definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

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

interest rate arbitrage in currency baskets forecasting weights and measuring risk we use a time series modeling approach to address two related questions of interest to foreign exchange market participants and policy makers dealing with basket currencies first how are unknown weights appropriately extracted from basket currencies second how does one correctly account for the risk in terms of conditional variance of expected profits that time varying weights add to the standard basket hedge position we suggest a methodology that can provide answers to these questions and apply it to the heavily traded thai baht currency basket

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

multiple equilibrium overnight rates in a dynamic interbank market game abstract we analyse a two period model of the interbank market i e the market where banks trade liquidity we assume that banks do not take the interbank interest rate as given but instead negotiate on interest rates and transaction volumes with each other the solution concept applied is the shapley value we show that there are a multiplicity of average equilibrium interest rates of the first period so that the average interest rate in this period does not convey any information on the expected liquidity situation on the interbank market as the banks control not only the transaction volumes but also the interest rates they can leave the interest rates constant and adjust the transaction volumes when for example a liquidity deficit becomes more likely

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

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

nature of transfers income tax function and empirical estimation of elasticity of taxable income for brazil abstractthis article aims to estimate the elasticity of taxable income eti taking into account the nature of transfers and their use as a redistribution package involving cash and in kind transfers to households in brazil our contributions are twofold first we provide a simple model with balanced budget government that reveals the role played by cash and in kind transfers on the labour supply and income tax revenues thereof next in order to estimate eti in the presence of cash and in kind transfers brazilian population surveys pesquisa nacional por amostra de domicilios pnad are used to explore a limited tax reform that was implemented between 1997 and 1998 this reform only affected the higher income tax bracket our findings suggest that in kind cash transfers are positively negatively associated with reported taxable income and precise estimation of eti requires estimates of both types of transfers last we estimate the eti for brazil in the range from 0 4 to 1 3 not different fro

tax effects versus budget effects on labor supply this paper analyzes the effects on labor supply of parallel changes in taxes and public spending of various types a number of important recent developments in the labor supply behavior of households are highlighted by such a study of various types of budget effects rather than isolated tax effects this comes out in particular when considering cross substitution effects on labor supply of changes in public spending on goods and services or of the subsidization of goods and services provided by private markets moreover the income effects of tax changes are often mitigated or possibly even removed by the income effects of the accompanying expenditure changes

cheap talk and strategic rounding in libor submissions interbanking rates were until recently based on judgmental estimates of borrowing costs we interpret this as a cheap talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost but in times of financial stress only coarse equilibria survive we take this prediction to the data and show that banks round more frequently if the risk of the bank increases rounding is also more frequent for the more liquid short term rates and certain benchmark maturities

precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

a search based model of the interbank money market and monetary policy implementation we present a search based model of the interbank money market and monetary policy implementation banks are subject to reserve requirements and the central bank tenders reserves interbank payments redistribute holdings and banks trade with each other in a decentralized over the counter market the central bank provides standing facilities where banks can either deposit surpluses or borrow to cover shortfalls of reserves overnight the model provides insights on liquidity trading volume and rate dispersion in the interbank market features largely absent from the canonical models in the tradition of poole 1968 and fits a number of stylized facts for the eurosystem observed during the recent period of unconventional monetary policies moreover it provides insights on the implications of different market structures

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

a survey of the literature on the optimal peg abstract it is widely agreed that floating is not an appropriate exchange rate policy for most developing countries but in a world of generalized floating the question of exchange rate policy is not resolved by deciding to peg rather than to float it is also necessary to decide to what to peg this is the question of the optimal peg on which a significant literature has emerged since 1976 the present paper provides a survey of that literature section 2 summarizes the principal papers section 3 compares the objectives and rules advocated by different authors section 4 evaluates the alternative approaches arguing that in general the peg should be chosen to stabilize the nominal trade weighted effective exchange rate section 5 considers whether this criterion points to the sdr as a satisfactory peg

out of space regulation and technical change in communications satellites regulatory practices by the federal communications commission fcc have the effect of rationing the use of a particular resource required for communications satellite technology the electromagnetic spectrum spectrum or the airwaves is the medium over which communications signals such as tv telephone and radar travel federal government allocation of spectrum among competing services has long been implemented to mitigate the interference that can arise between nearby signals hence for instance the assignment of radio stations to unique regions along the am and fm dials that government regulation can and probably does fail to allocate spectrum efficiently for all the usual economic reasons has been attested to criticized and in turn the subject of proposed reformation in an economics literature both historic radio spectrum regulation inspired coase s theorem and growing including work which dates from harvey levin 1971 and references cited therein to most recently stanley besen et al 1984 left unaddressed however have been the implications of inefficient spectrum regulation for the pace and direction of technical change specifically the problems of static resource misallocation may be compounded by inefficiency in induced innovation v kerry smith 1974 1975 koji okuguchi 1975 wesley magat 1976 if fcc allocations incorrectly signal the true economic scarcity of spectrum innovation to augment spectrum and other inputs on the basis of relative scarcity may be misdirected and the overall rate of r d spending may be distorted accordingly the effect of government regulation on innovation in communications satellite technology merits particular attention for several reasons first a recent fcc ruling will increase the cost of future satellites by requiring them to operate at fcc mandated minimum levels of intensity of spectrum use on top of rationed quantities of spectrum see federal register 1983 para 69 second unlike other uses of spectrum there is a large public sector component to satellite r d spending that is also likely to be affected by fcc regulation undertaken by nasa current research expenditures on advanced communications satellite technology have been justified in large part by a perceived need to develop methods that use spectrum more intensively see nasa 1984 and u s congress house 1984 third and again distinguishing satellites from other users of spectrum the inherently global nature of satellite technology renders satellite spectrum allocations a contentious international issue in particular developing countries not currently using satellite technology have expressed serious concern about future spectrum availability in response technical change economizing on spectrum is frequently endorsed by regulators and moral suasion is accordingly brought to bear on industry as an appropriate solution see fcc 1985 and u s congress 1982 1 this paper proceeds as follows section i tailors a model of induced innovation de

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

the intraday price of money evidence from the e mid interbank market we provide empirical evidence based on tick by tick data for the e mid euro area interbank market covering 2003 and 2004 that the overnight interest rate shows a clear downward pattern throughout the operating day thus a positive hourly interest rate half basis point implicitly emerges from the intraday term structure of the overnight rate such a pattern was not detected in the mid 1990s we explain this evolution as an outcome of the recent trend toward real time settlement the estimated intraday interest rate is lower than in the united states this is due to the different cost of central bank daylight credit

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

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

asset prices and liquidity in an exchange economy i develop an asset pricing model in which financial assets are valued for their liquidity the extent to which they are useful in facilitating exchange as well as for being claims to streams of consumption goods the implications for average asset returns the equity premium puzzle and the risk free rate puzzle are explored in a version of the model that nests the work of mehra and prescott 1985

a determination of the optimal currency basket a macroeconomic analysis abstract this paper analyzes the choice of the optimal currency basket using a general equilibrium macro model of a small open economy with perfect capital mobility the optimal weights are derived to minimize the variance of domestic output the general properties of the optimal basket so obtained are identified and a number of special cases are analyzed in detail the weights are also compared with those found in the existing literature which differs from the approach here in its more partial equilibrium nature its neglect of capital flows and its focus on the stabilization of more proximate policy objectives

equilibrium wage dispersion and interindustry wage differentials this paper develops a search theoretic explanation of interindustry wage differentials given coordination problems in the labor market the probability of filling a vacancy is an increasing function of the wage offered in equilibrium firms that find vacancies more costly will offer higher wages the model thus explains the persistence of interindustry wage differentials and their correlation with industry average capital labor ratio and profitability additionally the model predicts that high wage firms will receive more applications per job opening and that wages in the labor market will behave as strategic complements

interest rate dispersion and volatility in the market for daily funds abstract the purpose of this paper is to study the determinants of equilibrium in the market for daily funds we use the eonia panel database which includes daily information on the lending rates applied by contributing commercial banks the data clearly show an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period these increases are highly correlated we design a model to account for these empirical facts our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period this reduction in the elasticity together with market segmentation and heterogeneity is able to generate distributions for the interest rates and quantities traded with the same properties as in the data we also investigate the effects of the changes in the eurosystem s operational framework enacted on march 2004 for interest rate behaviour

monetary policy transmission with interbank market fragmentation this paper shows how interbank market fragmentation disrupts the transmission of monetary policy fragmentation is the fact that banks depending on their country of location have different probabilities of default on their interbank borrowings once fragmentation is introduced into standard theoretical models of monetary policy implementation excess liquidity arises endogenously this leads short term interest rates to depart from the central bank policy rates using data on monetary policy operations i show that this mechanism has been at work in the euro area since 2008 the model is used to analyze conventional and unconventional monetary policy measures

fixed costs and the behavior of the federal funds rate abstract this paper presents an equilibrium model of the federal funds market that ties movements in the funds rate to changes in the supply of reserves and to a fixed cost facing banks that borrow at the discount window it is found that the existence of the fixed cost is capable of explaining a number of features of the funds market in particular it is critical for explaining occasional instances of extremely high funds rates it also provides an explanation for heterogeneous behavior across banks towards the discount window and for higher average funds rates at the end of maintenance periods

family labor supply with taxes over the period 1960 1983 the proportion of federal tax revenue raised by taxation of labor supply has risen from 57 77 percent in this paper we specify and estimate a model of family labor supply which treats both federal and state taxation husbands and wives labor supply are treated jointly rather than in aseparate manner as in previous research a method to calculate the virtual wage for nonworking spouses is used within a utility maximizing framework to treat correctly the joint family labor supply decision joint family efforts are found to be important the efficiency cost deadweight loss of labor taxation is estimated to be 29 6 of tax revenue raised the effect of the new 10 deduction to ease the marriage tax for working spouses leads to a prediction of 3 8 increase in wives labor supply and a 9 decrease in husbands labor supply overall taxes paid are predicted to decrease by 3 4 this abstract was borrowed from another version of this item

income inequality government expenditures and growth this paper investigates the relationship between income inequality and growth by utilizing the recently published deininger squire data set most of the recent empirical growth literature suggests a negative relationship between inequality and growth on the basis of reduced form growth equations this is also found in the author s study some effort is made to discuss the argument behind the perceived negative relationship between inequality and growth according to the fiscal policy approach a high level of income inequality leads to a higher demand for redistribution which in turn affects growth through resource allocation out of investment or through incentive distorting taxes needed to fund the redistribution it is suggested that the last mentioned relationship between government expenditure and growth is more likely to be non linear positive with small amounts and negative with large amounts such a relationship however is only found for public goods thus government expenditure on law and ord

asset prices liquidity and monetary policy in an exchange economy i formulate a model in which money coexists with equity shares on a risky aggregate endowment agents can use equity as a means of payment so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange i characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations i also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations

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

some results on the optimality and implementation of the friedman rule in the search theory of money abstract i characterize a large family of monetary policies that implement milton friedman s prescription of zero nominal interest rates in a monetary search economy with multiple assets and aggregate uncertainty this family of optimal policies is defined by two properties i the money supply must be arbitrarily close to zero for an infinite number of dates and ii asymptotically on average over the dates when fiat money plays an essential role the growth rate of the money supply must be at least as large as the rate of time preference

a dynamic network model of the unsecured interbank lending market abstract we introduce a dynamic network model of interbank lending and estimate the parameters by indirect inference using network statistics of the dutch interbank market from february 2008 to april 2011 we find that credit risk uncertainty and peer monitoring are significant factors in explaining the sparse core periphery structure of the market and the presence of relationship lending shocks to credit risk uncertainty lead to extended periods of low market activity intensified by reduced peer monitoring moreover changes in the central bank s interest rate corridor have both a direct effect on the market as well as an indirect effect by changing banks monitoring efforts

a model for the federal funds rate target this paper is a statistical analysis of the manner in which the federal reserve determines the level of the federal funds rate target one of the most publicized and anticipated economic indicators in the financial world the paper introduces new statistical tools for forecasting a discrete valued time series such as the target and suggests that these methods in conjunction with a focus on the institutional details of how the target is determined can significantly improve on standard vector autoregression forecasts of the effective federal funds rate we further show that the news that the fed has changed the target has statistical content substantially different from the news that the fed failed to make an anticipated target change causing us to challenge some of the conclusions drawn from standard linear var impulse response functions

liquidity regulation and the implementation of monetary policy in addition to revamping existing rules for bank capital basel iii introduces a new global framework for liquidity regulation one part of this framework is the liquidity coverage ratio lcr which requires banks to hold sufficient high quality liquid assets to survive a 30 day period of market stress as monetary policy typically involves targeting the interest rate on loans of one of these assets central bank reserves it is important to understand how this regulation may impact the efficacy of central banks current operational frameworks we introduce term funding and an lcr requirement into an otherwise standard model of monetary policy implementation our model shows that if banks face the possibility of an lcr shortfall then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented

liquidity premia in dynamic bargaining markets abstract this paper develops a search theoretic model of the cross sectional distribution of asset returns abstracting from risk premia and focusing exclusively on liquidity in contrast with much of the transaction cost literature it is not assumed that different assets carry different exogenously specified trading costs instead different expected returns due to liquidity are explained by the cross sectional variation in tradeable shares the qualitative predictions of the model are consistent with much of the empirical evidence

systemic illiquidity in the federal funds market this paper shows how the intra day allocation and pricing of overnight loans of federal funds reflect the decentralized inter bank market in which these loans are traded a wouldbe borrower or lender typically finds a counterparty institution by direct bilateral contact once in contact say by telephone the two counterparties to a potential trade negotiate terms that reflect their incentives for borrowing or lending as well as the attractiveness of their respective options to forego a trade and to continue shopping around this overthe counter otc pricing and allocation mechanism is quite distinct from that of most centralized markets such as an electronic limit order book market in which every order is anonymously exposed to every other order with a centralized order crossing algorithm while there is a significant body of research on the micro structure of specialist and limit order book markets most otc markets do not have comprehensive transactionslevel data available for analysis the federal funds market is a rare exception we go beyond a previous study by craig furfine 1999 of the microstructure of the federal funds market by modeling how the likelihood of matching a particular borrower with banking studies federal reserve bank of new york 33 liberty street new york ny 10045 we are grateful for support and data from the federal reserve bank of new york and for comments from guillaume plantin jamie mcandrews craig furfine michael fleming and anonymous federal funds traders we have also benefited from comments by andrew metrick jeremy stein ken french larry harris owen lamont john taylor and randy westerfield the views expressed here are not necessarily those of the federal reserve bank of new york or the federal reserve system

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

voluntary reserve targets we study monetary policy implementation through an operating regime involving voluntary reserve targets vrts operating regimes based on reserve requirements may lead to a collapse in interbank trade as they have since the financial crisis we show that no matter the abundance of reserves vrts encourage market activity and support the central bank s control over interest rates we consider i the impact of anticipated and unanticipated liquidity injections by the central bank on market outcomes and ii a comparison with the implementation framework currently adopted by the federal reserve overall a vrt framework may provide several advantages over other frameworks

exit strategies for monetary policy abstract in response to the financial crisis of 2007 08 all major central banks decreased interest rates to historically low levels and created large excess reserves central bankers and academics currently discuss how to implement monetary policy going forward we find that paying interest on reserves ior is optimal if the central bank has full fiscal support if the central bank has no fiscal support reducing reserves is optimal this can be achieved by reserve absorbing operations which hold the size of the balance sheet constant or by selling assets which reduces the size of the balance sheet

monetary policy implementation in a negative rate environment monetary policy implementation could in theory be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

payment obligations reserve requirements and the demand for central bank balances we develop a model in which a bank s demand for reserves depends on the joint distribution of transactions reserve requirements and the interest rate by devoting resources to its liquidity management a bank can save on costly reserves required to settle its payments on time we test the model with data from the largest banks in the swiss interbank clearing system we find that the turnover ratio the speed with which a bank turns over its reserves in the payment system depends largely on the aggregate value of its payments we also find that reserve requirements impose a highly uneven burden on the banks

interest rate corridors and reserves abstract this paper evaluates reserves regimes versus interest rate corridors which have become competing frameworks for monetary policy implementation rate corridors relying on lending and deposit facilities to create ceilings and floors for overnight interest rates evince mixed results on controlling volatility reserve requirements allow period average smoothing of interest rates but even if remunerated are subject to reserve avoidance activities a system of voluntary period average reserve commitments could offer equivalent rate smoothing advantages if central banks created symmetric opportunity costs of meeting or falling short of period average reserve requirements or commitments they could achieve flat reserve demand on settlement day

the over the counter theory of the fed funds market a primer we present a dynamic over the counter model of the fed funds market and use it to study the determination of the fed funds rate the volume of loans traded and the intraday evolution of the distribution of reserve balances across banks we also investigate the implications of changes in the market structure as well as the effects of central bank policy instruments such as open market operations the discount window lending rate and the interest rate on bank reserves

corridor system and interest rates volatility and asymmetry the corridor system in its current form is believed to reduce the volatility of overnight interest rates and to eliminate any chance of persistent upward or downward bias the model presented here serves to highlight two main findings one is that a central bank can further reduce the volatility of overnight interest rates by allowing banks some flexibility to meet their reserve targets within a small range as observed in the uk data the second is that a seemingly symmetric corridor may be asymmetric in practice due to several distortions as the uk and euro area data suggest

portfolio choice and pricing in illiquid markets abstract this paper studies portfolio choice and pricing in markets in which immediate trading may be impossible it departs from the literature by removing restrictions on asset holdings and finds that optimal positions depend significantly and naturally on liquidity when expected future liquidity is high agents take more extreme positions given that they do not have to hold those positions for long when they become undesirable consequently larger trades should be observed in markets with more frequent trading liquidity need not affect the price significantly however because liquidity has offsetting impacts on different agents demands this result highlights the importance of unrestricted portfolio choice the paper draws parallels with the transaction cost literature and clarifies the relationship between the price level and the realized trading frequency in this literature

monetary policy in a channel system abstract channel systems for conducting monetary policy are becoming increasingly popular despite its popularity the consequences of implementing policy with a channel system are not well understood we develop a general equilibrium framework of a channel system and study the optimal policy a novel aspect of the channel system is that a central bank can tighten or loosen its policy without changing its policy rate this policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest rate rules

trade dynamics in the market for federal funds we develop a model of the market for federal funds that explicitly accounts for its two distinctive features banks have to search for a suitable counterparty and once they have met both parties negotiate the size of the loan and the repayment the theory is used to answer a number of positive and normative questions what are the determinants of the fed funds rate how does the market reallocate funds is the market able to achieve an efficient reallocation of funds we also use the model for theoretical and quantitative analyses of policy issues facing modern central banks

efficiency and bargaining power in the interbank loan market using detailed transactions level data on interbank loans we examine the efficiency of an overnight interbank lending market and the bargaining power of its participants our analysis relies on the equilibrium concept of the core which imposes a set of no arbitrage conditions on trades in the market for canada s large value transfer system we show that although the market is fairly efficient systemic inefficiency persists throughout our sample the level of inefficiency matches distinct phases of both the bank of canada s operations as well as phases of the 2007 8 financial crisis we find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and surprisingly toward riskier borrowers

a model of job and worker flows we develop a model of gross job and worker flows and use it to study how the wages permanent incomes and employment status of individual workers evolve over time and how they are affected by aggregate labor market conditions our model helps explain various other features of labor markets such as the size and persistence of the changes in income that workers experience due to displacements or job to job transitions the length of job tenures and unemployment duration and the amount of worker turnover in excess of job reallocation we also examine the effects that labor market institutions and public policy have on the gross flows as well as on the resulting wage distribution employment and aggregate output in the equilibrium from a theoretical point of view we study the extent to which the competitive equilibrium achieves an efficient allocation of resources

day to day monetary policy and the volatility of the federal funds rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

optimal currency baskets for small developed economies optimal weights for a currency basket are derived under the assumption that the objective of the policymaker is to minimize fluctuation in the production of traded goods using the formulas derived in the analysis various optimal basket calculations are carried out for finland norway and sweden for all these countries the optimal basket weights for germany and united kingdom are found to be less than the trade share weights the opposite is true for united states moreover the actual weights in the basket of sweden are almost identical to those we have computed as optimal

day to day monetary policy and the volatility of the federal funds interest rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

ex ante price offers in matching games non steady states a matching problem is considered in which sellers can publicly commit to a trading price that differs from the price at which buyers expect to trade elsewhere in the market when demand and supply are nearly equal the equilibrium ex ante price offer lies below the price associated with the nash bargaining split this relationship reverses when the level of excess demand is large sellers always have an incentive to make ex ante offers when prices elsewhere are determined by nash bargaining this can be interpreted to mean that nash bargaining is an unstable pricing institution copyright 1991 by the econometric society

bank liquidity interbank markets and monetary policy a major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs this paper studies the efficiency of the interbank lending market in allocating funds we consider two different types of liquidity shocks leading to di erent implications for optimal policy by the central bank we show that when confronted with a distribu tional liquidity shock crisis that causes a large disparity in the liquidity held among banks the central bank should lower the interbank rate this view implies that the traditional tenet prescribing the separation between prudential regulation and mon etary policy should be abandoned in addition we show that during an aggregate liquidity crisis central banks should manage the aggregate volume of liquidity two di erent instruments interest rates and liquidity injection are therefore required to cope with the two di erent types of liquidity shocks finally we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs

search in asset markets market structure liquidity and welfare this paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market to this end we generalize the search theoretic model of financial intermediation of darrell duffie et al 2005 to allow for entry of dealers and unrestricted asset holdings

a new suggestion for simplifying the theory of money we propose a new search theoretic model of monetary exchange with indivisible assets based on price posting instead of bargaining and incorporating noisy search this yields some familiar results plus a lot more the model admits multiple steady states due to the self referential nature of liquidity it admits cyclic chaotic and stochastic equilibria and compared to bargaining versions the dynamics are more general and have better microfoundations it generates price dispersion with interesting efficiency implications plus sticky prices and rational inattention parametric examples yield closed form solutions based on these results we suggest this should become a benchmark model in monetary economics

search based models of money and finance an integrated approach many applications in monetary economics of search and bargaining theory use shi trejos wright hereafter stw many applications in finance use duffie g rleanu pedersen hereafter dgp these models share several features and both concern liquidity yet they also differ in stw agents use assets as payment instruments when trading goods in dgp they pay with goods or transferable utility when trading assets we integrate the two this clarifies connections between the literatures and generates novel insights several new results are provided for the baseline stw and dgp models while the integrated structure generates even more interesting outcomes including endogenous transactions patterns and belief based dynamics

the impact of return on collateral in a channel system we empirically investigate the relationship between the return on collateral and monetary policy implementation in the channel system recent developments in monetary theory suggest that the return on government assets which measures the opportunity cost of holding collateral should have negative impacts on the interest rate spread and the interbank market rate the central bank should set a higher spread when the return on collateral is below a cutoff but implements a lower spread when the return on collateral is higher than the cutoff the interbank market rate tends to lie above the policy target rate when the return on collateral is low and vice versa we use data from eurozone area and six industrialized countries to test these theoretical implications we propose two econometric models one is more structural and closely related to the monetary model to test the negative relationships and the other is based on the threshold autoregression model to detect the potential cutoffs our findings provide conditional support for the negative impact of return on collateral jel e40 e52 e58

monetary policy implementation and overnight rate persistence overnight money market rates are the predominant operational target of monetary policy as a consequence central banks have redesigned the implementation of monetary policy to keep the deviations of the overnight rate from the key policy rate small and short lived this paper uses fractional integration techniques to explore how the operational framework of four major central banks afiects the persistence of overnight rates our results suggest that a well communicated and transparent interest rate target of the central bank is a particularly important condition for a low degree of overnight rate persistence

on the marginal cost of public funds and the optimal provision of public goods abstract this paper argues that in models with heterogeneous agents the concept of the marginal cost of public funds mcpf will only be useful if it is compared with an analogous concept for the benefit side the mcpf does not assume a unique value and is not particularly illuminating in and out of itself also gone is the benchmark status of mcpf 1 turning to the provision of public goods using a mechanism design approach the paper constructs a two stage proof for kaplow s kaplow l 1996 the optimal supply of public goods and the distortionary cost of taxation national tax journal 49 513 533 proposition concerning the irrelevance of labor supply and distributional concerns in public good provision this highlights the two fundamental ingredients for his result first the provision of public goods per se when it satisfies the samuelson s rule is only potentially pareto improving second the actual pareto improvement will materialize when or if one reforms the income tax structure if the reform is not forthcoming the decision on public goods provision must rely on redistributional concerns finally the paper generalizes broadway and keen s boadway r keen m 1993 public goods self selection and optimal income taxation international economic review 34 463 478 result to a model with many types of agents many private goods and without making any assumptions regarding which self selection constraints are or are not binding

leaning against the wind during financial disruptions market makers provide liquidity by absorbing external selling pressure they buy when the pressure is large accumulate inventories and sell when the pressure alleviates this paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure and order execution delays i show that competitive market makers offer the socially optimal amount of liquidity provided they have access to sufficient capital if raising capital is costly this suggests a policy role for lenient central bank lending during financial disruptions

a model of fiat money and barter abstract we present an infinite horizon model with capital in which fiat money and barter are two competing means of payment fiat money has value because barter is limited by the extent of a double coincidence of wants the pattern of exchange generally involves both money and barter we find that the chicago rule is sufficient for pareto efficiency while nominal interest smoothing is necessary for a specific utility function we provide a complete characterization of the patterns of exchange and calculate the range of inflation rates over which a stationary monetary equilibrium exists journal of economic literatureclassification numbers d51 e42 e52

tax rates government expenditures and labor supply clarifying the record a central claim of supply side economics is that in general equilibrium the income effect of a change in the income tax rate washes out and only the substitution effect remains in the words of ehrenberg and smith 1985 there would be a substitution effect with no overall income effect and labor supply would increase the aggregate supply of labor curve then must be upward sloping p 160 emphasis in the original although there has been a substantial literature on this subject the literature is sometimes confused in this paper a simple model is used to sort through the literature correct mistaken assertions derive a new result and collect earlier results in a compact way

experiments with the optimal currency composite this paper addresses the issue of the determination of an optimal currency composite in the context of a world characterized by generalized exchange rate flexibility the approach adopted here is macroeconomic in nature and stresses general equilibrium considerations the emphasis upon both monetary and real considerations capital mobility and rational expectations in the context of a multi country framework is what sets this paper apart from previous attempts to address this issue empirically the problem of choosing an optimal currency composite has if anything gained importance according to the annual report on exchange arrangements issued by the international monetary fund as many as 37 countries were reported to be practicing currency basket arrangements during 1980 81 while a year later i e 1981 82 the number of such countries had increased to 53 see annual report june 3 1983 as indicated in the annual report this increase can be attributed to the movement away from single currency dollar pegs in favor of increased use of currency composites including the sdr pg 9 the advantage of a composite peg over a single currency peg is clear a composite peg embodies automatic and systematic adjustment of bilateral exchange rates whenever necessary which may be preferable to an absolute peg against all currencies or to joint floating as implied by a single currency peg the latter arrangement may subject the economy in question to an undesirable degree of exchange rate volatility while the former carries with it heavy intervention costs thus the composite currency peg has proved to be an acceptable middle ground for economies as different as sweden and india in practice the shares assigned to various currencies comprising the basket where such arrangements have been maintained have usually been determined on the basis of the currency composition of the economy s international trade the appendix provides some institutional details regarding the weighting practices of the 53 currency composite countries over the period 1981 82 as indicated here 32 countries peg their currencies to a basket whose currency shares are determined in accordance with bilateral trade patterns of the economy in question an additional 21 countries peg their currencies to the sdr which is itself a 5 currency basket with the weights being set by the imf by reference to the currency denomination of world trade theoretical analysis of the composition of the optimal basket owes much to flanders and helpman 8 9 whose work is extended by

a theory of money and marketplaces this article considers an infinitely repeated economy with divisible fiat money the economy has many marketplaces that agents choose to visit in each marketplace agents are randomly matched to trade goods there exist a variety of stationary equilibria in some equilibrium each good is traded at a single price whereas in another every good is traded at two different prices there is a continuum of such equilibria which differ from each other in price and welfare levels however it is shown that only the efficient single price equilibrium is evolutionarily stable

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

open mouth operations abstract this paper explains how central bank statements rather than open market operations can be used to implement monetary policy in the extreme policy instruments can be held constant and yet interest rates will evolve along the path desired by the central bank we show how the recent implementation of monetary policy in new zealand works in this way using announcement data from new zealand we find that open mouth operations lead to large changes in interest rates across all maturities and these changes cannot be explained by open market operations implications are drawn for monetary policy in other jurisdictions

liquidity requirements and the interbank loan market an experimental investigation abstract we develop a stylized interbank market environment and use it to evaluate with experimental methods the effects of liquidity requirements baseline and liquidity regulated regimes are analyzed in a simple shock environment which features a single idiosyncratic shock and in a compound shock environment in which the idiosyncratic shock is followed by a randomly occurring second stage shock interbank trading of the illiquid asset follows each shock in the simple shock environment we find that liquidity regulations reduce the incidence of bankruptcies but at a large loss of investment efficiency in the compound shock environment liquidity regulations not only impose a loss of investment efficiency but also fail to reduce bankruptcies

progressive taxation redistribution and labor supply the analysis of the effect of progression on labor supply is extended to a model with many consumers the condition for progression to increase labor supply given constant aggregate tax revenue is derived and shown to depend on the income effects resulting from redistribution it is then shown that the optimal linear income tax schedule involves a degree of progression which on the margin does reduce labor supply