportunistic behavior might be reduced to the extent that political parties or constituencies impose costs for shirking through affecting politicisns post elective office career or the careers of their children thus a politicians last term in elective office may not represent his last period in any meaningful sense the next section outlines the differing views on how politicians act when they no longer face the threat of reelection section iii describes some empirical evidence on what mechanisms may prevent this last period problem the final section discusses the impliactions of these results ii the last period whether economists view politicians as ideologues e g kau and rubin 1979 and kalt and zupan 1984 or as simply attempting to maximize political support e g barro 1973 ferejohn 1986 nelson 1976 and peltzman 1984 the threat of reelection is seen as preventing shirking as kalt and zupan 1984 298 phrase it it appears that the proximity of the next election inhibits ideological shirking even those who do not view the last period as affecting how a politician votes argue that it will affect how often he votes lott 1987a 1987b has argued that if voters can determine and elect politicians that have ideological preferences corresponding exactly to the wishes of constituents politicians voting patterns should continue to reflect those values even when the cost of shirking in terms of forgone future votes is low the penalty to ideologues of not votingfor their constituency in the last period when they no longer face reelection is the forgone utility from not doing what they personally value assuming that politicians also desire leisure politicians should continue to vote for what they believe in but they should vote less frequently since they no longer receive the additional return of larger future support mechanisms to overcome this last period problem have been suggested by becker and stigler 1974 9 10 they argue that opportunistic behavior can be controlled if officeholders face the loss of a pension or equivalently a posted bond in the event of opportunistic behavior in their last term however the actual pension system does not effectively eliminate the last period for politicians since retirement payments are not based on cheating in the last period

money and asset prices in a cash in advance economy an asset pricing model with money introduced via a cash in advance constraint is presented the monetary velocity is variable hence money demand does not obey the trivial quantity equation the effects of disturbances in output and money growth on real balances the price level and interest rates are examined monetary policy has effects on real asset prices the fisher relation and the premium on nominal bonds are discussed the precise role of the timing of information and transactions for properties of price levels and interest rates are clarified

extensive margins and the demand for money at low interest rates we argue that the relevant monetary decision for the majority of u s households is not the fraction of assets to be held in interest bearing form but whether to hold any such assets at all we call this the decision to adopt the financial technology we show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets this implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations we do so with the 1989 survey of consumer finances we find that a the elasticity of money demand is very small when the interest rate is small b the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets and c the cost of adopting financial technologies is negatively related to participation in a pension program at intere

the last period problem in politics do congressional representatives not subject to a reelection constraint alter their voting behavior this study of roll call voting behavior in the u s house of representatives empirically documents the existence of an important simultaneity bias in the heretofore much investigated relationship between legislator ideological shirking and the security with which a legislator holds office the results indicate that while greater security allows a policymaker more leeway for ideological consumption increases in ideological on the job consumption also diminish a policymaker s security in office

measuring the welfare costs of inflation in a life cycle model abstract in a neoclassical growth model with life cycle households in which money is held to satisfy a cash in advance constraint the optimal steady state inflation rate is absurdly high in excess of 20 lump sum age independent money injections twist and flatten the lifetime profile of utility making this profile look more like the one that would be chosen by a planner the cost of monetary finance of lump sum payments is the distortion introduced to the labor leisure choice

the influence of ideology on congressional voting i introduction the question of what determines congressional voting on legislation has inspired a number of recent empirical analyses all are in agreement that congressional voting on specific bills is correlated with the economic self interest of the representative s constituents and a measure of the representative s ideology as indicated by his broader voting record however the interpretation of the empirical results regarding the influence of ideology has generated more debate than consensus in the current literature kau and rubin 1979 find evidence that a congressman s ideology influences his voting but also find evidence for an alternative but not mutually exclusive hypothesis that a congressman s rating by ideological groups reflects membership in a logrolling coalition kalt and zupan 1984 argue that although a representative s votes are likely to reflect the economic interests and the ideology of his constituents the weak incentive for the constituent principal to monitor the voting behavior of his representative agent gives the representative the opportunity to shirk or vote according to his personal ideology rather than his constituents both nelson and silberberg 1987 and mcarthur and marks 1988 find that the degree of shirking increases as the opportunity cost of shirking decreases in contrast to the above findings peltzman 1984 argues that ideological voting by congressmen need not necessarily reflect shirking but instead may be a way for the representative to cheaply provide his constituents with information about his general position on issues what appears to be shirking allowed by an imperfect principal agent relationship may instead be signaling designed to at least partially overcome the imperfect nature of the relationship lott 1987 extends peltzman s signaling argument by hypothesizing that if politicians are viewed by constituents as search goods rather than experience goods then they will have an incentive to establish a political brand name by establishing a consistent ideological voting record dougan and munger s 1989 approach is similar to lott s they argue that politicians with strongly held views that match those of their constituents make ideal representatives because they are less likely to vote against their constituents interests when pressured by special interest groups an incumbent therefore has an incentive to invest in reputational capital by maintaining the consistency over time of his broader voting record because this reputational capital generates quasi rents in electoral competition with candidates who possess less of it neither lott nor dougan and munger find evidence of shirking in their analyses of congressmen s broader voting records as measured by ideological groups ratings dougan and munger also develop a variable intensity of commitment version of the reputational capital hypothesis this version contends that voters with unambiguously liberal or conservative ideologies may prefer a candidate whose voting record indicates that his views are more extreme than their own such a zealous candidate voters believe is even less likely to be influenced by special interest groups a congressman serving an unambiguously liberal or conservative constituency therefore has an incentive to establish and maintain an extremely ideological overall voting record in contrast a congressman serving a constituency with centrist ideological preferences has an incentive to establish an overall voting record that matches his constituency s ideological leanings the systematic deviation of a congressman s voting record from his constituents preferences when near either extreme of the ideological spectrum is not inconsistent with a faithful principal agent relationship one cannot help but be struck by the observation that those researchers finding evidence consistent with shirking studied voting on specific legislation whereas those researchers finding no evidence of shirking studied representatives broader voting records as measured by ideological ratings

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

money velocity in an endogenous growth business cycle with credit shocks the explanation of velocity has been based in substitution and income effects since keynes s 1923 interest rate explanation and friedman s 1956 application of the permanent income hypothesis to money demand modern real business cycle theory relies on a goods productivity shocks to mimic the data s procyclic velocity feature as in friedman s explanation while finding money shocks unimportant and not integrating financial innovation explanations this paper sets the model within endogenous growth and adds credit shocks it models velocity more closely with significant roles for money shocks and credit shocks along with the goods productivity shocks endogenous growth is key to the construction of the money and credit shocks since they have similar effects on velocity through substitution effects from changes in the nominal interest rate and in the cost of financial intermediation but opposite effects upon growth through permanent income effects that are absent with exogenous growth

on cash in advance models of money demand and asset pricing this paper shows how a cash in advance model of money can be written in a way that combines a simple yet empirically defensible money demand function with an asset pricing equation that is similar to the standard barter economy euler equations return premia are determined as in the barter exchange model except that a short term risk free nominal interest rate enters into the first order conditions in special cases asset prices satisfy the barter economy euler equations exactly in the empirical analysis the interest rate factor adds some explanatory power but both the barter and the monetary asset pricing model perform rather poorly copyright 1991 by ohio state university press

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

contrasting models of the effect of inflation on growth the paper formulates a nesting model for studying the theoretical literature on inflation and endogenous growth it analyses different classes of endogenous growth models with different usage of physical and human capital with different exchange technologies first the paper shows that a broad array of models can all generate significant negative effects of inflation on growth second it shows that these models can be differentiated primarily by the fact whether there is a tobin type effect of inflation and also whether the inflation growth effect becomes weaker as the inflation rate rises a non linearity or stays essentially constant over the range of inflation rates the paper compares these features of the models to empirical evidence as a way to summarize the efficacy of the models

on the complementarity of money and credit i propose a model where agents choose to conduct their business using two payment instruments money and bilateral credit a friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit money and credit complement each other with anticipated inflation complementarity implies that the credit to money ratio decreases with inflation

a test for pure or apparent ideology in congressional voting a politician s preferences do matter he is not simply a captured agent speaking only for his constituent s interests some latitude exists for him to shirk his responsibility to serve his constituents interests and to cast votes consistent with his own personal ideology more important to our understanding and modeling of voting behavior shirking for ideological consumption is seen to increase with age once a threshold of about 53 years old is reached shirking is not a phenomena of the politicians final term in office rather it likely exists in every term and begins to increase significantly two terms prior to the expected horizon sixty percent of the sample of senators were seen to exhibit increasing ideological consumption with age

liquidity preference and financial intermediation we examine the characteristics of optimal monetary policies in a general equilibrium model with incomplete markets markets are incomplete because of uninsured preference uncertainty and because productive capital is traded infrequently rational individuals are willing to hold a liquid asset money at a premium monetary policy interacts with existing flnancial institutions to determine this premium as well as the level of precautionary holdings we show that inflation is expansionary and that the optimal inflation rate is positive if there is no operative banking system the tobin effect otherwise efficiency requires that money be undominated in its rate of retum the friedman rule we analyse the preference for liquidity and evaluate the effects of monetary policy in a framework where individuals optimize and goods and asset markets are competitive liquidity needs of individuals and characteristics of assets are consequences of the structure of preferences technology and information equilibrium is compatible with diiferences in the rates of retum on assets differing in liquidity with divergences between household savings and aggregate investment in productive capital and distortion of household consumption plans we examine how these quantities are determined in altemative financial environments the extent to which monetary or interest rate policies are effective and desirable and the relative efficiency of altemative instruments which serve private liquidity needs we find that monetary policy is effective and infiation is expansionary if the consumption plans of individuals are constrained by the lack of liquidity at the same time such expansion can be welfare inferior intermediation which allows liquid assets to be issued against productive investment is both feasible and desirable unlike infiation intermediation achieves welfare enhancing expansion this allows a comparison of the tobin effect tobin 1965 and the friedman mle friedman 1969 in a general equilibrium model cmdely speaking the first indicates that infiation is desirable while the other claims that defiation is the difference as we show depends on the degree of intermediation money and productive capital are simultaneously held by individuals even when money has a lower rate of retum this is due to the fact that money is liquid it can be used to pay for goods at any time and in all states of nature capital on the other

inflation and balanced path growth with alternative payment mechanisms the paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long run inflation experience a negative inflation growth relation is explained including a striking nonlinearity found re peatedly in empirical studies a set of tobin 1965 effects are also explained and further linked in magnitude to the growth effects through the interest elasticity of money demand undis closed previously this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

the monetary transmission mechanism in a general equilibrium version of the baumol tobin model abstract the paper analyzes the effects of financial shocks on an economy in which individuals hold money to make purchases and in which the frequency of conversions of other assets into money is endogenous the paper thus extends the work of sanford grossman and laurence weiss 1983 and julio rotemberg 1984 by allowing agents to choose the timing of trips to the bank there are two major conclusions first the economy s response to a nominal interest rate shock exhibits large cycles second the economy s response differs dramatically both qualitatively and quantitatively from its response when the timing of trips is fixed

anonymity adverse selection and the sorting of interdealer trades this article asks why london security dealers use more than one trading venue to trade with one another we argue that differences in the exclusivity liquidity anonymity and post trade transparency of each system permit a more efficient sorting of interdealer trades than if there were just one system our evidence comes from detailed data on where london dealers chose to place interdealer trades contrary to intuition we show that uninformed interdealer trades as measured by subsequent price impact tend to migrate to third party brokered systems where trade is anonymous by contrast informed interdealer trades tend to migrate to the direct nonanonymous public market additionally we show that this distribution of trades is supported by differences in the price improvement dealers receive in the direct and brokered markets our findings have implications for three strands of the market microstructure literature first they contribute to our understanding of the importance of anonymity and transparency in securities trading most theoretical models of the effects of anonymity and transparency predict that anonymous trading systems will attract more informed trades

risk allocation and inter dealer trading this paper contrasts an auction and a dealership market in the latter parallel to the public market market makers are allowed to trade with each other in a separate inter dealer market since market makers are assumed to be risk averse variations in asset holdings induced by trades with outside investors generate portfolio hedging trade we find that the price at which market makers trade with each other in the inter dealer market determines the prices quoted in the public market for outside investors it is shown that an investor gets a better price in the dealership market as long as the market makers and speculators are imperfectly competitive and the delay between executing the customer s order and trading in the inter dealer market is not too large

the welfare cost of inflation in general equilibrium abstract this paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions although individually none of the distortions is very large they combine to yield substantial welfare cost estimates a sustained 4 percent inflation like that experienced in the us since 1983 costs the economy the equivalent of 0 41 percent of output per year when currency is identified as the relevant definition of money and over 1 percent of output per year when m1 is defined as money the results illustrate how the traditional partial equilibrium approach can seriously underestimate the true cost of inflation

the demand for bank reserves and other monetary aggregates the paper starts with haslag s 1998 model of the bank s demand for reserves and reformulates it with a cash in advance approach for both financial intermediary and consumer this gives a demand for a base of cash plus reserves that is not sensitive to who gets the inflation tax transfer it extends the model to formulate a demand for demand deposits yielding an m1 type demand and then includes exchange credit yielding an m2 type demand based on the comparative statics of the model it provides an interpretation of the evidence on monetary aggregates this explanation relies on the nominal interest as well as technology factors of the banking sector e31 e13 o42

measuring the contribution of durable goods to the welfare cost of inflation in this paper we measure the contribution of durable goods to the welfare cost of inflation in the context of an endogenous growth model with durable and nondurable goods where purchases of the latter require only a partial cash payment compared with the former unlike existing measures our proposed welfare measure is computationally efficient and relatively easy to implement we find that durability adds a significant component to the welfare costs of inflation

inflation and financial sector size abstract traditionally the cost of expected inflation has been seen as the shoeleather cost of going to the bank more often this paper focuses on the other side of these transactions i e on the increased production of financial services i construct a model in which households must make purchases either with money or with costly transactions services produced by firms in the financial services sector in the model a higher inflation rate leads households to substitute purchased transactions services for money balances thereby boosting the size of the financial services sector a test of the model using cross sectional data finds that the size of a nation s financial sector is strongly affected by its inflation rate the empirical results provide an alternative way to measure the costs of inflation these costs appear to be large

a simple general equilibrium version of the baumol tobin model this paper presents a simple general equilibrium model that includes optimizing choices of the frequency of trips to the bank the model is used to analyze the effect of inflation on the capital stock the interest elasticity of money demand the optimum quantity of money and the welfare costs of inflationary finance

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

representation voluntary retirement and shirking in the last term there is disagreement over whether or not representatives shirk previous studies however have used raw interest group scores thatdo not allow for accurate comparisons over time i take advantageof recently published indexed ada scores by groseclose levitt andsnyder 1999 that adjust for temporal differences to test forshirking i compare results from adjusted ada scores to poole androsenthal s nominate scores with a simple straightforward test ofdyadic representation i provide additional evidence that shirkingexists among voluntarily retiring members of congress