directed matching and monetary exchange we develop a model of monetary exchange where as in the random matching literature agents trade bilaterally and not through centralized markets rather than assuming they match exogenously and at random however we determine who meets whom as part of the equilibrium we show how to formalize this process of directed matching in dynamic models with double coincidence problems and present several examples and applications that illustrate how the approach can be used in monetary theory some of our results are similar to those in the random matching literature others differ significantly

optimal pricing of intraday liquidity abstract this paper presents a general equilibrium model where intraday liquidity is needed because the timing of payments is uncertain a necessary and sufficient condition for an equilibrium to be efficient is that the nominal intraday interest rate be zero even when the overnight rate is strictly positive because a market for liquidity may not achieve efficiency this creates a role for the central bank i allow for the possibility of moral hazard and study policies commonly used by central banks to reduce their exposure to risk i show collateralized lending achieves the efficient allocation while for certain parameters caps cannot prevent moral hazard

financial development income inequality and the redistributive effects of monetary policy abstract how should financial systems be designed to limit income inequality does the redistributive impact of inflation depend on the extent of financial development should optimal monetary policy vary across countries with different levels of financial development in order to address these questions we develop a monetary growth production model with heterogeneous agents in our economy optimal policy needs to weigh the effects of policy across two groups capital owners and individuals who hold liquid assets in this environment we compare various economies that are identical in every aspect except for their level of financial development interestingly we generally find that economies at the highest stages of financial development economies in which money bonds and claims to capital are traded experience the highest amount of capital formation and social welfare as long as inflation is low yet regardless of the extent of financial development there are generally redistributive consequences from inflation moreover the model tends to predict that economies with relatively small stock markets produce the highest levels of income inequality empirical work examining the role of money growth and the implications of financial development across countries is consistent with predictions from the model

why does overnight liquidity cost more than intraday liquidity abstract in this paper we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design in our environment overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non money holders the low cost of intraday liquidity is explained by the friedman rule the optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment risk sharing during the day

beyond search fiat money in organized exchange am odel offiat money is constructed in which spatial separation and the logistics of communication are made explicit as in search theory but in which exchange is organized by profit seeking business enterprises as in all market economies firms mitigate search costs by opening shops that are easily located the model endogenizes the number of shops and which objects are traded in each shop it permits the double coincidence of wants and deals easily with divisible commodities equilibria may exist in which fiat money is used as a universal medium of exchange when such an equilibrium exists fiat money is essential in the sense that it is the universal medium of exchange in any efficient network of shops the model provides a foundation to cash in advance theory without specifying in advance that one object will be used as the universal medium of exchange

exchange rate regimes banking and the non tradable sector abstract this paper presents a small open economy two good version of the diamond and dybvig model with cash constraints to analyze the implications on banking of different exchange rate regimes and monetary policies i show that fixed exchange rates with a central bank providing liquidity in local currency imply pareto efficiency with conditions for a run equilibrium stronger than in the literature in a flexible exchange rate regime multiple equilibria may not be eliminated in particular for very a expansive monetary policy there exists an equilibrium where a fraction of patient consumers purchases dollars in the interim period which constitutes a partial currency run a dollarized banking system without international short run credit may also implement the efficient allocation under certain conditions

money and loans agents expect to trade with each other infinitely often but face a temporal absence of a coincidence of wants when they meet only loans and or money can facilitate exchange in small close knit economies enduring trade relationships are valued and loans are optimal in larger economies with limited communication information concerning repayment of loans diffuses too slowly to deter agents from reneging unless loans are severely restricted in magnitude money has no such redeemability problems but if clower constraints bind loans help supplement money purchases so that both become essential roles of various institutions and the historical evolution of media of exchange are explained

rural development in the united states connecting theory practice and possibilities rural development in the united states presents a comprehensive evaluation of the economic environmental and political implications of past rural development and a thorough consideration of the directions in which future development efforts should go the authors have assembled the best of what is being thought and done with regard to rural development in the united states and place it in a broad theoretical historical and geographical context the book provides a summary of the key findings in rural development research of the past twenty years an integration of development theory and practical experience a bridge between the related but often isolated disciplines that inform rural development a catalyst for new thinking in the area of rural development analysis of the key economic sectors in rural areas natural resources the service sector elderly services telecommunications manufacturing tourism and high technology it includes important information about how national and international trends affect rural communities and development strategies and will help guide rural economic development policy in the united states during the 1990s and beyond

liquidity risk and banks asset composition implications for monetary policy monetary growth models in which the government is a net debtor demonstrate that inflation adversely affects capital formation through the crowding out effect interestingly the results are at odds with empirical evidence in particular recent studies point to an asymmetric relationship between inflation and the real economy across countries specifically inflation and output are negatively correlated in poor countries in contrast inflation is associated with higher levels of economic activity in advanced economies i present a monetary growth model with public debt where the exposure to risk is inversely related to the level of income in this setting i demonstrate that the effects of monetary policy depend on the level of capital of the economy in poor countries banks portfolios consist primarily of government liabilities therefore a higher rate of money creation inhibits capital formation in these economies in contrast banks devote more resources toward productive uses in advanced countries consequently monetary policy generates a tobin effect

imperfect interbank markets and the lender of last resort abstract this paper presents a monetary model in which interbank markets have limited commitment to contracts limited commitment reduces the proportion of assets that can be used as collateral and thus banks with high liquidity demands face borrowing constraints in interbank markets these constraints can be relieved by the central bank a lender of last resort through the provision of liquidity loans i show that the constrained efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited otherwise a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency

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

one or two monies abstract the set of incentive feasible allocations is examined in a dynamic quasi linear environment where agents lack commitment and have private information over their idiosyncratic characteristics when record keeping is available the first best allocation is implementable in a set of sufficiently patient economies when record keeping is limited to one money this set is strictly smaller except when private information is absent when record keeping is expanded but limited to two monies the set of economies for which the first best is implementable corresponds to that of record keeping even when private information is present we further demonstrate that two monies are a perfect substitute for record keeping

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

even up maintaining relationships abstract when are economic interactions mediated by prices and transfers and when are they mediated by variations in the continuation payoffs within a relationship to address this question we examine a relationship between two players who periodically face opportunities to undertake randomly generated projects that impose a cost on one player and a benefit on the other as well as opportunities to make voluntary transfers to one another we characterize the set of equilibria with particular emphasis on the efficient frontier in the absence of transfers incentives are often created by adjusting the continuation values of the relationship sometimes increasing player 1 s continuation payoff to induce player 1 to accept a particularly costly current project and sometimes increasing player 2 s continuation payoff in contrast once transfers enter the picture continuation payoffs maximize the sum of the two players payoffs no matter how asymmetric the point on the pareto frontier under consideration however transfers can also be relatively rare and in particular can occur less often than the adjustments in continuation values that occur without transfers players thus rely on transfers to create incentives but manage to do so while rarely making transfers

the role of financial sector competition for monetary policy in this paper we examine the impact of competition in the banking industry on financial market activity in particular we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing in addition spatial separation and private information generate a transactions role for money interestingly we demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy under perfect competition higher rates of money growth lead to lower interest rates and a higher volume of lending activity in contrast in a monopoly banking sector money growth restricts the availability of funds and raises the cost of borrowing

monetary fiscal and reserve requirement policy in a simple monetary growth model the authors consider an otherwise conventional monetary growth model in which spatial separation and limited communication create a transactions role for currency and stochastic relocation gives rise to financial intermediaries in this framework they consider how changes in fiscal and monetary policy and in reserve requirements affect inflation capital formation and nominal interest rates there is also considerable scope for multiple equilibria the authors show how reserve requirements that never bind along actual equilibrium paths can play an important role in avoiding undesirable equilibria finally they demonstrate that changes in apparently nonbinding reserve requirements can have significant real effects coauthors are mark g guzman elisabeth huybens and bruce d smith copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

models as economies the distinction between actual economies and stylized general equilibrium models is no t sharp general equilibrium models with such key elements as uncerta inty spatial separation private information limited communication and limited commitment provide a catalogue that one can use to inter pret actual economies further a general equilibrium model can provi de a framework one can use to trace out the logic of some premise for joint economy wide phenomena a web to tie together seemingly unrel ated observations also in tolerating wide variations in environment s general equilibrium models provide laboratories one can use to con duct relatively inexpensive policy experiments copyright 1987 by royal economic society

international aspects of merger policy a survey this paper surveys the literature on merger policy in open economies we first adopt a reduced form approach to derive general insights on the scope for conflict between national antitrust authorities and on the gains from international merger policy coordination taking trade costs as given we use standard oligopoly models to derive conditions on market structure under which underenforcement or overenforcement of national merger policies can arise we then study the interactions between merger policy and trade policy and find that trade liberalization often leads to stricter national merger policies we conclude by discussing empirical evidence on conflict between antitrust authorities

redemption costs and interest rates under the u s national banking system interest rates under the u s national banking system 1863 1914 appear to imply that banks failed to exploit an arbitrage opportunity for two reasons yields on government bonds exceeded the tax rate on note issue by approximately 150 basis points and short term interest rates varied seasonally this paper examines whether note redemption costs can explain observed interest rates we present a model in which redemption costs create a spread between the tax rate on note issue and bond yields and in which temporary seasonal fluctuations in currency demand generate seasonal movements in short term interest rates calibration of the model to actual data lends support to the model s implications further interest rates are shown not to vary seasonally when banks do not incur the costs of note redemption the banking system that existed in the united states between 1863 and 1914 the so called national banking system is unique in u s history under this system private commercial banks national banks were permitted to issue payable on demand liabilities banknotes that were required to be fully collateralized by government bonds and that carried an explicit government guarantee against noteholder loss should the issuing bank fail banks were taxed based on the quantity of their notes in circulation and each bani had to redeem its own notes at par in lawful money specie or greenbacks the national banking system gave rise to a national currency because each bank was required to accept the notes of other national banks at par a bank holding notes issued by another bank could redeem those notes at par in lawful money through redemption centers established by the u s treasury with the costs of redemption borne by the issuing bank during the period of the national banking system observed interest rates were characterized by two features first yields on intermediated government bonds ex

the conduct of monetary policy with a shrinking stock of government debt this article considers the consequences for a central bank of a declining stock of government debt the model has a treasury that taxes spends and issues debt a central bank that conducts open market operations in treasury debt and banks that intermediate private savings it suggests that a sufficiently small stock of debt can put an economy on the pareto inferior side of the seigniorage laffer curve implying unnecessarily high inflation if there is also a primary budget deficit equilibrium might not exist discount window lending is a potentially desirable alternative to open market operations especially if the loans are not subsidized

optimal fiduciary monetary systems abstract in a fiduciary monetary system there is a social agreement to quote prices and denominate financial instruments in terms of a specific paper liability of the government what are the best terms for this paper instrument i investigate a system where the terms involve not only paying market interest rate on the monetary instrument as proposed by many economists earlier but also indexing the returns to the price level the result is a homeostatic monetary system with a highly stable price level in the face of shifts in money demand and other disturbing influences the paper examines the performance of the new fiduciary standard in equilibrium and disequilibrium models

optimal multiperiod contracts and the gain from enduring relationships under private information informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts in an illustrative risk sharing model even relatively short two period contracts can be mutually beneficial if there is private information though one period contracts suffice otherwise further contracts which are pareto optimal relative to the environment and the information structure are defined and partially characterized an example illustrates how otherwise inefficient intertemporal tie ins can be used optimally to mitigate incentive problems the obvious borrowing lending schemes are not private information pareto optimal in these period by period actions are not sufficiently constrained discounting affects the form of the optimal contract but none of these qualitative conclusions

a theory of managed trade this paper proposes a theory that predicts low levels of protection during periods of normal trade volume coupled with episodes of special protection when trade volumes surge this dynamic pattern of protection emerges from a model in which countries choose levels of protection in a repeated game facing volatile trade swings high trade volume leads to a greater incentive to defect unilaterally from cooperative tariff levels therefore as the volume of trade expands the level of protection must rise in a cooperative equilibrium to mitigate the rising trade volume and hold the incentive to defect in check copyright 1990 by american economic association

optimal monetary policy and economic growth abstract a question at the center of many analyses of optimal monetary policy is why do central banks never implement the friedman rule to the list of answers to this question we add neoclassical production specifically the tobin effect as one possible explanation to that end we study an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money we assume a production function with a knowledge externality romer style that nests economies with endogenous growth ak form and those with no long run growth the diamond model the tobin effect is shown to be always operative under crra preferences a mild degree of social increasing returns is sufficient but not necessary for some positive inflation to dominate zero inflation and for the friedman rule to be sub optimal irrespective of the degree of risk aversion

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

economic geography and contemporary rural dynamics an empirical test on some french regions schmitt b 1999 economic geography and contemporary rural dynamics an empirical test on some french regions reg studies 33 697 711 this paper presents an economic geography framework used to account for rural population and employment changes besides agglomerative forces these models introduce factors which induce household or firm dispersion that are identified as operative in rural areas population dispersion can be the outcome of increased urban land rents comparative advantages can affect the location of land related activities technological externalities may lead to the dispersion of specific industrial sectors and job increases attract new residents leading to the dispersion of some firms we show that all these factors do not act at the same level and a distinction can be made between forces acting within labour market areas and those acting between labour market areas a simultaneous equation system is built to model the effect of these forces on population and job changes it dis

the allocation of jurisdiction in international antitrust abstract in this paper we consider the organisation of international antitrust as an issue of institution design which involves a trade off between an inadequate internalisation of external effects across jurisdictions and the risk of capture in a centralised agency we focus on the first element of the trade off and on merger control we first point out that the current framework of public international law allows for wide discretion in the assertion of jurisdiction we then consider various allocations of jurisdictions in a stylised model of international merger control which attempts to capture the essential features of the objectives being pursued and of the procedures being implemented in the major jurisdictions we find that in this framework much of the scope for conflict disappears the fact that conflicts actually often arise in global industries must then be associated with the pursuit of objectives that antitrust authorities are not supposed to pursue we also find that the allocation of jurisdiction matters surprisingly little for the final outcome

liquidity risk and financial competition implications for asset prices and monetary policy abstract this paper studies the implications of banking competition for capital markets and monetary policy in particular i develop a two sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential banks insure depositors against such risk and invest in the economy s assets in this setting i compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector unlike previous work banks can have market power in both deposits and capital markets compared to a perfectly competitive financial sector i demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation assets prices and the degree of risk sharing furthermore multiple steady states can emerge and the economy becomes subject to poverty traps more importantly market power in financial markets may overturn the tobin effect present under a perfectly competitive financial sector this necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

economic organization with limited communication this paper presents formal stylized representations of communication accounting systems oral assignment portable object written message and telecommunication systems are considered the environments that allow this formalization are characterized by spatial separation private information and a need to keep track of past actions transfers and shocks in environments that have spatial separation and private information beneficial multilateral arrangements can depend critically on agents ability to communicate to one another values of contemporary shocks and to keep track of histories of past transfers or past announced shocks this paper formalizes this idea and focuses on com

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

dollarization and the integration of international capital markets a contribution to the theory of optimal currency areas we consider the following questions 1 does the adoption of a common currency either reduce or enhance the scope for endogenously generated volatility to emerge 2 does the adoption of a common currency reduce or enhance the scope for indeterminacies to arise 3 is there a welfare justification for the adoption of a single currency 4 what are the fiscal consequences of a move to a single currency we address these issues in a two country model with both a transactions role and a store of value role for currency moreover banks arise endogenously in each country in this context we compare the determination and characteristics of an equilibrium in each of two situations one where each country issues its own currency and one where one of the countries adopts the currency of the other country the consequences of this dollarization depend very much on the degree of integration of the capital markets of the two countries when their credit markets are poorly integrated a regime with two currencies displays a unique stationary equilibrium dollarization under very weak conditions gives rise to a continuum of equilibrium paths these may exhibit oscillation hence when capital markets are segmented dollarization may be a source of indeterminacy and endogenously arising volatility in addition the welfare justifications for dollarization are weak and dollarization my have adverse fiscal consequences when credit markets are fully integrated internationally the results are substantially different in that case both regimes display a unique equilibrium path hence in the presence of unrestricted international capital flows the adoption of a common currency does

transferability finality and debt settlement abstract payment fundamental to exchange in a decentralized economy often takes the form of transfers of inside money i e specialized forms of debt associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts and the allocation of the ensuing risks in this paper we develop a model of debt as inside money in a simple mechanism design framework we show that transferable debt that can be used to settle other debt obligations with finality can be a welfare improving arrangement in the presence of limited enforcement powers transferable debt has two advantages over simple chains of credit it allows for removal of less than perfectly reliable agents from the chain in a timely fashion and it allows agents to direct payments to the proper party without direct communication with other members of the credit chain

crises in competitive versus monopolistic banking systems we study a monetary general equilibrium economy in which banks exist because they provide inter temporal insurance to risk averse depositors a banking crisis is defined as a case in which banks exhaust their reserve assets this may but need not be associated with liquidation of a storage asset when such liquidation does occur the result is a real resource loss to the economy and we label this a costly banking crisis there is a monetary authority whose only policy choice is the long run constant rate of growth of the money supply and thus the rate of inflation under different model specifications the banking industry is either a monopoly bank or a competitive banking industry it is shown that the probability of a banking crisis may be higher either under competition or under monopoly this is shown to depend on the rate of inflation in particular if the nominal rate of interest rate of inflation is below above some threshold a monopolistic banking system will always result in a higher lower crisis probability thus the relative crisis probabilities under the two banking systems cannot be determined independently of the conduct of monetary policy we further show that the probability of a costly banking crisis is always higher under competition than under monopoly however this apparent advantage of the monopoly banking is strictly due to the fact that it provides relatively less valuable inter temporal insurance

money banking and capital formation we consider a monetary growth model in which banks arise to provide liquidity in addition there is a government that issues not only money but interest bearing bonds these bonds compete with capital in private portfolios when the government fixes a constant growth rate for the money stock we show that there can exist multiple nontrivial monetary steady states one of these steady states is a saddle while the other can be a sink moreover paths approaching a steady state can display damped endogenous fluctuations and development trap phenomena are common across different steady states low capital stocks are associated with high nominal interest rates the latter signal the comparative inefficiency of the financial system also increases in the steady state inflation rate can easily reduce the steady state capital stock journal of economic literatureclassification numbers e13 e44 e50 g20 o16

introduction to monetary and financial arrangements abstract recent years have seen major innovations in the nature of monetary banking and payment arrangements these innovations which are certain to continue into the foreseeable future will have huge implications for the conduct of monetary policy for the regulation of banking and for the design of payment systems indeed central banks now need to think about the conduct of monetary policy in environments where the evolution of banking and payments systems already has implied and will continue to imply a declining demand for their liabilities central banks also need to think about the conduct of monetary policy in increasingly global markets and in a context where the number of currencies is shrinking as different nations abandon their own monies in favor of the dollar or the euro and at least in the united states all legal impediments to the issue of currency substitutes by private agents have been repealed this has occurred at the same time that developments in communications and record keeping technologies have made it feasible for agents to issue various forms of electronic currency substitutes what would the widespread issue of private possibly electronic currency substitutes imply for price level and interest rate determination or for the conduct of monetary policy in general in addition the increasing frequency and severity of financial crises around the globe and the increasing exposure of economies like the u s to external events raise issues about the appropriate roles for national central banks and the appropriate roles for international agencies like the imf and recent changes in u s banking legislation will force a rethinking of how the supervision and regulation of the banking system should be conducted and of how far the safety net created by deposit insurance provision and lender of last resort services should be extended these issues will become particularly vexing as the scope of activities conducted by banks increases and as the notion of a bank becomes more amorphous the papers in this issue are intended to provide frameworks for advancing research on these and other topics journal of economic literature classification numbers e0 e5 g0

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

multimarket contact and collusive behavior traditional analyses of industrial behavior typically link the exercise of market power in an industry to internalfeatures such as demand conditions concentration and barriers to entry nevertheless some economists have remained concerned that external factors such as contact across markets may also play a significant role in determining the level of competitiveness in any particular industry in this article we examine the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition we isolate conditions under which multimarket contact facilitates collusion and show that these collusive gains are achieved through modes of behavior that have been identified in previous empirical studies of multimarketfirms

private and public circulating liabilities abstract legal and technological changes have made private banknote issue or its electronic equivalent possible we construct a model where private liabilities circulate either by themselves or alongside outside money we provide results on existence and multiplicity of equilibria and characterize dynamics near steady states our results support friedman in that circulating private liabilities are associated with endogenous volatility but implementing friedman s advice the government should ban private currency substitutes causes significant inefficiency the proposal of hayek that the government should leave currency creation to the market also is often constrained suboptimal both public and private circulating liabilities are required for optimality journal of economic literature classification numbers e3 e4 e5

money and dynamic credit arrangements with private information abstract we construct a model with private information in which consumers write dynamic contracts with financial intermediaries a role for money arises due to random limited participation of consumers in the financial market without defection constraints a friedman rule is optimal the mean and variability of wealth tend to fall with inflation in the steady state and the welfare effects of inflation are very small with defection constraints the effects of inflation on the distribution of welfare and consumption are large but the effect on average welfare is still small the relaxation of defection constraints resulting from higher inflation can cause a substantial increase in the real interest rate journal of economic literature classification numbers d8 e4 g2

comments on howitt s beyond search fiat money in organized exchange studying efficient ways to organize exchange is one of the objectives of monetary theory shapley and shubik 1977 were among the first to pose a static model that organized multilateral exchange at trading posts between agents who have endowments of goods that may differ from what they prefer to consume in this issue howitt 2005 studies a dynamic environment with some of the explicit spatial information and enforcement frictions employed in search models of money e g kiyotaki and wright 1993 but which allows directed matching to trading posts or shops howitt studies the conditions under which a fiat medium of exchange dominates an alternative method of exchange barter at shops trading posts which are restricted to exchange in only two goods mitigate search costs between households but are themselves costly to operate there are n nonstorable goods in his economy and n n 1 household types i e each household is endowed with one of the n goods but desires one of the other n 1 goods in any active symmetric equilibrium the minimum number of barter shops that must open is n n 1 2 whereas only n monetary shops are necessary since a merchant incurs a fixed cost to run a shop it is then clear that monetary exchange economizes on such costs on the other hand for monetary exchange to take place in this spatial setting consumption this period must be paid for with money earned last period which is not necessary for barter howitt shows proposition 4 that if a monetary equilibrium exists then it is pareto efficient since it minimizes the fixed costs associated with multilateral exchange and bilateral exchange is ruled out by assumptions in the environment conditions for the existence of a monetary equilibrium in the presence of barter alternatives which depend on the size of the fixed costs and the household s discount factor are provided in proposition 3

optimal monetary rules under persistent shocks abstract the tug o war for supremacy between inflation targeting and monetary targeting is a classic yet timely topic in monetary economics in this paper we revisit this issue within the context of a pure exchange overlapping generations model in which spatial separation and random relocation create an endogenous demand for money we study ar 1 shocks to both real output and the real interest rate irrespective of the nature of the shocks the optimal inflation target is always positive under monetary targeting shocks to output necessitate negative money growth rates for shocks to real interest rates money growth rates may be either positive or negative depending on the elasticity of consumption substitution also for output shocks monetary targeting welfare dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk in sharp contrast for shocks to the real interest rate we prove that monetary targeting and inflation targeting are welfare equivalent only in the limit as the shocks become i i d the upshot is that persistence of the underlying fundamental uncertainty matters depending on the nature of the shock policy responses need to be either more or less aggressive as persistence increases

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

merger policy in open economies abstract we extend farrell and shapiro s 1990 analysis of horizontal mergers to the case of an open economy we show how the rules for approving a merger ought to be adapted to account for the fact that the regulator is only concerned with domestic welfare that is ignores the effect of the merger on foreign firms and consumers we also explore the consequences of this externality in a model of a single market which includes consumers and producers of different countries in particular we provide conditions under which a decentralized process of evaluating merger proposals a la farrell shapiro can survive the externality mentioned above

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

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

money banking and the determination of real and nominal exchange rates the authors consider a model where spatial separation limited communication and stochastic relocation create a role for banks and country specific currencies the same factors also permit a deviation from the law of one price the authors examine how monetary policies influence real and nominal rates of exchange and real and nominal rates of interest under both fixed and flexible exchange rate regimes they also demonstrate that both regimes are characterized by an indeterminacy of both the real and the nominal rate of exchange copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

intermediaries and payments instruments abstract we study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium we show that with arbitrarily small transactions costs only the liabilities of intermediaries will circulate and not those of other private sector agents therefore our model connects intermediation activity with the issuance of payments media a connection that has not been made in earlier literature we use our model to suggest a resolution of the banknote underissue puzzle of cagan in d carson ed banking and monetary studies richard d irwin publishing homewood il 1963

monetary stability and liquidity crises the role of the lender of last resort we study an economy where agents are subject to liquidity demand shocks and banks arise endogenously to insure consumers against these shocks in this environment we evaluate the desirability of a lender of last resort who can provide liquidity loans to banks in distress in the absence of a lender of last resort the economy has a unique stationary equilibrium the introduction of unlimited and costless lender of last resort services allows the economy to achieve a steady state allocation that is pareto optimal however this economy also displays a continuum of hyperin ationary equilibria we then explore restrictions on the provision of lender of last resort services that rule out such monetary instability while preserving some of the e ciency obtained by unrestricted lender of last resort services when the lender of last resort charges an interest rate on liquidity loans the economy has a unique steady state equilibrium and when the interest rate charged is high enough no hyperin ationary equilibria arise finally when the lender of last resort faces an upper bound on loanable funds there is again a unique long run equilibrium and when the upper bound on loanable funds is small enough hyperin ationary equilibria are ruled out

incomplete record keeping and optimal payment arrangements abstract we study a random matching absence of double coincidence environment in which people cannot precommit and in which there are two imperfect ways to keep track of what other people have done in the past money and a public record of all past actions that is updated with an average lag we study how the magnitude of that lag affects the allocations that are optimal from among allocations that are stationary and feasible and that satisfy incentive constraints which arise from the absence of commitment and the imperfect ways of keeping track of what others have done in the past journal of economic literature classification numbers e40 c73 d82

on interdependent supergames multimarket contact concavity and collusion abstract following bernheim and whinston 1990 this paper addresses the effects of multimarket contact on firms ability to collude real world imperfections tend to make firms objective function strictly concave and market supergames interdependent firms payoffs in each market depend on how they are doing in others then multimarket contact always facilitates collusion it may even make collusion sustainable in all markets when otherwise it would not be sustainable in any the effects of conglomeration are discussed multigame contact is shown to facilitate cooperation in supergames other than oligopolies as long as agents objective function is submodular in material payoffs journal of economic literature classification numbers c72 d43 l13 l21

global dynamics in macroeconomics an overlapping generations example abstract in this paper we present some techniques used in the dynamical systems literature that let us characterize the stable and unstable manifolds of a given dynamical system as a result we can study how an economy behaves as it moves far away from the steady state in an environment where economic agents do not face uncertainty the underlying idea behind these methods is to compute the manifolds nonlocally by exploiting an invariance condition that analytically describes these manifolds in order to illustrate these techniques we present a general equilibrium model under two different policy regimes demonstrating that local and global dynamics of an economic system can be substantially different

the two money theorem in this article i consider environments in which all shocks have finite support and any transfer of resources is ex post voluntary consider an allocation that is achievable when potential trading partners know each others histories the one money theorem says that the allocation is achievable using only one money if that money is divisible and money holdings are observable the two money theorem says that the allocation is achievable using two divisible monies even if money holdings are concealable copyright economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimal choice of monetary policy instruments in an economy with real and liquidity shocks faced with real and nominal shocks what should a benevolent central bank do x the money growth rate or target the in ation rate in this paper we make a rst attempt at studying the optimal choice of monetary policy instruments in a micro founded model of money speci cally we produce an overlapping generations economy in which limited communication and stochastic relocation creates an endogenous transactions role for at money we nd that when the shocks are real welfare is higher under money growth targeting when the shocks are nominal and not large welfare is higher under in ation rate targeting while under in ation rate targeting it is always optimal to pursue an expansionary policy it is never optimal to do so under money growth targeting

the seasonality of banking failures during the late national banking era in this paper we expand previous models with banks and money and explore the consequences of seasonals in the banking system we find that when bank failures occur not all of them have associated large output losses and currency premiums exist we show that the most important sources of seasonal fluctuations for the banking system are those related to the return on farming activities and the scrapping value of the initial investment finally this model is consistent with the notion that the treasury is more likely to accommodate the money market in periods where the liquidity needs

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

core periphery economic linkage a measure of spread and possible backwash effects for the washington economy many questions regarding economic development should be viewed in a regional core periphery framework a core periphery input output model of the washington state economy was constructed the core region supplied the periphery with higher order services while the periphery furnished the core with natural resource based commodities weak backward linkages from major core industries to the periphery lead to rejection of the growth pole theory tenet that core growth supports periphery growth economic growth in the periphery was felt more strongly in the core because periphery sectors with strong within region effects generally had strong impacts in the core

specialization and diversification in a system of cities abstract when do cities specialize in production and when do they diversify when do both specialized cities and diversified cities coexist what determines the size and number of cities of different types in an economy these questions are addressed in a general equilibrium model of a closed economy consisting of a system of cities the economy produces two goods which are traded within the system at no transportation costs in the context of this model the factor which leads to the formation of specialized cities is internal scale economies due to the existence of fixed cost in production whereas the reason for the formation of diversified cities is the existence of economies of joint production i e economies of scope the model presented generates three possible equilibrium configurations 1 pure specialization in which each city specialized in the production of one good 2 pure diversification in which all cities in the economy produce both goods 3 mixed system in which specialized and diversified cities coexist in the economy the conditions under which each configuration emerges are identified thus the model represents an explanation of urban hierarchy in spatial economies

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

liquidity risk economic development and the effects of monetary policy abstract empirical evidence indicates that monetary policy is not super neutral in many countries in particular in high inflation economies inflation is negatively related to economic activity by comparison inflation may be positively correlated with output in low inflation countries we present a neoclassical growth model with money in which the incidence of liquidity risk is inversely related to aggregate capital formation interestingly there may be multiple monetary steady states where the effects of monetary policy vary in poor economies the financial system is highly distorted and higher rates of money growth are associated with less capital formation in contrast in advanced economies a tobin effect is observed since inflation exacerbates distortions from a coordination failure in the low capital steady state individuals become much more exposed to liquidity risk consequently optimal monetary policy depends on the level of development

the size distribution of the banking sector and the effects of monetary policy abstract in recent years the industrial organization of the banking system has received a large amount of attention in particular it is generally viewed that the size distribution of the banking sector has changed where it is dominated by a small number of large institutions in this paper we develop a model of imperfectly competitive banks that differ in terms of the size of their deposit base such differences are important for aggregate credit market activity and the effects of monetary policy notably we explain how the optimal size distribution of the banking system involves trade offs from distortions in credit markets due to imperfect competition across banking markets second the effects of monetary policy on credit market activity are weaker in an economy dominated by a small number of large banks empirical analysis examining the role of concentration among the current members of the european monetary union is consistent with the predictions of the model

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

monetary policy and banking structure in this paper i examine the differences in optimal monetary policy in various banking systems in particular i compare two monetary economies one with a competitive banking system and the other with a monopolistic one in addition the optimality of the discount window policy is considered it is shown that the friedman rule is the optimal monetary policy in a monopolistic banking economy and the zero inflation policy is optimal in a competitive banking economy under appropriate parameters in addition the combination of the friedman rule and the discount window policy can achieve efficient allocation in both banking systems

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

the evolution of cash transactions some implications for monetary policy this paper considers the implications for monetary policy of a decreasing demand for outside money it finds that even perpetual declines in the demand for base money pose no threat to the traditional methods employed for conducting monetary policy the effects of such reductions in the demand for central bank liabilities however do depend on how monetary policy is conducted four monetary policy regimes are analyzed with a policy of nominal interest rate targeting a secular decline in the volume of cash transactions unambiguously leads to accelerating inflation a policy of maintaining a fixed composition of government liabilities leads to accelerating decelerating inflation if agents have sufficiently high low levels of risk aversion inflation targeting produces falling nominal and real interest rates while a policy of fixing the rate of money growth can easily lead to indeterminacy and endogenous oscillation in interest rates it is argued that a policy of fixing the composition of government liabilities has several advantages if it is known that agents are not too risk averse and that the asymptotic demand for base money is small if this information is not known then interest rate or inflation targeting have an advantage because their consequences are not sensitive to such environmental features

incentives communication and payment instruments abstract alternative payment instruments are studied in an economy with private information delayed communication and limited commitment attention is restricted to checks and bank drafts which differ in resource cost and communication characteristics checks are less costly but settlement delays create a limited commitment constraint we find that drafts dominate at low wealths and checks at higher wealths applications to 19th century and modern payment systems are discussed

the value of inside and outside money abstract we study dynamic economies in which agents may have incentives to hold both privately issued a k a inside and publicly issued a k a outside circulating liabilities as part of an equilibrium our analysis emphasizes spatial separation and limited communication as frictions that motivate monetary exchange we isolate conditions under which a combination of inside and outside money does and does not allow the economy to achieve a first best allocation of resources we also study the extent to which the use of private circulating liabilities alone or the use of public circulating liabilities alone can address the frictions that lead to monetary exchange

information constrained insurance the revelation principle extended abstract private information induced incentive constraints can cause allocations to diverge from full information optimal allocations often in the direction of limited insurance but can bring unanticipated anomalies related plausible contract exclusion restrictions can be damaging in welfare terms more generally private information optimal allocations can be sensitive to the information structure suggesting that the latter be specified with an eye toward realism as well as tractability in an effort to make tractability less of a constraint the paper shows how two apparently difficult information structures a costly state verification environment and a multiperiod multilateral private information environment can be handled theoretically by revelation principle methods the paper also shows how solutions can be generated numerically

sectoral shifts labor market sorting and aggregate fluctuations a model of sectoral reallocation is constructed where intersectoral friction is not caused by search or mobility costs instead a sectoral disturbance has a negative effect on production possibilities because it reduces the value of previous sorting in the labor market in equilibrium a measure of sectoral dispersion is positively correlated with the unemployment rate an increase in the incidence of sectoral disturbances increases unemployment at cyclical peaks and at cyclical troughs copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

an equilibrium approach to international merger policy i treat international merger policy as a repeated veto game i show that there exists a unique efficient equilibrium within a particular class of trigger strategy equilibria i then consider a series of comparative statics and extensions a if for some exogenous reason one of the countries becomes more lenient towards mergers than the other country becomes more lenient as well b merger remedies increase the probability that a merger is approved and increase total welfare c the effects of a merger wave are magnified by the equilibrium approval policy d 2005 elsevier b v all rights reserved jel classification f0 l4

sub optimality of the friedman rule in townsend s turnpike and stochastic relocation models of money do finite lives and initial dates matter abstract the friedman rule a widely studied prescription for monetary policy is optimal in townsend s turnpike model of money it is not so in the overlapping generations version of his stochastic relocation model of money we investigate these monetary models in the light of this disparity to this end we create a modified version of the turnpike model that generates the same stationary monetary equilibria as does the two period overlapping generations model with random relocation we exploit this equivalence to explain the aforementioned disparity we also discuss the importance of whether or not the economy has an initial date

dollarization and the inflation threshold this paper analyzes the relationship among inflation dollarization financial intermediation and real activity empirical evidence suggests non linearity in the eects of inflation on financial intermediation and real activity i e the existence of an inflation threshold evidence also suggests that one way in which inflation aects financial intermediation in high inflation economies is through the substitution of dollars under the mattress for savings in domestic banks our model captures these empirical regularities inflation and real activity are positively related at low levels of inflation when the inflation rate exceeds certain threshold however agents substitute in their portfolios dollars a non productive asset of constant value that also provides liquidity services for deposits issued by domestic banks this substitution reduces the scale of financial intermediation and the capital investment in the economy as a consequence at high levels of inflation the levels of capital stock and output become negatively related to the inflation rate