the optimal taxation of fiat money in search equilibrium this paper investigates the link between welfare and the taxation of money in the context of a general equilibrium search model where decentralized trading motivates the use of fiat money since buyers with money must invest effort or search intensity to contact sellers with goods a natural trading externality arises given a sufficiently productive economy search efforts will be too low relative to social efficiency this provides a welfare improving role for policies which tax money balances the nature of this role is explored and its implications for optimal monetary policy discussed copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

inflation interest rates and welfare this paper develops a simple general equilibrium model of a monetary economy with a capital market money demand arises from a cash in advance constraint rather than from any direct role in the utility function and uncertainty gives rise to a meaningful portfolio choice between money and bonds we show that velocity is increasing in the rate of inflation and that the optimal monetary policy is that which maximizes real balances we also show that the real rate of interest is not invariant to monetary policy inflation lowers the real rate

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

money interest rates and exchange rates with endogenously segmented markets we analyze the effects of money injections on interest rates and exchange rates when agents must pay a baumol tobin style fixed cost to exchange bonds and money asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money infrequently when the government injects money through an open market operation only those agents that are currently trading absorb these injections through their impact on these agents consumption these money injections affect real interest rates and real exchange rates the model generates the observed negative relation between expected inflation and real interest rates as well as persistent liquidity effects in interest rates and volatile and persistent exchange rates

endogenous market participation and the general equilibrium value of money we study the monetary theory implications of fixed costs associated with trade in private assets we show that with heterogeneous endowment profiles it is possible for an endogenous subset of agents to hold currency even when it is dominated in return by a competing asset with respect to positive issues in monetary theory the model implies that changes in the steady state growth rate of the money supply have a negative effect on real interest rates because of endogenous market participation measures on the normative side we show that there may be an equity efficiency trade off from monetary deflation

stabilizing monetary injection policies abstract the primary concern of this paper is understanding how prices and interest rates respond to open market operations in a model economy developed by grossman and weiss but with more general utility functions we establish global existence of equilibrium paths and observe that prices and interest rates rise initially but thereafter oscillate around a new steady state also investigated are optimal monetary policies wherein injections take place in more than one time period and corresponding to which the equilibrium prices are most stable existence of such policies is established by mathematical analysis and its detailed structure explored by numerical simulation journal of economic literature classification numbers e50 e52

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

liquidity redistribution and the welfare cost of inflation abstract the long run welfare costs of inflation are studied in a micro founded model with trading frictions and costly liquidity management by modelling the liquidity management decision the model endogenizes the responses of velocity output the degree of market segmentation and the distribution of money compared to the traditional estimates based on a representative agent model the welfare costs of inflation are significantly smaller due to distributional effects of inflation the welfare cost of increasing inflation from 0 to 10 is 0 62 of consumption for the us economy furthermore the welfare cost is generally non linear in the inflation rate

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

currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach

currency substitution and the real exchange rate the utility maximization approach abstract this paper studies the currency substitution hypothesis with rational expectations in terms of a sidrauski type model where domestic and foreign money enter the utility function it shows that contrary to liviatan 1981 the approach does not necessarily contradict calvo and rodriguez 1977 furthermore the impact of monetary stabilization policy is fully characterized with flexible and pre fixed rates for an extension of dornbusch and mussa 1975 a brief analysis of the optimal quantity of money is also provided

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

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

alternative monies and the demand for media of exchange prepaid cards cash cards electronic purse smart cards these are but a few of the elements in the revolution now taking place in monetary systems around the world at that movement s heart is the emergence of a new value transfer system where alternative monies are offered to consumers through the miracle of electronics in some cases the new monies are merely a repackaging of existing media of exchange for example stored value cards that have been traditionally available for single vendors now are being offered for multiple merchant use in other cases technology and its acceptability are being cross sold as with debit cards and the expanded use of atm cards as point of sale vehicles however the banking industry is perhaps most enthusiastic about the emerging technology of smart cards chip in cards that have been making inroads in europe with the expanded capability of a memory chip alternative monies are seen to have the capability of moving to a new plateau of acceptance there are many stories in the business press about the general enthusiasm for these new forms of money for example block 1995 and cutler 1994 herald the new day of electronic money they forecast the demise of both the greenback and of commercial banks that exploit the float derived from its use according to the hyperbole from marketing reps from this side of the financial community currency and demand deposits soon will be endangered species consumer acceptance is alleged to be high and cost efficiency associated with the new technology is expected to be substantial

on a simple rule for the optimal inflation rate in second best taxation abstract the optimal inflation rate is analyzed in the framework of dynamic second best with endogenous factor prices it is shown that when the marginal excess burden of taxation is relatively small the optimal inflation rate is approximated by a simple rule the paper also analyzes the robustness of this rule to the specification of the model money as an input in utility or production

money creation and the shadow banking system many explanations for the rapid growth of the shadow banking system in the mid2000s focus on money demand this paper asks whether the short term liabilities of the shadow banking system behave like money we rst present a simple model where households demand money services which are supplied by three types of claims deposits treasury bills and asset backed commercial paper abcp the model provides predictions for the price and quantity dynamics of these claims as well as the behavior of the banking system in terms of issuance and the monetary authority in terms of open market operations consistent with the model the empirical evidence suggests that the shadow banking system does respond to money demand

transactions costs inflation and the variety of intermediation services a general equilibrium model with fixed costs of financial intermediation and costs of transacting with intermediaries is constructed this model is used to show that ignoring fixed costs of in termediation is not innocuous in tobin baumol type transactions cost models of money demand deflation is optimal in spite of the fact that an increase in inflation reduces nominal interest rates and may increase the transactions costs incurred by all groups of economic agents changes in reserve requirements have ambiguous effects the authors obtain novel results due to the fact that the variety of intermediation services is affected by government intervention copyright 1987 by ohio state university press

effects of inflation on the pattern of international trade this paper integrates a transactions based model of money with a real trade model and examines how steady state inflation affects the direction and size of international trade the effects of inflation work through changes in supplies of labour and capital which are chosen jointly with production and consumption by utility maximizing households if production exhibits constant returns to scale in domestically mobile factors then it is unlikely that the economy will produce both of the two traded goods for certain rates of inflation small changes can have dramatic effects on the direction of trade for other rates of inflation the volume of trade is affected when money is held for transactions purposes and factor supplies are endogenous changes in inflation can cause changes in the pattern of trade that do not reflect real underlying changes in comparative advantage

money and exchange rates in the grossman weiss rotemberg model abstract we analyze the impact of monetary policy on inflation interest rates and exchange rates in a model with segmented asset markets developed by grossman and weiss 1983 and rotemberg 1984 1985 we find parameters for which real and nominal exchange rates in this model are 1 much more volatile than interest rates inflation rates and money growth rates 2 highly correlated with each other and 3 highly persistent while this model fails to match the data in other important respects it illustrates a potentially useful approach to modelling exchange rate behavior

economic exchange during hyperinflation historical evidence indicates that hyperinflations can disrupt individuals normal trading patterns and impede the orderly functioning of markets to explore these issues we construct a theoretical model of hyperinflation that focuses on individuals and their process of economic exchange in our model buyers must carry cash while shopping and some transactions take place in a decentralized setting in which buyer and seller negotiate over the terms of trade of an indivisible good since buyers face the constant threat of incoming younger hence richer customers their bargaining position is weakened by inflation allowing sellers to extract a higher real price however we show that higher inflation also reduces buyers search increasing sellers wait for customers as a result the volume of transactions concluded in the decentralized sector falls at high enough rates of inflation all agents suffer a welfare loss

segmentation analysis of residential water electricity demand for customized demand side management programs with increasing water and energy use in the residential sector due to population growth urbanization and climate change demand side management dsm is essential to complement supply side interventions to meet future demands and reduce costs this paper explores how customer segmentation analysis can support customized water and electricity dsm we contribute a three phase customer segmentation analysis of over 1000 residential accounts in the los angeles county southern california to explore the heterogeneity of residential water electricity demand profiles and provide insights for coordinated water energy dsm results show that on the one hand daily water and electricity consumption are correlated thus groups of high consumers can be targeted with coordinated water electricity dsm interventions on the other hand the absence of a relevant causal nexus between water and electricity daily load shapes suggests that dsm actions for water should be differentiated from those for electricity finally both objective e g presence of swimming pool and subjective psychographic features e g conservation attitude are found to be relevant potential drivers of water electricity demands based on these findings we propose recommendations for designing a portfolio of mixed customized water electricity dsm interventions to foster conservation or peak shifting objectives

the construct of institutional distance through the lens of different institutional perspectives review analysis and recommendations this paper presents a review and critique of the 20 year old literature on institutional distance which has greatly proliferated we start with a discussion of the three institutional perspectives that have served as a theoretical foundation for this construct organizational institutionalism institutional economics and comparative institutionalism we use this as an organizing framework to describe the different ways in which institutional distance has been conceptualized and measured and to analyze the most common organizational outcomes that have been linked to institutional distance as well as the proposed explanatory mechanisms of those effects we substantiate our qualitative review with a meta analysis which synthesizes the main findings in this area of research building on our review and previous critical work we note key ambiguities in the institutional distance literature related to underlying theoretical perspectives and associated mechanisms distance versus profile effects and measurement we conclude with actionable recommendations for improving institutional distance research

inflation employment and welfare in the presence of transactions costs for some time now two issues of primary importance in macroeconomics and monetary theory have been the relation between inflation and unemployment the phillips curve and the optimum rate of inflation the optimum quantity of money in both of these areas the work of friedman and phelps has been influential friedman 1968 and phelps 1970 emphasized the role of inflationary expectations in generating a short run phillips curve like tradeoff but argued that in the long run the phillips curve is vertical that is friedman and phelps claimed that in the long run defined as the time period within which expectations fully adjust to actual circumstances inflation and employment should be uncorrelated more recently friedman 1977 has argued that since the rate of inflation and its variability tend to be positively related inflation and employment may be negatively related in the long run this is the positively sloped phillips curve phenomenon in recent years the link between inflation and employment has continued to receive considerable attention the vast rational expectations literature on the role of monetary policy and the equilibrium approach to the business cycle are in large part an outgrowth of the earlier phillips curve controversy the notion that there is an inverse long run relation between inflation and employment has recently received theoretical support from barro and santomero 1976 stockman 1981 and aschauer and greenwood 1983 related studies concerning the real effects of inflation have been undertaken by jovanovic 1982 stockman 1984 and abel 1985 the common element running through all of these papers is that the real effects of inflation arise from the transactions technology that underlies money demand l

the challenge of monetary theory departing from custom i want to address a problem that needs to be solved rather than one that has been solved i do not have much to contribute to its solution but i believe that the problem is important and want to focus attention on it in general terms the problem is to find appropriate conceptual foundations for monetary economics i believe that we do not as yet have a suitable theoretical framework for studying the functioning of a monetary system the main obstacle to the development of such a framework is our habit of thinking in terms of frictionless organized i e walrasian markets the problem is partly a problem of language the central concepts of economics demand supply and price are concepts that presuppose a system of centralized walrasian markets we are used to thinking in terms of these concepts and we tend to apply them rather automatically to the market for money frequently without realizing that the market for money must be a rather non walrasian market if indeed it can be called a market at all more or less all the models of monetary economics that are being used in practice proceed in this way using artifical adaptations of the walrasian centralized markets model to accommodate money without actually giving an account of what the role of money in the economy is the problem is one of pure economic theory however it bears on many important questions of applied economics and economic policy to study the relation between money income and prices we need a framework which gives a satisfactory account of the relation between the monetary system and the price mechanism to study the effects of central bank open market

the optimal rate of inflation and taxation abstract we investigate the optimal rate of inflation in a finitely lived individual model using the optimal commodity tax framework the inefficiency in dynamic allocation of the economy should be taken into account in optimal monetary policy the optimal rate of inflation may be positive when the steady state capital labor ratio is relatively smaller than the first best level

uncertainty inflation and welfare this paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk in a microfounded search theoretical monetary model we calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness we show that in the presence of imperfect insurance the estimated long run welfare costs of inflation are on average 40 to 55 smaller compared to a complete markets representative agent economy and that inflation induces important redistributive effects across households

avoiding the inflation tax i study the effects of inflation on the purchasing behavior of buyers in the lagos wright monetary economy the standard framework fails to capture the long standing intuition that when inflation increases agents try to spend their money holdings speedily i propose a simple realistic extension in which buyers can rebalance their money holdings only sporadically i e not every period i show that in such a case higher inflation can induce buyers to spend their money faster by frontloading their consumption and searching more intensively for transactions these trade distortions have traditionally been associated with the economic costs of inflation

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

heterogeneous consumers segmented asset markets and the real effects of monetary policy this paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects specifically i develop a flexible price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings because varieties of consumption bundles are purchased sequentially newly injected money disseminates slowly throughout the economy via second round effects the model predicts a short term inflation output trade off a liquidity effect countercyclical markups and procyclical wages after monetary shocks among other correlations of financial variables it also reproduces the empirical negative relationship between changes in the money supply and markups

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

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

the behavior of money velocity in high and low inflation countries this paper presents a general equilibrium model of money demand where the velocity of money changes in response to endogenous fluctuations in the interest rate the parameter space can be divided into two subsets one where velocity is constant as in standard cash in advance models and another one where velocity fluctuates as in baumol 1952 the model provides an explanation of why for a sample of 79 countries the correlation between the velocity of money and the inflation rate appears to be low unlike common wisdom would suggest the reason is the diverse transaction technologies available in different economies

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

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

optimal inflation and the government revenue mix abstract this paper examines the question of optimal inflation and taxation as a government optimal control problem by inclusion of bond finance and portfolio decisions by private agents in a perfect foresight framework it is shown that i optimal steady state inflation is independent of government revenue requirements ii inflation and tax rates do not necessarily move together in optimum

a note on the optimum quantity of money abstract it is shown that a rise in perfectly anticipated inflation enhances welfare across steady states however this result does not invalidate optimum quantity of money rather it is the problem of inappropriately using steady states to make welfare comparisons thus non steady state analysis is necessary to evaluate the full effect of inflation