optimal consumption portfolio policies a convergence from discrete to continuous time models abstract we establish a convergence of optimal intertemporal consumption and portfolio policies from a sequence of discrete time multivariate and multinomial models to a continuous time multi dimensional diffusion model

optimal consumption and investment with transaction costs and multiple risky assets we consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion cara investor who faces fixed and proportional transaction costs when trading multiple risky assets we show that when asset returns are uncorrelated the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds to trade to the corresponding optimal targets an extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature this paper studies the optimal intertemporal consumption and investment policy of an investor with a constant absolute risk aversion cara preference and an infinite horizon the investor can trade in one risk free asset and n 1 risky assets in contrast to the standard setting the investor faces both fixed and proportional transaction costs in trading any of these risky assets in the absence of transaction costs and when risky asset prices follow geometric brownian motions the optimal investment policy is to keep a constant dollar amount in each risky asset as shown by merton 1971 this trading strategy requires continuous trading in all the risky assets in addition the optimal consumption is affine in the total wealth in the presence of transaction costs however trading continuously in a risky asset would incur infinite transaction costs therefore risky assets are traded only infrequently in this case the literature on optimal consumption and investment with multiple risky assets subject to transaction costs is limited leland 2000 examines a multiasset investment fund that is subject to transaction costs and capital gains taxes under the assumption that the fund has an exogenous target for each risky asset he develops a relatively simple numerical procedure to compute the no transaction region akian menaldi and sulem 1996 consider an optimal consumption and investment problem with proportional transaction costs for

the impact of technological change on the currency behavior of households an empirical cross section study the purpose of this article is to determine the impact of adoption of new technology atms by households on their behavior in holding currency inventories previous studies hypothesize that households respond to the availibility of atms by reducing their currency inventories to test this hypothesis data from two large household surveys are utilized it is shown that the use of technology has a substantial impact on the currency inventories held by households copyright 1994 by ohio state university press

portfolio choice under transitory price impact abstract we consider a portfolio optimization problem for a short term investor who faces an illiquid stock market the illiquidity of this market results from a transitory price impact that is captured by the transaction costs that are convex in the number of shares traded by an investor the linear component in these costs defines a no trading zone while the nonlinear component does not allow trading the stock at an arbitrary rate the portfolio choice problem is solved when the stock path is continuous and when the stock may crash we find that an economy could be in states where the conditional liquidity premium is of the same order of magnitude as the historical risk premium of the stock market if the illiquid stock undergoes crashes then in many states an investor demands a premium for crashes that is much higher than that in the liquid market finally we study the shape of the no trading zone when the nonlinearity in the transitory price impact is strong or moderate we find that this shape is significantly different from that when the transitory price impact is linear

should the federal reserve pay competitive interest on reserves in 2008 the federal reserve began paying interest on reserves how should the fed use this new policy instrument as the fed reduces its balance sheet should it continue to satiate reserve demand and pay competitive interest on reserves here we argue that this may be an inefficient use of the new policy instrument using a standard dynamic stochastic general equilibrium model dsge augmented to include a banking sector and an interbank market our benchmark calibration implies an optimal tax on reserves of about 20 to 40 basis points in the steady state and a fluctuating tax rate in response to shocks

instability of the u s money demand function this paper surveys the two major episodes of instability of the u s money demand function known respectively as the mystery of missing money and the great velocity decline it also assesses the recent literature on open economy money demand models and their usefulness in explaining the puzzling behavior of money demand manifested shortly after the transition to floating exchange rates copyright 1991 by blackwell publishers ltd

time to build and capacity choice abstract this paper studies how demand uncertainty and time to build interact in affecting irreversible investment activity using impulse control methods we find the optimal timing and size of investment for a firm such as an electric utility that considers expanding its capacity in order to meet an uncertain demand when the construction lag is short uncertainty delays investment while increasing its size once it takes place however for comparatively long and realistic times to build the sensitivity to uncertainty is drastically reduced and the results can even be reversed more uncertainty can speed up investment and reduce its size

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

overdrafts and the demand for money this paper presents a stochastic analysis of the demand for interest bearing money such as now accounts when overdrafting is allowed at some penalty rate it is shown that the short run interest elasticity of money demand is probably large in absolute value and negative but in the long run this elasticity is much smaller or even positive it is also argued that current definitions of the monetary aggregates which exclude unused credit may spuriously generate instability of money demand an alternative definition of money stock is suggested and seems to be conceptually more satisfying copyright 1990 by american economic association

the future of branch cash holdings management is here new markov chains abstract liquidity management is one of the main concerns of the banking sector since it provides control in key areas such as treasury management working capital financing and business valuation under the assumption that branch efficiency makes a fundamental contribution towards the effective performance of the global banking institution this paper provides a new methodology markov chains by blocks in order to achieve knowledge on the branch cash holdings conditions which ensure optimal cash holdings recurring properties which help to better predict cash holdings shifts and the study of the branch cash holdings steady states using ergodic theory these findings will let bank managers know the time validity of the current cash holdings this is a crucial advantage to ensure efficient cash management while helping keep banking institutions on sound financial footing by guaranteeing the compulsory by law safety cushion it also allows bank managers to make sound decisions upon fund investments this incipient mathematical framework based on the re definition of classical theory on markov chains provides an alternative standpoint which may also apply to those dynamical systems which can be categorized into groups of similar features

optimal inattention to the stock market with information costs and transactions costs recurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values when consumers observe the value of their wealth they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds transfers of funds are subject to a transactions cost that reduces wealth and consists of two components one is proportional to the amount of assets transferred and the other is a fixed resource cost because it is costly to transfer funds the consumer may choose not to transfer any funds on a particular observation date in general the optimal adjustment rule including the size and direction of transfers and the time of the next observation is state dependent surprisingly unless the fixed resource cost of transferring funds is large the consumer s optimal behavior eventually evolves to a situation with a purely time dependent rule with a constant interval of time between observations this interval of time can be substantial even for tiny observation costs when this situation is attained the standard consumption euler equation holds between observation dates if the consumer is sufficiently risk averse

cash burns an inventory model with a cash credit choice abstract a dynamic cash management model is analysed where agents choose whether to pay with cash or credit at every point in time in the model credit usage depends on the current stock of cash a novel result that matches recent micro evidence on households payment choices the optimality of such a decision rule is novel and cannot be obtained by models where cash credit decisions are made at the beginning of each period we discuss how to use the model to account for cross country evidence on the intensity of credit usage and for several statistics on the size and frequency of cash withdrawals the model is used to assess the household s welfare cost of phasing out cash

price barriers and the dynamics of asset prices in equilibrium a price barrier is a price level at which a large number of investors either buy or sell securities we analyze the dynamics of asset prices in an economy in which price barriers exist our analysis suggests that asset prices and volatility can exhibit jumps when the price barrier is reached interestingly the market s anticipation of future trades can influence prices in the opposite direction from what one might expect for example when multiple barriers exist stock prices can be inflated rather than depressed in the proximity of an anticipated stock sale

financial innovation and the transactions demand for cash we document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives we extend the baumol tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost this modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology such as the increasing diffusion of bank branches and atm terminals we characterize the solution of the model which qualitatively reproduces several empirical patterns we estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns the estimates are used to quantify the expenditure and interest rate elasticity of money demand the impact of financial innovation on money demand the welfare cost of inflation and the benefit of atm ownership

short term gdp forecasting with a mixed frequency dynamic factor model with stochastic volatility in this article we develop a mixed frequency dynamic factor model in which the disturbances of both the latent common factor and of the idiosyncratic components have time varying stochastic volatilities we use the model to investigate business cycle dynamics in the euro area and present three sets of empirical results first we evaluate the impact of macroeconomic releases on point and density forecast accuracy and on the width of forecast intervals second we show how our setup allows to make a probabilistic assessment of the contribution of releases to forecast revisions third we examine point and density out of sample forecast accuracy we find that introducing stochastic volatility in the model contributes to an improvement in both point and density forecast accuracy supplementary materials for this article are available online

the problem of global environmental protection what distinguishes global common property problems and global unidirectional externalities from the ones that arise under a single jurisdiction is that there is no global authority empowered to intervene and regulate use of global environmental resources cooperation is needed the paper discusses when cooperation is most needed and how it might be obtained cooperation might emerge from a noncooperative setting if supergames are played if the actions of any one country are explicitly contingent on the actions undertaken by other countries or if moral concerns lead countries to consider the consequences of their actions for others cooperation emerges in an explicit though limited form when countries commit to regulate themselves in signing international agreements in these cases the signatories cooperate but the agreements are self enforcing an attempt is made to relate these theoretical concepts to the practice of global environmental protection copyright 1990 by oxford university press

asset price dynamics and infrequent feedback trades this article combines the continuous arrival of information with the infrequency of trades and investigates the effects on asset price dynamics of positive and negative feedback trading specifically we model an economy where stocks and bonds are traded by two types of agents speculators who maximize expected utility and feedback traders who mechanically respond to price changes and infrequently submit market orders we show that positive feedback strategies increase the volatility of stock returns and the response of stock prices to dividend news conversely the presence of negative feedback traders makes stock returns less volatile and prices less responsive to dividends

the optimal mix of taxes on money consumption and income abstract we determine the optimal combination of taxes on money consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes we show that the optimal policy does not tax money regardless of whether the government can use as alternative fiscal instruments an income tax a consumption tax or the two taxes jointly these results are at odds with recent literature we argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

the demand for money financial innovation and the welfare cost of inflation an analysis with household data we use microeconomic data on households to estimate the parameters of the demand for currency derived from a generalized baumol tobin model our data set contains information on average currency deposits and other interest bearing assets the number of trips to the bank the size of withdrawals and ownership and use of atm cards we model the demand for currency accounting for adoption of new transaction technologies and the decision to hold interest bearing assets the interest rate and expenditure flow elasticities of the demand for currency are close to the theoretical values implied by standard inventory models however we find significant differences between individuals with an atm card and those without the estimates of the demand for currency allow us to calculate a measure of the welfare cost of inflation analogous to bailey s triangle but based on a rigorous microeconometric framework the welfare cost of inflation varies considerably within the population but never turns out to be very lar

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

inference in cointegrating models uk m1 revisited the paper addresses the practical determination of cointegration rank this is difficult for many reasons deterministic terms play a crucial role in limiting distributions and systems may not be formulated to ensure similarity to nuisance parameters finite sample critical values may differ from asymptotic equivalents dummy variables alter critical values often greatly multiple cointegration vectors must be identified to allow inference the data may be 1 2 rather than 1 1 altering distributions and conditioning must be done with care these issues are illustrated by an empirical application of multivariate cointegration analysis to a small model of narrow money prices output and interest rates in the uk copyright 1998 by blackwell publishers ltd

residential energy demand for space heating in the nordic countries accounting for interfuel substitution abstract reliable estimation of fuel consumption in residential sector is crucial for the future development of fuel supply system three approaches are compared in this study to capture climate impact as well as and interfuel substitution between fuels on residential fuel consumption for space heating in the nordic countries the first approach aims at directly estimating the demand for each energy carrier as a function of explanatory variables including heating degree days fuels price and gdp per capita the second approach is a two stage model combing an econometric model for total energy use for space heating and the market share for energy carriers based on cross price elasticities while in the third approach a set of simultaneous equations models were estimated based on the results of the mean average error and root mean square error criteria for three approaches across the nordic countries it was found that the second and third approaches were able to capture the complementary and substitution effects between fuels this finding confirms our hypothesis that the interfuel substitution is a key factor for estimating changes in fuel demand and should be accounted for when residential energy demand is projected the results additionally have important implications for climate change policy by exploring the impact of fuel price on residential energy demand for space heating

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

the demand of liquid assets with uncertain lumpy expenditures abstract we consider an inventory model for a liquid asset where the per period net expenditures have two components one that is frequent and small and another that is infrequent and large we give a theoretical characterization of the optimal management of liquid asset as well as of the implied observable statistics we use our characterization to interpret some aspects of households currency management in austria as well as the management of demand deposits by a large sample of italian investors

on the instability of long run money demand and the welfare cost of inflation in the united states we evaluate the policy implications of measuring the welfare cost of inflation accounting for instabilities in the long run money demand for the u s over the period 1900 2013 we extend the analysis and reassess the results reported in lucas 2000 and ireland 2009 also considering the recent theoretical contributions of lucas and nicolini 2015 and berentsen et al 2015 breaks in the long run money demand give rise to regime dependent welfare cost estimates we find that the welfare cost is about 0 1 of annual income over 1976 2013 as compared to 0 8 over 1945 1975 overall these values are substantially lower than those reported in the literature

relaxing the cash in advance constraint at a fixed cost are simple trigger target portfolio rules optimal this paper studies the microeconomic foundations of trigger target rules of portfolio demand such as the demand for money it allows an agent to relax her cash in advance constraint by paying a fixed transactions cost to move between money and the interest bearing asset an example is generated where the potential of being liquidity constrained in order to avoid incurring the transactions cost can cause excessive nonconcavities of the value function in a dynamic program such that simple trigger target rules of money demand are suboptimal

financial innovations money demand and the welfare cost of inflation in the 1990s the empirical relation between money demand and interest rates began to fall apart we analyze to what extent improved access to money markets can explain this break down for this purpose we construct a microfounded monetary model with a money market which provides insurance against liquidity shocks by offering short term loans and by paying interest on money market deposits we calibrate the model to u s data and find that improved access to money markets can explain the behavior of money demand very well furthermore we show that by allocating money more efficiently better access to money markets decrease the welfare cost of inflation substantially

a sparsity based model of bounded rationality this article defines and analyzes a sparse max operator which is a less than fully attentive and rational version of the traditional max operator the agent builds as economists do a simplified model of the world which is sparse considering only the variables of first order importance his stylized model and his resulting choices both derive from constrained optimization still the sparse max remains tractable to compute moreover the induced outcomes reflect basic psychological forces governing limited attention the sparse max yields a behavioral version of basic chapters of the microeconomics textbook consumer demand and competitive equilibrium i obtain a behavioral version of marshallian and hicksian demand arrow debreu competitive equilibrium the slutsky matrix the edgeworth box roy s identity and so on the slutsky matrix is no longer symmetric nonsalient prices are associated with anomalously small demand elasticities because the consumer exhibits nominal illusion in the edgeworth box the offer curve is a two dimensional surface rather than a one dimensional curve as a result different aggregate price levels correspond to materially distinct competitive equilibria in a similar spirit to a phillips curve the arrow debreu welfare theorems typically do not hold this framework provides a way to assess which parts of basic microeconomics are robust and which are not to the assumption of perfect maximization jel codes d01 d03 d11 d51

optimal inattention to the stock market inattentive agents update their information sporadically and thus respond belatedly to news we generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio s contempo raneous value it is optimal for the consumer to check his investment portfolio at equally spaced points in time consuming from a riskless trans actions account in the interim the riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted we show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation quantitatively even a small observation cost one basis point of wealth implies a substantial eight month decision interval under conventional parameter values

technological change and the households demand for currency abstract it is shown that accounting for technology variations across households and periods is important to obtain theoretically consistent estimates of the demand for currency an inventory model is presented where the withdrawal technology is explicitly modeled both the level and the interest rate elasticity of cash holdings depend on the withdrawal technology available to households empirical proxies for the household withdrawal technology based on the diffusion of cash withdrawal points measured at city level are used to test the model predictions on a panel of italian household data over the 1993 2004 period

inventory control in a fluctuating demand environment we present an inventory model where the demand rate varies with an underlying state of the world variable this variable can represent economic fluctuations or stages in the product life cycle for example we derive some basic characteristics of optimal policies and develop algorithms for computing them in addition we show that certain monotonicity patterns in the problem data are reflected in the optimal policies

a comparison of bioenergy policies and institutional frameworks in the rural areas of emilia romagna and norway abstract this paper explores the relationship between bioenergy rural development and related innovation processes in two case studies emilia romagna in italy and norway for a better understanding of the impacts of different policy regimes on bioenergy innovation regional innovation systems theory is used to explain the results emerging from the case studies and to identify the presence of potential elements for innovation we used policy and relevant literature analysis and a grounded approach based on semi structured interviews of relevant actors involved in the local bioenergy system the main findings show that the case studies present consistent differences in terms of policy instruments and socio political dynamics emilia romagna has major weaknesses and threats that hinder innovation but some positive potential elements for the future norway presents stronger local elements for innovation within local bioenergy systems such as the employment of local resources and knowledge but critical market and policy features that threaten further innovation developments the conclusion draws on the comparative analysis to discuss policy implications of the study

transactions costs and portfolio choice in a discrete continuous time setting abstract this paper makes the following observation concerning a new formulation of the consumption and portfolio choice model of merton 1971 with transaction costs suppose an investor observes his or her current wealth only when making a transaction that transactions are costly and that decisions to transact can be made at any time based on all current information if at each transaction the agent is charged a fixed fraction of current portfolio value an optimal policy exists and the optimal interval of time between transactions is fixed independent of time and current wealth

monetary policy and the transaction role of money in the us the declining importance of money in transactions can explain the well known fact that u s interest rate policy was passive in the pre volcker period and active after 1982 we generalise a standard cashless new keynesian model woodford2003 by incorporating an explicit transaction role for money in the pre volcker period we estimate that money did play an important role and determinacy required a passive interest rate policy however after 1982 money no longer played an important role in facilitating transactions correspondingly the conventional view prevails and an active policy ensured equilibrium determinacy

arbitrage with fixed costs and interest rate models in this paper we study securities market models with fixed costs we characterize the absence of arbitrage opportunities and we provide fair pricing rules we then apply these results to extend some popular interest rate and option pricing models which present arbitrage opportunities in the absence of fixed costs in particular we prove that the quite striking result obtained by dybvig ingersoll and ross 1996 which asserts that under the assumption of absence of arbitrage long zero coupon rates can never fall is no longer true in models with fixed costs even arbitrarily small ones for instance models where the long term rate follows a diffusion process are arbitrage free in the presence of fixed costs including arbitrarily small ones we also rationalize models with partially absorbing or reflecting barriers on the price processes in particular we propose a version of the cox ingersoll and ross 1985 model which as in longstaff 1992 produces yield curves with realistic humps but does not assume an absorbing barrier for the short term rate this is made possible by the presence of even arbitrarily small fixed costs

using cash to monitor liquidity implications for payments currency demand and withdrawal behavior this paper provides one explanation why cash is still used for transactions despite a broad diffusion of noncash payment instruments in particular we argue that a distinctive feature of cash a glance into one s pocket gives a signal of the remaining budget and past expenses provides utility to some consumers using payment survey data we show that consumers who need to keep control over their remaining liquidity and who have elevated costs of information processing conduct a larger percentage of payments using cash withdraw less often and hold larger cash balances than other consumers

currency demand new technology and the adoption of electronic money micro evidence from japan we estimate currency demand functions conditional on electronic money adoption with household level survey data from japan under an instrumental quantile regression framework contrary to theoretical predictions our results suggest that users of electronic money hold more currency than non users

the management of near money in the miller orr model is not optimal the most prominent model of the transactions demand for money that incorporates the availability of more than one interest bearing asset is that of miller and orr 1968 this three asset model is an extension of their simpler two asset money bonds model in which money is managed as an inventory with the objective of minimizing holding and transactions costs the extended model is used in graduatelevel textbooks to show that a corporate money manager facing an array of assets will behave much like the manager faced with a choice between money and only one type of security so that the simple model is an adequate basis for modeling the demand for money 1 in empirical work a similar belief is reflected in implementations of the transactions model of money demand that utilize a broad definition of money as though transactions motives will induce a money manager to handle a spectrum of near money assets in the same way as the medium of exchange the miller orr model appears to support such interpretations because in its three asset version the interrnediate interest bearing asset is managed in a fashion similar to that of non interest bearing money but when miller and orr solve this extended version of their model they neglect the corner solution that would allow the manager to hold only the highest yielding asset in this note i show that when the corner solution is

marriage markets and money a coasian theory of household formation this article integrates search based models of marriage and money we think about households as organizations the way coase thinks about firms as alternatives to markets that become more attractive when transactions costs increase in the model individuals consume market and home produced goods and home production is facilitated by marriage market frictions including taxes search and bargaining problems increase the marriage propensity the inflation tax encourages marriage because being single is cash intensive microdata confirm singles use cash more than married people we use macrodata over many countries to investigate how marriage responds to inflation taxation and other variables

an exact solution to a dynamic portfolio choice problem under transactions costs the presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor it requires one to either act or do nothing an issue which of course does not arise in frictionless situations the investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all his objective is to maximize the expected utility derived from that terminal consumption we postpone the terminal point far into the future to obtain a stationary portfolio rule the portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate we show how to calculate them

an overview of the biomass resource potential of norway for bioenergy use this paper provides an overview of the norwegian biomass resources for bioenergy use bioenergy market and frame conditions through a comparison with denmark finland and sweden which have a leading role in bioenergy production in the european union although the contribution of renewable energy in norway is among the highest in europe 58 mainly due to hydroelectricity bioenergy has a low contribution to norwegian energy supply 6 as the experience from the other eu member states showed long term stable policies and relatively strong incentives are needed to initiate and build up a bioenergy market in norway there is still a significant available potential for increasing the bioenergy contribution to the energy supply the abundance and relatively low prices of energy i e fossil fuels and electricity in connection with the need of high investment costs did not favour so far bioenergy production additional forest biomass may be mobilized in norway by more intensive management of currently exploited forests however there are several limitations related to topography accessibility and economics the biomass resources and the full range of technologies available for heat or electricity generation both at small and large scale that can provide good opportunities for increased bioenergy production the experience gained in denmark finland and sweden may be relevant for norway as well as for other eu member states where there is a deficit of mobilization of biomass resources and insufficient industrial integration of bioenergy with other forest based sectors

financial innovation and regional money this article studies the effect that financial innovation which has been very common in recent years has on money using japanese regional data and the money demand specification we first provide evidence of instability in the simple money output relationship however when this relationship is extended to include a proxy for a comprehensive measure of financial innovation the model is found to be stable furthermore consistent with economic theory evidence is obtained of financial innovation leading to decreased demand for liquid financial assets in this respect in japan demand deposits seem to possess very similar characteristics to cash over recent years

the rise of risk based pricing of mortgage interest rates in italy abstract this paper assesses how much mortgage interest rates in italy are priced on credit risk as proxied by the probability of household mortgage delinquency estimated using the eu silc database owing to data availability we restrict the analysis of mortgage pricing to italian households consistent with the more widespread use of credit scoring estimates indicate that italian lenders have increasingly priced mortgage interest rates on household credit risk for mortgages granted between 2000 and 2007 we find that a 1 point increase in the probability of default is associated with a 21 basis point rise in mortgage interest rates lower than the 38 basis point premium edelberg 2006 estimated for the us at the end of the 1990s

durable consumption and asset management with transaction and observation costs this paper provides a contribution to the recent growing literature on rational inattention we start by testing the implications of recent rational inattention models of asset management liquidity holdings and savings using two novel datasets some predictions of these models are at odds with the data which motivates us to introduce a new model that shifts the focus from non durable to durable consumption and features both information and adjustment costs the focus on non durable consumption which departs from the previous literature is key to improve the fit of the model the investor s behavior in our setup combines elements of what the literature refers to as state dependent and time dependent adjustments the model allows us to quantify the information and transactions costs that are consistent with observed patterns of information review and asset trades a calibration of the model shows that very small information costs are sufficient to reproduce the relatively high frequency of observation that is found in the data we test a novel prediction of the model on the relationship between assets trades and durable goods trades and find it aligned with the data

demand for cash with intra period endogenous consumption abstract we extend the literature on the demand for money by relaxing the assumption of a constant rate of consumption although total consumption is still fixed over the period agents can choose more than one rate of consumption and cash depletion in the period to minimize the cost of money management consistent with empirical evidence we find that agents do not smooth intra period consumption instead their rate of consumption will be positively related to their cash position this positive correlation depends on the volatility of the consumption process

investment opportunities and corporate demand for lines of credit abstract the behavior of a risk neutral corporation in selection of a line of credit is modeled in a new framework where demand for credit lines by a firm arises from the stochastic arrival in continuous time of short lived opportunities to capture investment projects the firm needs speed and secrecy to capture projects before competitors the firm chooses a credit line that balances its up front commitment cost against the expected extra cost of borrowing in the spot market upon exhaustion of its credit line the firm s demanded credit line depends upon both relative pricing within the contract and the nature of the firm s growth opportunities interestingly while credit line demand is positively related to business growth prospects it is potentially negatively related to uncertainty in those prospects

learning and asset price jumps w e develop a general equilibrium model in which income and dividends are smooth but asset prices contain large moves jumps these large price jumps are triggered by optimal decisions of investors to learn the unobserved state we show that learning choice is determined by preference parameters and the conditional volatility of income process an important model prediction is that income volatility predicts future jump periods while income growth does not consistent with the model large moves in returns in the data are predicted by consumption volatility but not by consumption growth the model quantitatively captures these novel features of the data jel g00 g12 g14 d83 a prominent feature of financial markets is infrequent but large price movements jumps 1 in this article we develop a model in which income and dividends have smooth gaussian dynamics however asset prices are subject to large infrequent jumps in our model large moves in asset prices obtain from the actions of the representative agent to acquire more information about the unobserved state of the economy for a cost we show that the optimal decision to incur a cost and learn the true economic state is directly related to the level of uncertainty in the economy this implies that aggregate economic volatility as well as market volatility should predict jumps in returns we show that indeed in the data consistent with the model return jumps are predicted by consumption volatility market volatility further the implied asset price implications from our model are consistent with the key findings from parametric models about frequency and predictability of jumps as well as nonparametric jump detection analysis of barndorff nielsen and shephard 2006 based on

homogeneity and the transactions demand for money the paper presents the properties of money demand implied by the frenkel jovanovic 1980 inventory model without approximation the money demand function is implicitly defined by the first order condition of the model from the implicit function we show that the elasticities of money demand satisfy a set of homogeneity conditions we also show that increasing transactions cost increases the cash flow elasticity the interest elasticity in absolute value and the uncertainty elasticity but decreases the transactions cost elasticity if the ratio of cash flow uncertainty to the transactions variable is small then the interest elasticity is greater than 1 2 in contrast it lies between 71 and 1 2 when the approximation method is applied

optimal price setting with observation and menu costs we study the price setting problem of a firm in the presence of both observation and menu costs in this problem the firm optimally decides when to collect costly information on the adequacy of its price an activity which we refer to as a price review upon each review the firm chooses whether to adjust its price subject to a menu cost and when to conduct the next price review this behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment the goal of the paper is to study how the firm s choices map into several observable statistics depending on the level and relative magnitude of the observation vs the menu cost the observable statistics are the frequency of price reviews the frequency of price adjustments the size distribution of price adjustments and the shape of the hazard rate of price adjustments we provide an analytical characterization of the firm s decisions and a mapping from the structural parameters to the observable statistics we compare these statistics with the ones obtained for the models with only one type of cost the predictions of the model can with suitable data be used to quantify the importance of the menu cost vs the information cost we also consider a version of the model where several price adjustment are allowed between observations a form of price plans or indexation we find that no indexation is optimal for small inflation rates

cash management in a randomly varying environment we study a cash management system in which the distribution of the cash flow xn in period n 1 2 depends on the state in of a randomly varying environment sufficient conditions are found for the optimality of a simple transfer rule generalizing and partially improving the well known results for the classical case with i i d cash flows these and further structural results obtained for the cash balance are shown to reduce the computational effort drastically in determining an optimal transfer rule in addition structural and computational results w r t the environment are derived finally some examples are given for economic and statistical environments and their interactions with the cash flow process

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

credit cards and money demand a cross sectional study this study investigates credit card holding and the household demands for several monetary assets in a simultaneous equations framework it exploits the detailed data on household assets as well as demographic and preference characteristics in the 1983 survey of consumer finances a key finding is that consistent with theory a higher probability of credit card ownership implies lower demand for transaction balances with no effect on small time deposit balances copyright 1995 by ohio state university press

international pollution problems unilateral initiatives by environmental groups in one country abstract international pollution involving two groups of countries is modelled as a two player game each country is characterized by specific preferences for consumption goods and the environment both countries produce a single consumption good with a given technology that determines pollution per unit output each country is economically isolated except for the presence of a global pollutant within a static framework m hoel j environ econom management 20 55 70 1991 shows that unilateral actions to reduce harmful emissions advocated by environmental groups in one country may result in higher total emissions i characterize cooperative and noncooperative emission strategies for the two countries using welfare functions that within a static framework yield total emissions without cooperation always higher than those with cooperation when both governments choose linear closed loop strategies and one country is not sensitive to the environmental condition the unique equilibrium exhibits less pollution than the cooperative equilibrium only if the other country cares a great deal about the well being of future generations and has relatively low bargaining power in the negotiations equilibria that result from nonlinear closed loop strategies are also characterized

transaction costs and asset prices a dynamic equilibrium model in this article we study the effects of transaction costs on asset prices we assume an overlapping generations economy with a riskless liquid bond and many risky stocks carrying proportional transaction costs we obtain stock prices and turnover in closed form surprisingly a stock s price may increase in transaction costs and a more frequently traded stock may be less adversely affected by an increase in transaction costs calculations based on the marginal investor overestimate the effects of transaction costs for realistic parameter values transaction costs have very small effects on stock prices but large effects on turnover

a computational scheme for optimal investment consumption with proportional transaction costs abstract we consider the optimal investment consumption strategy of an investor who can invest in a stock and a bank we consider the case where proportional transaction costs are present and the objective is to maximize the discounted utility of consumption we describe an efficient computational scheme that transforms the arising free boundary problem to a sequence of fixed boundary problems we prove the convergence of the scheme and also show that the converged solution is the optimal value function finally we compare and contrast the results obtained by our procedure with certain well known results and approximations the proposed scheme also lends itself to optimizing portfolios with multiple risky assets

efficient trading strategies in the presence of market frictions we provide a price characterization of efficient contingent claims that is chosen by at least a rational agent in multiperiod economies with market frictions frictions include market incompleteness transaction costs short selling and borrowing costs we characterize the inefficiency cost of a trading strategy its required investment minus the largest amount necessary to obtain the same utility level and we propose a measure of portfolio performance we show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments we observe common investment strategies becoming inefficient with market frictions and others rationalized by them in this article we characterize efficient contingent claims to future consumption consumption bundles in multiperiod economies with uncertainty taking a wide range of market frictions into account 1 such as dynamic market

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

endogenous labor leisure investment choice under time constraints we posit the opportunity cost of time required to manage risky investments including conducting research and performance monitoring as a potential explanation for the equity premium puzzle an economic agent who should allocate a limited amount of time to labor leisure and risky investment is subject to the opportunity time cost of investment activity which is foregone labor or leisure our model envisages its impact on equity premium and volatility in the presence of such a time constraint in particular with closed form solutions to the risky asset returns volatility and risk free rate in a simple equilibrium framework wherein agents have log utility the model is shown to yield excess return and volatility consistent with historical values observed in the u s stock market even with a small amount of time cost in addition the model enables us to sort out the impact of endogenous labor leisure choice on return dynamics by comparing it with the exogenous labor income case

sluggish responses of prices and inflation to monetary shocks in an inventory model of money demand we examine the responses of prices and inflation to monetary shocks in an inventory theoretic model of money demand we show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households money inventories leads to a partially offsetting endogenous reduction in velocity we also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate in a quantitative example we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match u s households holdings of m2

inflation and welfare in the steady state this is a paper on expected inflation and welfare in steady state equilibrium the demand for money is an inventory demand with an endogenous payment period the clower constraint is not imposed higher inflation reduces welfare by reducing consumption as people devote more of their real income to maintaining lower average money holdings high inflation does not necessarily promote an increase in the capital stock the mundell tobin effect is absent the policy conclusion is standard deflate at the rate of time preference because capital is held socially optimal consumption falls short of its golden rule level if inside money is allowed it drives out fiat money and welfare is again at a maximum

portfolio rebalancing and asset pricing with heterogeneous inattention can households inattention to the stock market quantitatively account for the inertia in portfolio rebalancing i address this question by introducing an observation cost into a production economy with heterogeneous agents in this environment inattention changes endogenously over time and across agents i find that inattention explains the inertia in portfolio rebalancing and its heterogeneity across households inattention also rationalizes the limited stock market participation observed in the data and improves the asset pricing performance of the model finally i present a novel testable implication linking the effects of inattention on portfolio choices and asset prices to households funding liquidity

money demand function estimation by nonlinear cointegration conventionally the money demand function is estimated using a regression of the logarithm of money demand on either the interest rate or the logarithm of the interest rate this equation is presumed to be a cointegrating regression in this paper we aim to combine the logarithmic specification which models the liquidity trap better than a linear model with the assumption that the interest rate itself is an integrated process the proposed technique is robust to serial correlation in the errors for the usa our new technique results in larger coefficient estimates than previous research suggested and produces superior out of sample prediction copyright 2007 john wiley sons ltd

coalitions in transboundary pollution reduction during emission reductions countries render services to each other by reducing transboundary pollution which should be recognized as an additional source of benefit since transboundary pollution fluxes are often significant the underestimation of this factor can substantially affect the choice of emission reduction strategies and eventually restrain pollution reduction this factor is a specific feature of the transboundary pollution problem that in the taxonomy of m iler 1990 relates to the case of regional reciprocal externalities cooperation in the case of regional reciprocal externalities has been often studied explicitly or implicitly in terms of cooperative games with transferable utilities tu one reason for this is that within this approach side payments are allowed which theoretically give higher gains to participants as compared to the approach with non transferable utilities ntu another reason is that the theory of ntu games is not yet sufficiently developed as compared with the theory of tu games but the standard tu approach to regional environmental regulation shows significant drawbacks discussing the analyses of the canadian american agreement on the columbia river by krutilla 1966 1968 and of the mexican american agreement on the colorado river by kneese 1988 m iler 1990 points out that the countries do not use side payments in the explicit form moreover the amounts of implicit side payments seem to be in contradiction with the criteria of economic benefits producing an impression of irrationality of the countries choices mner 1990 in this paper the tu approach is abandoned in favour of the ntu approach to treat the case of regional reciprocal externalities from the viewpoint of the ntu game an irrational behaviour of a participant occurs when his preferences involve hidden goals while his implicit side payments favourably affect the other participants expected choices of strategies with respect to these hidden goals the ntu approach becomes immune to irrational behaviour if it allows consideration of the participants utilities reflecting their respective hidden goals through the above mechanism of transposed preferences non transferability of utilities generally means incommensurability of

the heckman correction for sample selection and its critique this paper gives a short overview of monte carlo studies on the usefulness of heckman s 1976 1979 two step estimator for estimating selection models such models occur frequently in empirical work especially in microeconometrics when estimating wage equations or consumer expenditures it is shown that exploratory work to check for collinearity problems is strongly recommended before deciding on which estimator to apply in the absence of collinearity problems the full information maximum likelihood estimator is preferable to the limited information two step method of heckman although the latter also gives reasonable results if however collinearity problems prevail subsample ols or the two part model is the most robust amongst the simple to calculate estimators

international environmental problems a simple taxonomy of international environmental problems is developed based on economic considerations the unidirectional externalities are illustrated by the case of one upstream and one downstream country the main problem in this case is an informational one the analysis of regional reciprocal externalities is illustrated by the acid rains in europe it is shown that an efficient solution could be achieved by transferable export rights finally global external problems are discussed with reference to greenhouse effects and extinction of species copyright 1990 by oxford university press

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

dynamic market participation and endogenous information aggregation abstract this paper studies information aggregation in financial markets with recurrent investor exit and entry i consider a dynamic general equilibrium model of asset trading with private information and collateral constraints investors differ in their aversion to knightian uncertainty when uncertainty is high some investors exit the market since exiting investors information is not fully revealed by prices conditional return volatility and risk premia both increase the model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty averse investors the model thus predicts less informative prices toward the end of a long boom moreover economies with looser collateral constraints should see more volatility due to exit and partial revelation higher capital requirements potentially improve welfare by inducing more information revelation by prices