monetary policy rules in the open economy effects on welfare and business cycles abstract this paper computes welfare maximizing taylor style interest rate rules in a business cycle model of a small open economy the model assumes staggered price setting and shocks to domestic productivity to the world interest rate to world inflation and to the uncovered interest rate parity condition optimized policy rules have a pronounced anti inflation stance and entail significant nominal and real exchange rate volatility the country responds to an increase in external volatility by holding more foreign assets the policy rule affects the variance and the mean of consumption the effect on the mean matters significantly for welfare

sustainability of the friedman rule in an international monetary policy game this article develops a two country monetary economy model in order to analyze the international monetary policy game between governments and the domestic monetary policy game between each government and its private sector we prove that if governments can commit to their own private sectors the cooperative equilibrium of the game between governments is for them to follow the friedman rule when governments lack such ability to commit we find that the friedman rule is more likely to be sustained in our open economy model than in the closedeconomy model of ireland jel e31 e52 e61 one recurring theme in the analysis of policy making is that in many situations policymakers can benefit from the opportunity to make a binding commitment to restrict their activities one such situation is what is known as the time consistency problem in monetary policy making a government or its monetary authority out of good intention may find it beneficial to generate unexpected inflation to fix some nonmonetary distortion in the economy for example goods market inefficiency due to monopoly power that is characterized by higher than efficient product prices this first best monetary policy however is not time consistent in the sense that firms foresee the government s incentive to impose monetary surprises and set their nominal prices at a higher level as a result the government s attempts to remedy the

generating real persistent effects of monetary shocks how much nominal rigidity do we really need abstract this paper attempts to assess whether money can generate persistent economic fluctuations in dynamic general equilibrium models of the business cycle we show that a small nominal friction in the goods market can make the response of output to monetary shocks large and persistent if it is amplified by real wage rigidity in the labor market we also argue that for plausible levels of real wage rigidity a small degree of nominal stickiness is sufficient for money to produce economic fluctuations as persistent as those observed in the data

the causal effect of family income on child health in the uk recent studies examining the effect of family income on child health have been unable to account for the endogeneity of income using data from a british cohort study we address this gap by exploiting exogenous variation in local labour market characteristics to instrument for family income we estimate the causal effect of family income on different measures of child health and explore the role of potential transmission mechanisms we find that income has a very small but significant causal effect on subjective child health and no significant effect on chronic health conditions apart from respiratory illnesses using the panel structure we show that the timing of income does not matter for young children moreover our results provide further evidence that parental health does not drive a spurious relationship between family income and child health our study implies that financial transfers are unlikely to deliver substantial improvements in child health

inflation financial markets and long run real activity abstract empirical evidence suggests that real activity the volume of bank lending activity and the volume of trading in equity markets are strongly positively correlated at the same time inflation and financial market activity are strongly negatively correlated in the long run as are inflation and the real rate of return on equity inflation and real activity are also negatively correlated in the long run particularly for economies with relatively high rates of inflation we present a monetary growth model in which banks and secondary capital markets play a crucial allocative function we show that at least under certain configurations of parameters the predictions of the model are consistent with these and several other observations about inflation finance and long run real activity

the role of expectations in adolescent schooling choices do youths respond to economic incentives i introduction over the postwar period the level of education attained by individuals in nations of the organisation for economic co operation and development has increased steadily this is especially true for the united states 1 in 1950 for example the average american aged 25 or older had 9 3 years of education by 2000 this had increased to 12 7 years this increase reflects sizable increases in the rate of high school completion in the cohort aged 16 24 in 1960 more than 27 were counted as high school dropouts by 2001 the proportion of high school dropouts in this age cohort had fallen to 10 7 although the proportion of whites in any given age cohort who graduated high school has exceeded that for african americans over this period this gap narrowed significantly during the 1970s and 1980s and by 2000 had nearly closed 2 observed trends in and patterns of educational attainment human capital accumulation and labor market success are determined by several factors in addition to changes in a wide variety of background factors such as ability motivation race and gender these involve decisions made by governments as reflected in school resources and macroeconomic performance and by parents e g parental education work effort and child care time also relevant are the choices made by adolescents themselves in response to the net economic returns of the options open to them in this article we explore the schooling choices of youths in response to their perception of these returns economic and sociological research on the determinants of the schooling outcomes of youths is extensive and distinguished 3 these studies focus primarily on the family neighborhood and peer group determinants of educational attainments and are largely reduced form in nature the role of youth preferences and the choices made in response to the economic incentives and constraints that young people face have not been systematically explored in these studies hence their results may attribute to background and family characteristics effects properly attributed to differences in youths own choices in response to the incentives that they face 4 in this study we address the role of youths own choice conditioned expectations in understanding their schooling choices by constructing a choice or switching model we emphasize the effect of individual student perceptions regarding the returns associated with graduating from high school versus dropping out while controlling for an extensive set of family and community factors youths are presumed to form their expectations by referring to the outcomes of a slightly older cohort of individuals who have characteristics similar to their own because these expected income returns are choice specific we require estimates of each youth s choice conditioned expected returns taken to be unobserved by the analyst but known by the youth 5 we focus on the high school graduation outcome for three reasons first individuals must complete high school to consider postsecondary schooling options hence the decision to complete high school carries with it an option value benefit 6 second high school completion the first schooling decision over which adolescents have some control plays a crucial role in understanding the declining labor market position of low skilled workers 7 finally our analysis of the high school graduation choice is nested within an extensive economic literature that addresses the determinants of this outcome by focusing on the role of youth s own expectations we have neglected other aspects of a complete analysis of the process of educational attainment for example we presume that our extensive set of family and neighborhood factors are exogenous to the outcome and independent of unobserved factors although we do not explicitly include school characteristics in our estimation our detailed neighborhood and family variables are likely to accurately proxy for neighborhood school quality

stock markets and development this paper asks if financial development especially stock market development affects the level and or the growth rate of economic activity it finds a substantial effect on both current wisdom suggests that the growth effects of financial intermediation could be either permanent or transitory for instance the greenwood jovanovic 1990 henceforth gj model has an ak stucture with no diminishing returns to the reproducible factor and a permanent exogenous improvement in financial structure would cause a permanent increase in the rate of growth on the other hand if the returns to the reproducible factor did diminish better intermediation could lead only to level effects since one should not a priori exclude either growth effects or level effects we shall look for both our search for growth effects will use the gj model our search for level effects will rely on an amended version of the mankiw romer and weil 1992 henceforth mrw structure

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

industry growth and capital allocation does having a market or bank based system matter are market based or bank based financial systems better at financing the expansion of industries that depend heavily on external finance facilitating the formation of new establishments and improving the efficiency of capital allocation across industries we find evidence for neither the market based nor the bank based hypothesis while legal system efficiency and overall financial development boost industry growth new establishment formation and efficient capital allocation having a bank based or market based system per se does not seem to matter much

two stage residual inclusion estimation addressing endogeneity in health econometric modeling the paper focuses on two estimation methods that have been widely used to address endogeneity in empirical research in health economics and health services research two stage predictor substitution 2sps and two stage residual inclusion 2sri 2sps is the rote extension to nonlinear models of the popular linear two stage least squares estimator the 2sri estimator is similar except that in the second stage regression the endogenous variables are not replaced by first stage predictors instead first stage residuals are included as additional regressors in a generic parametric framework we show that 2sri is consistent and 2sps is not results from a simulation study and an illustrative example also recommend against 2sps and favor 2sri our findings are important given that there are many prominent examples of the application of inconsistent 2sps in the recent literature this study can be used as a guide by future researchers in health economics who are confronted with endogeneity in their empirical work

the long run relationship between inflation and output in postwar economies abstract we investigate the relationship between inflation and real output in a large sample of postwar economies our methodology is to use a structural vector autoregression to estimate the response of the level of real output to permanent inflation shocks separately for each country we find that a permanent shock to inflation is not associated with a permanent movement in the level of real output for most countries in our sample the main exceptions are certain low inflation countries in which permanent inflation shocks permanently increase the level of output we also find that permanent inflation shocks do not permanently influence real output growth rates in our sample

stock market returns and inflation evidence from other countries this paper investigates the relation between common stock returns and inflation in twenty six countries for the postwar period our results do not support the fisher hypothesis which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one to one correspondence with expected inflation there is a consistent lack of positive relation between stock returns and inflation in most of the countries

urban poverty and juvenile crime evidence from a randomized housing mobility experiment this paper uses data from a randomized housing mobility experiment to study the effects of relocating families from high to low poverty neighborhoods on juvenile crime outcome measures come from juvenile arrest records taken from government administrative data our e ndings seem to suggest that providing families with the opportunity to move to lower poverty neighborhoods reduces violent criminal behavior by teens

estimating the effect of income on health and mortality using lottery prizes as an exogenous source of variation in income a vast literature has established a strong positive relation between income and health status and a negative relation with mortality this paper studies the effects of income on health and mortality using only the part of income variation due to a truly exogenous factor monetary lottery prizes of individuals the findings are that higher income causally generates good health and that this effect is of a similar magnitude as when traditional estimation techniques are used a 10 percent income increase improves health by about 4 5 percent of a standard deviation

how good are standard debt contracts stochastic versus nonstochastic monitoring in a costly state verification environment the authors investigate ex ante efficient contracts in an environment in which implementation is costless in this environment standard debt contracts will typically not be optimal optimal contracts may involve defaults even in states in which the borrower is fully able to repay the authors then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts when model parameters are calibrated to realistic values the welfare loss from exogenously imposing this restriction is extremely small thus if implementation costs are actually nontrivial as seems likely standard debt contracts will be very close to optimal copyright 1994 by university of chicago press

money and liquidity effects separating demand from supply in the canonical monetary policy model money is endogenous to the optimal path for interest rates and output but when liquidity provision by banks dominates the demand for transactions money from the real economy money is likely to contain information for future output because of its impact on financial spreads and so we decompose broad money into primitive demand and supply shocks we find that supply shocks have played a significant role in the time series in each of the usa uk and eurozone in the short to medium term we further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

destabilizing optimal policies in the business cycle abstract it is often believed that governments should either abstain from leading activist policies or if they lead such policies that these policies should somehow be stabilizing in the sense of reducing the volatilities of some endogenous variables we construct a model with explicit foundations where the optimal policies are activist and they make both employment and output more volatile than in the no intervention case

the friedman rule in an overlapping generations model with nonlinear taxation and income misreporting this paper models a two period overlapping generations economy with money populated with individuals of different skills they face a nonlinear income tax schedule and can engage in tax evasion money serves two purposes the traditional one modeled through a money in the utility function it also facilitates tax evasion the main message of the paper is that income tax evasion in this framework leads to the violation of the friedman rule the paper also shows that even in the absence of tax evasion when optimality requires differential commodity taxation complementarity of real cash balances and labor supply does not guarantee the optimality of the friedman rule as a boundary solution an additional assumption is required

recursive monetary policy games with incomplete information abstract this paper provides recursive methods for analyzing the credible equilibria of an incomplete information monetary policy game the policy game is one in which a discretionary government has a short run temptation to engage in a surprise monetary expansion it also has the opportunity to imitate a government that always implements the ex ante optimal monetary policy actions we derive an algorithm for computing the set of credible equilibrium payoffs we use this algorithm to explore the idea that incomplete information monetary policy games of this kind have fewer equilibria and less indeterminacy than their complete information counterparts

volatility growth and welfare this paper constructs an endogenous growth model driven by self ful lling expectation shocks to explain the stylized fact that the average growth rate of gdp is related negatively to volatility and positively to capacity utilization the implied welfare gain from further stabilizing the u s economy is about a quarter of annual consumption which is consistent in order of magnitude with estimates based on the empirical studies of ramey and ramey 1995 and alvarez and jermann 2004 hence policies designed to reduce uctuations can generate large welfare gains because smaller uctuations are associated with permanently higher rates of growth

banking sector development and interest rate volatility in emerging economies over the last decades macroeconomic stability is said to be one of the major concerns of emerging economies financial sector as a core of macroeconomic stability has been under close consideration of policy makers the relationship between interest rate uncertainty and banking sector development as one of the most important indicators of financial sector development especially for emerging economies has not received enough attention in the literature perhaps this article is the most comprehensive study that investigates the relationship between interest rate uncertainty and banking sector development for a large group of emerging economies to do this the short run and long run models using a bounds testing approach to cointegration for 12 emerging economies over the period 1980 2011 have been developed estimated results from all models indicate that interest rate uncertainty has significant effect on banking sector development in both short run and long run phenomena in the majority of countries

the determinants of educational attainment modeling and estimating the human capital model and education production functions this paper develops and estimates a theoretical model of an individual s high school graduation choice the model incorporates the idea of a utility maximizing youth responding to the economic incentives associated with incremental education as posited by the human capital literature however it also allows for family neighborhood and school characteristics to affect the process of being educated as posited by the education production function literature estimation of the model using the panel study of income dynamics psid supplemented with neighborhood and school data indicates that indeed students respond to economic incentives in making education choices however most of the effects of background characteristics are working through the education process rather than affecting returns to schooling

optimal monetary policy in a phillips curve world abstract in this paper we study optimal monetary policy in a model that integrates the modern theory of unemployment with a liquidity model of monetary transmission two policy environments are considered period by period optimization time consistency and full commitment ramsey allocation when the economy is subject to productivity shocks the optimal policy is pro cyclical we also characterize the long term properties of monetary policy and show that with commitment the optimal inflation rate is inversely related to the bargaining power of workers both results find empirical support in the data

does judicial efficiency lower the cost of credit the authors investigate the effect of judicial efficiency on banks lending spreads for a large cross section of countries they measure bank interest rate spreads for 106 countries at an aggregate level and for 32 countries at the level of individual banks the authors find that after controlling for a number of other country characteristics judicial efficiency in addition to inflation is the main driver of interest rate spreads across countries this suggests that in addition to improving the overall macroeconomic climate in a country judicial reforms through a better enforcement of legal contracts are critical to lowering the cost of financial intermediation for households and firms

moving to opportunity in boston early results of a randomized mobility experiment this paper examines the short run impacts of a change in residential neighborhood on the well being of low income families using evidence from a program in which eligibility for a housing voucher was determined by random lottery we examine the experiences of households at the boston site of moving to opportunity mto a demonstration program in five cities families in high poverty public housing projects applied to mto and were assigned by lottery to one of three groups experimental offered mobility counseling and a section 8 subsidy valid only in a census tract with a poverty rate of less than 10 percent section 8 comparison offered a geographically unrestricted section 8 subsidy or control offered no new assistance but continued to be eligible for public housing our quantitative analyses of program impacts uses data on 540 families from a baseline survey at program enrollment a follow up survey administered l to 3 5 years after random assignment and state administrative data on earnings and welfare receipt 48 percent of the experimental group and 62 percent of the section 8 comparison group moved through the mto program one to three years after program entry families in both treatment groups were more likely to be residing in neighborhoods with low poverty rates and high education levels than were families in the control group however while members of the experimental group were much more likely to be residing in suburban communities than were those in the section 8 group the lower program take up rate among the experimental group resulted in more families remaining in the most distressed communities households in both treatment groups experienced improvements in multiple measures of well being relative to the control group including increased safety improved health among household heads and fewer behavior problems among boys experimental group children were also less likely to be a victim of a personal crime to be injured or to experience an asthma attack there are no significant impacts of either mto treatment on the employment earnings or welfare receipt of household heads in the first three years after random assignment

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

female labour supply and on the job search an empirical model estimated using complementary data sets we develop an empirical model of labour supply that is consistent with on the job search and which is identified and estimated by combining two data sets the u k family expenditure survey which contains information on income and expenditure and the u k labour force survey which has data on hours and job search behaviour we provide statistical evidence on the compatibility of the two samples for the purposes of estimating our model we find that search has a direct negative effect on hours of work and we establish a strong positive effect of wages on hours

financial markets the pattern of industrial specialization and comparative advantage evidence from oecd countries due to underlying technological and organizational differences industries differ in their need for external finance since services provided by the financial sector are largely immobile across countries the pattern of industrial specialization should be influenced by the level of financial development among oecd countries we find a strong causal effect of the financial sector on industrial specialization further the financial sector is a source of comparative advantage in a way consistent with the hecksher ohlin vanek model results are also presented on which aspects of financial systems are important for specialization and comparative advantage

gaps and triangles we derive principles of optimal short run monetary policy in a real business cycles model with money and prices set in advance the optimal allocation is achieved under the friedman rule however given that policy the allocation is indeterminate we move away from the friedman rule take the interest rate path as exogenous and characterize the optimal money supply policy we identify the conditions under which it is optimal to replicate the allocation under exible prices in general sticky prices provide the planner with tools to improve upon a distorted exible prices allocation

monitoring the monitor an incentive structure for a financial intermediary this paper studies financial intermediation i e delegated monitoring in a costly state verification model there are a finite number of agents thus the intermediary cannot fully diversify its portfolio and is subject to default risk the role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders two questions arise when a delegated monitor is subject to non trivial default risk a what arrangement solves the problem of monitoring the monitor b what intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders unlike previous delegated monitoring studies the law of large numbers is not sufficient to obtain our results instead we appeal to a stronger results the large deviation principle which establishes that convergence in the law of large numbers is exponential

the determinants of mortality mortality rates have fallen dramatically over time starting in a few countries in the 18th century and continuing to fall today in just the past century life expectancy has increased by over 30 years at the same time mortality rates remain much higher in poor countries with a difference in life expectancy between rich and poor countries of also about 30 years this difference persists despite the remarkable progress in health improvement in the last half century at least until the hiv aids pandemic in both the time series and the cross section data there is a strong correlation between income per capita and mortality rates a correlation that also exists within countries where richer better educated people live longer we review the determinants of these patterns over history over countries and across groups within countries while there is no consensus about the causal mechanisms we tentatively identify the application of scientific advance and technical progress some of which is induced by income and facilitated by education as the ultimate determinant of health such an explanation allows a consistent interpretation of the historical cross country and within country evidence we downplay direct causal mechanisms running from income to health

institutions household credit composition and the business cycle we show that the negative effect of household credit growth on subsequent economic growth documented in the recent literature is not the same across countries the effect is stronger in countries with weak institutions where the fraction of consumer credit in total household credit is greater that is an important nuance as consumer credit is a sizable part of household credit in many emerging markets and its rapid buildup should be observed with the same caution as a rapid buildup in housing credit jel g21 e32 e44

from institutions to financial development and growth what are the links this paper presents an integrated overview of the literature linking institutions financial development and economic growth from the large body of research on institutional development the paper first selects those contributions that make it possible to study the role of institutional arrangements in ameliorating worsening the information frictions and transaction costs that characterize the development of financial markets the paper then investigates the theoretical mechanisms by which these specific frictions affect economic growth and presents the stock of empirical evidence quantifying the impact of institutions on growth through financial development

cross country evidence on long run growth and inflation i introduction many believe inflation has important adverse effects on long run economic performance this conviction is based on the logic summarized by fischer and modigliani 1978 for example that firms and workers devote productive resources to dealing with inflation that inflation uncertainty reduces efficiency by discouraging long term contracting and increasing relative price variability and so on nonetheless many others believe that the magnitudes of such costs are small and insignificant at moderate rates of inflation cross country growth regressions would seem to offer a sensible means of empirically determining inflation s effects 1 such analysis would appear less sensible however in light of the levine and renelt 1992 finding that estimates of the growth inflation relationship vary sharply with the regression specification nonetheless analyses completed subsequent to levine and renelt 1992 for example fischer 1991 1993 cozier and selody 1992 and cukierman et al 1993 continue to use growth regressions to infer inflation s effects and typically conclude growth and inflation to be inversely related this paper shows that while inflation does generally appear to be inversely related to growth estimates of the relationship suffer two additional robustness problems problems which emerge across a variety of model specifications more specifically this analysis first demonstrates the sensitivity of growth inflation results to modifications to the sample of countries limited from the start to low and moderate inflation countries it next demonstrates the sensitivity of results to modifications in the time period for example among oecd countries abbreviating the covered time period from 1960 85 to 1968 85 reduces inflation s effect on growth to insignificance such fragility with respect to the country sample and time period may be viewed as even more fundamental than the regression specification sensitivity documented by levine and renelt 1992 this analysis then shows that the same robustness problems plague alternative specifications of the growth inflation relationship the baseline regression estimated here supposes a linear growth inflation relationship formally it follows from an augmented solow growth model 1956 in which inflation drives the level but not the growth rate of steady state income plausible alternatives include allowing inflation to have non linear effects on growth as in log and quadratic specifications and respecifying the model such that inflation formally drives steady state growth rather than just the steady state level of income such alternatives to the baseline specification yield results which suffer the same basic difficulties of sensitivity to country sample and time period ultimately these findings should further discourage that is lay to rest the practice of quantifying inflation s effects with cross country growth regressions while cross country growth regressions may be viewed as generally suggesting that inflation imposes costs the fragility of the estimates indicates researchers will need to use alternative approaches to better identify inflation s costs researchers might for example find it productive to build on the investment analyses of huizinga 1993 and pindyck and solimano 1993 which combine time series and cross section variation ii theory as detailed by mankiw romer and weil 1992 the solow growth model 1956 augmented to allow for human capital may be used to derive a simple relationship between growth and initial income population growth and the rates of physical and human capital investment 1 ln y sub i t y sub i 0 gamma sub 0 gamma sub 1 ln y sub i 0 gamma sub 2 ln n sub i g delta gamma sub 3 ln s sub i gamma sub 4 ln h sub i v sub i the variable y denotes income per capita n represents exogenous population growth g denotes the exogenous rate of growth of labor augmenting technology delta is the common rate of depreciation of physical and human capital and s and h denote respectively the rates of physical and human capital accumulation

who is credit constrained in the u s economy an important assumption of the life cycle model of consumption is the postulate of perfect capital markets this hypothesis has recently been challenged by substantial empirical evidence hall and mishkin 1982 using the panel study of income dynamics estimate that 20 percent of united states families are liquidity constrained mariger 1986 derives a life cycle model with endogenous liquidity constraints and using a cross section estimates this fraction to be 19 4 percent hubbard and judd 1986 simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences 19 0 percent of united states consumers are liquidity constrained the emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life cycle model in addition hayashi 1985 and zeldes 1989 investigate the correlation among consumption wealth and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving the main limitation of these studies is that in their data sets constrained consumers are not observable and have to be identified via indirect evidence thus there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained this paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable and explicitly links their existence to credit market imperfections and personal characteristics the data drawn from the 1983 survey of consumer finances scf and described in section ii provide information on individuals whose request for credit has been rejected by financial intermediaries in section iii a model is developed in which consumers and lenders behavior jointly determines the probability that a consumer is rationed in the credit market this probability is then

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

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

the economics of schooling production and efficiency in public schools n recent years public and professional interest in schools has been heightened by a spate of reports many of them critical of current school policy these policy documents have added to persistent and long standing concerns about the cost effectiveness and fairness of the current school structure and have made schooling once again a serious public issue as in the past however any renewed interest in education is likely to be short lived doomed to dissipate as frustration over the inability of policy to improve school practice sets in this frustration about school policy relates directly to knowledge about the educational production process and in turn to underlying research on schools although the educational process has been extensively researched clear policy prescriptions flowing from this research have been difficult to derive 2 there exists however a consistency to the research findings that does have an immediate application to school policy schools differ dramatically in quality

financial market frictions monetary policy and capital accumulation in a small open economy abstract we consider a small open economy with a costly state verification problem and binding reserve requirements the presence of these frictions leads to the existence of two steady states with credit rationing an increase in the money growth rate the world interest rate or reserve requirements raises lowers gdp in the high low activity steady state however sufficiently large increases in money growth or the world interest rate can transform the high activity steady state from a sink to a source the model also delivers prescriptions for restoring the stability of this steady state in such an eventuality journal of economic literatureclassification numbers e5 f4

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

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

oil price shocks and chinese banking performance do country risks matter abstract this paper contributes to the existing literature by investigating the impacts of oil prices on bank performance through a broad array of camel capital adequacy asset quality management earnings and liquidity indicators in china over the period 2000 2014 to gain further insights into this issue we also discuss whether the correlations change with different dimensions of country risk i e economic financial and political which extant studies ignored the results reveal that oil prices have a significant impact on banking performance as their increase triggers a reduction in banking performance in terms of capitalization management efficiency earning power and liquidity however these adverse effects are mitigated by country stability especially economic stability and political stability these results are important for policy makers who should be cautious when formulating a strategy for macroeconomic stability from the managerial perspective bank managers should consider establishing early warning and response mechanisms on the back of oil price shocks in order to operate under better performance

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

optimal fiscal and monetary policy equivalence results in this article we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy we consider standard monetary economies that differ in the price setting restrictions imposed on the firms we show that independently of the degree or type of price stickiness it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness in this sense environments with different price setting restrictions are equivalent

on credible monetary policy and private government information credible and optimal monetary policies are considered in environments in which the government observes a signal that is correlated with the state of the economy when the signal is public information it is optimal for monetary policy to be conditioned upon it the extent to which such conditioning should occur when the signal is the private information of the government depends upon the government s incentives to misrepresent information it is shown that in some cases the ramsey policy is incentive compatible in others it is not in the latter cases policy must be constrained to be incentive compatible this may result in penalty phases along the equilibrium path following apparent mistakes by the policy maker it may result in the optimal monetary policy making no use of the signal journal of economic literature classification numbers c73 e52 e58

monetary stabilisation with nominal asymmetries optimal monetary stabilisation in the standard new keynesian framework usually assumes a policy loss function from outside the model in this paper in contrast the objective arises directly from the model credit constraints and sticky nominal debt contracts imply that monetary stabilisation has asymmetric impacts depending on whether consumers are credit constrained the policy problem is to maximise some weighting of the expected utility of the different types of consumer features of optimal stabilisation are derived that do not appear to be far out of line with empirical evidence for many countries but that clearly conflict with standard loss function results

on the optimal monetary policy response to noisy indicators abstract we describe a behavior of a central bank when its measures of current inflation and output are subject to measurement errors in a framework of optimizing models with nominal price stickiness in our model a central bank sets the interest rate equal to its current estimate of the so called wicksellian natural rate of interest this is shown to imply that the interest rate responds to the central bank s estimates of both current inflation and output gap as advocated by taylor 1993 it is also shown that the noise contained in the indicators justifies a degree of policy cautiousness a reduced form representation of optimal policy should exhibit interest rate smoothing which is often found in the empirical literature on monetary policy reaction functions

strategic monetary policy in interdependent economies gains from coordination reconsidered abstract there is a wide acceptance that gains to international monetary policy coordination are small at best and that the need of policy coordination is questionable this conclusion however follows from the underlying presumption that monetary policy is concerned with the stabilization of macroeconomic fluctuations only this paper presents a general short run monetary policy analysis within a familiar two country new open economy macroeconomics noem framework where national monetary policy involves the choice of a deterministic growth trend of money supply average inflation rate and stochastic state dependent deviations of actual money supply from the deterministic trend stabilization strategic beggar thy neighbor considerations induce the deviation of both policy choices from their socially optimal values the gains from international coordination of the average inflation rate are of first order and hence larger than the gains from the coordination of the stabilization policies which are of second order

how much bang for the buck mexico and dollarization two arguments advanced in favor of mexico abandoning the peso and adopting the u s dollar are to lower exchange rate volatility and inflation we are not able to identify an independent link between economic growth and either the exogenous component of exchange rate volatility or the exogenous component of inflation exchange rate volatility generally reflects other factors rather than representing an independent growth determinant the findings are consistent with theoretical predictions that inflation influences growth by affecting financial development however we present suggestive evidence that legal reforms offer greater financial development dividends for mexico than adopting the dollar two of the main arguments advanced in favor of mexico abandoning the peso and adopting the u s dollar are 1 to lower inflation and inflation uncertainty and 2 to reduce exchange rate volatility from 1960 tol995 mexico s annual inflation rate averaged about 24 5 percent while inflation in the united states averaged 5 5 percent in addition mexico has experienced severe exchange rate fluctuations against the dollar especially in the last fifteen years supporters of complete dollarization believe that reducing the rate of inflation which moves very closely with the volatility of inflation toward u s levels and eliminating exchange rate variability vis a vis the u s dollar will enhance the business climate and thereby promote economic performance if lower inflation rates and less exchange rate variability boost growth then this strengthens the case for dollarization if however inflation and exchange rate variability do not exert large impacts on economic activity then the arguments in favor of dollarization must be sought elsewhere besides inflation and exchange rate volatility policymakers must contemplate an array of factors in deciding on dollarization dollarization would eliminate discretionary monetary policy and limit lender of last resort facilities during financial sec

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

interest margins and bank regulation in central america and the caribbean abstract this paper examines empirically the determinants of bank interest margins in central america and the caribbean over the period 1998 2014 a particular focus is set on the impact of differences in the regulatory environment and market structure across countries in explaining the interest margins of individual banks our results suggest that bank market power operating costs credit risk and liquid asset holdings increase the margin between loan and deposit rates while increased income diversification and gdp growth are associated with lower loan deposit spreads when considering information on banking regulation we find strong evidence to support our main hypothesis that improvements in market quality and liberalization have a significant effect on interest margins more specifically reductions in entry requirements to banking higher involvement of foreign banks and increased financial statement transparency are associated with significant reductions in interest margins

on the relevance of exchange rate regimes for stabilization policy this paper assesses the relevance of the exchange rate regime for stabilization policy using both fiscal and monetary policy we conclude that the exchange rate regime is irrelevant this is the case independently of the severity of price rigidities independently of asymmetries across countries in shocks and transmission mechanisms the only relevant conditions are on the mobility of labor and financial assets the results can be summarized with the claim that every currency area is an optimal currency area however with labor mobility or tradable state contingent assets additional policy instruments would be required to establish the irrelevance result

financial market participation financial intermediation and monetary policy abstract it is not uncommon for the friedman rule to be optimal in neoclassical models with money notably previous studies also find that financial intermediation is not welfare improving when money is costless to hold this paper departs from previous studies by highlighting the importance of participation costs in financial markets for the participation in financial intermediation and monetary policy as in previous work the friedman rule is optimal however i demonstrate that the welfare gains from disinflation are much higher when savings are intermediated if direct participation costs in financial markets are significant consequently financial intermediation can still be optimal at the friedman rule

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

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

the need for international policy coordination what s old what s new what s yet to come the first generation of policy coordination models was introduced some 25 years ago it provided a rationale for policy coordination but the gains from coordination were generally thought to be small now a new generation of policy coordination models is emerging incorporating monopolistic competition and nominal inertia here we examine macroeconomic interdependence and the scope for policy coordination in a tractable second generation model with two countries and multiple sectors initial calibration of the model suggests that second generation models may have more scope for policy coordination than did the first d 2004 elsevier b v all rights reserved

the white black educational gap stalled progress and the long term consequences of the emergence of crack cocaine markets abstract we propose the rise of crack cocaine markets as a key explanation for the end to the convergence in black white educational outcomes in the united states that began in the mid 1980s after constructing a measure to date the arrival of crack markets in cities and states we show that the decline in educational outcomes for black males begins with the start of the crack epidemic we also show that there are higher murder and incarceration rates after the arrival of crack cocaine and that these are predictive of lower black high school completion rates a result consistent with human capital theory we estimate that effects related to crack markets can account for approximately 40 to 70 of the fall in black male high school completion rates

the panel study of income dynamics after fourteen years an evaluation this article considers the representativeness of the panel study of income dynamics psid over its 14 year history from 1968 to 1981 given the dynamics of entry and exit from the panel by 1981 40 of the original members had left the sample and were replaced by new entrants who joined either existing households or new households being formed by members of the original sample we consider the distribution of demographic characteristics and earnings equations over time and we compare the psid with the current population survey cps by either approach we find little evidence that the psid has become unrepresentative

healthy bodies and thick wallets the dual relation between health and economic status there is abundant evidence of a quantitatively large association between many measures of economic status including income and wealth and a variety of health outcomes such as mortality or morbidity however considerable and often heated debate remains especially across disciplines about the direction of causation and about why the association arises although medical scientists are often convinced that the dominant if not exclusive pathway is that variation in socioeconomic status produces health disparities they are increasingly debating among themselves about why low economic status might lead to poor health at least for modern industrial countries 1 the old standby arguments the less well to do have access to less or lower quality medical care or a stronger pattern of deleterious personal behaviors have been rejected as insufficient instead a series of intriguing competing theories have arisen that emphasize long term impacts of early childhood or even inter uterine environmental factors the cumulative effects of prolonged exposures to individual stressful events or reactions to macro societal factors such as rising levels of income inequality a common link is that each theory attempts to document the physiological processes through which low economic status leads to poorer health while these scientific questions are extremely important this research has taken place with little input from economists economists are now making contributions about the alternative pathway the impact poor health may have on economic resources poor health may restrict a family s capacity to earn income or to accumulate assets by limiting work or by raising medical expenses at a minimum this work should provide a caution against exaggerating the magnitude of causation from economic status to health outcomes but the potential contribution runs deeper as people age the evolving variation in individual health outcomes may offer additional statistical information to estimate parameters of household savings and consumption behavior that so far have proven to be somewhat elusive thus incorporating health uncertainty and risk into economic models should eventually enrich our understanding of basic tenets of household behavior the first section of this paper documents the size of the association between health and one prominent economic status measure household wealth section two deals with how health influences economic status by sketching out reasons why health may alter household savings and eventually wealth and then providing estimates of the empirical magnitude of these effects section three shifts attention to the alternative pathway the links between economic status and health and summarizes 2major controversies and evidence surrounding these issues

identification of endogenous social effects the reflection problem this paper examines the reflection problem that arises when a researcher observing the distribution of behaviour in a population tries to infer whether the average behaviour in some group influences the behaviour of the individuals that comprise the group it is found that inference is not possible unless the researcher has prior information specifying the compisition of reference groups if this information is available the prospects for inference depend critically on the population relationship between the variables defining reference groups and those directly affecting outcomes inference is difficult to implossible if these variables are functionally dependent or are statistically independent the prospects are better if the variables defining reference groups and those directly affecting outcomes are moderately related in the population

optimal monetary policy with endogenous entry and product variety deviations from long run price stability are optimal in the presence of endogenous entry and product variety in a sticky price model in which price stability would be optimal otherwise long run inflation deflation is optimal when the benefit of variety to consumers falls short of exceeds the market incentive for creating that variety the desired markup price indexation exacerbates this mechanism plausible preference specifications and parameter values justify positive long run inflation rates however short run price stability around this non zero trend is close to optimal even in the presence of endogenously time varying desired markups that distort the intertemporal allocation of resources

transactions costs technological choice and endogenous growth abstract hicks a theory of economic history clarendon press oxford 1969 argues that an important aspect of industrial development is the adoption of technologies requiring highly illiquid capital investments the adoption of such technologies becomes economically viable in the presence of low cost financial markets that provide liquidity to investors this observation provides a mechanism by which the costs of transacting in financial markets affect the equilibrium choice of technology productive efficiency and by implication growth we analyze how the costs of financial market transactions affect the set of technologies in use and the equilibrium growth rate transactions cost reductions may depending on the capital structure enhance or reduce growth journal of economic literature classification numbers d90 e13 g14

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

the role of countercyclical monetary policy when firms set nominal prices in advance optimal monetary policy insulates aggregate output against shocks to demand it can do so however by following the constant money growth rule advocated by milton friedman it need not respond to the shocks in an actively countercyclical way in addition to the extent that output fluctuations are driven by shocks to supply money growth should be procyclical

regulations market structure institutions and the cost of financial intermediation this paper examines the impact of bank regulations market structure and national institutions on bank net interest margins and overhead costs using data on over 1400 banks across 72 countries while controlling for bankspecific characteristics the data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation inflation also exerts a robust positive impact on bank margins and overhead costs while concentration is positively associated with net interest margins this relationship breaksdownwhencontrolling for regulatory impediments to competition and inflation furthermore bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection while these institutional indicators robustly explain cross bank net interest margins and overhead expenditures thus bank regulations cannot be viewed in isolation they reflect broad national approaches to private property and competition

optimal monetary policy optimal monetary policy maximizes the welfare of a representative agent given frictions in the economic environment constructing a model with two sets of frictions costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods we find optimal monetary policy is governed by two familiar principles first the average level of the nominal interest rate should be sufficiently low as suggested by milton friedman that there should be deflation on average yet the keynesian frictions imply that the optimal nominal interest rate is positive second as various shocks occur to the real and monetary sectors the price level should be largely stabilized as suggested by irving fisher albeit around a deflationary trend path since expected inflation is roughly constant through time the nominal interest rate must therefore vary with the fisherian determinants of the real interest rate although the monetary authority has substantial leverage over real activity in our model economy it chooses real allocations that closely resemble those which would occur if prices were flexible in our benchmark model there is some tendency for the monetary authority to smooth nominal and real interest rates

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

the cyclicality of price cost margins in banking an empirical analysis of its determinants i introduction in this paper we study the cyclical behavior of price cost margins in banking calculated as the difference between the interest rate on loans and deposits using time series quarterly data for the period 1979 2005 in the united states this cyclical behavior of banks price cost margins a key fact about business fluctuations has received little attention before dueker and thornton 1997 find evidence that in cyclical downturns banks opt for a relatively high price cost margin however they focus exclusively on the markup of the bank prime lending rate over the marginal cost of funds for banks mandelman 2006 presents evidence on the cyclicality of margins for a large sample of countries and uses foreign bank penetration to explain the behavior of margins 1 in olivero 2005 aliaga diaz 2006 and aliaga diaz and olivero 2010a we document the countercyclicality of banks price cost margins in the united states in that paper we do so using an atheoretical methodology based on var forecast errors to measure comovement between variables 2 in this paper we build on this atheoretical evidence and take a step further by constructing an empirical model of the determinants of the cyclical behavior of margins here we take a theory based approach to decide on the inclusion of the relevant regressors that belong to this model doing so allows us to contribute to the literature by providing potential explanations for the previously documented countercyclical nature of margins monetary policy and credit risk could be suggested as the main and potentially the only determinants of the cyclical behavior of margins on the one hand the bank lending channel of monetary transmission predicts that the federal funds rate as a monetary policy indicator and margins are directly related therefore if policy rates exhibit a particular cyclical behavior not controlling for monetary policy could bias the estimations on the cyclical behavior of margins on the other hand credit risk is expected to be countercyclical and to raise margins so that default should help explain the countercyclicality of the latter based on these two observations our empirical methodology consists of two steps in a first step we test whether the negative and significant contemporaneous sample correlations between margins and a business cycle indicator are robust to the inclusion of controls related to monetary policy default risk and banking regulation results show it is so that there seems to be other channels through which fluctuations in the economy give rise to the observed countercyclicality of margins in a second step we look for these channels and offer several potential explanations for the observed behavior interest rate risk the economy s financial depth banks liquidity and capitalization and the share of total assets held by large banks all exert a significant impact on the behavior of margins over the business cycle these conclusions are consistent across alternative definitions of the margins and the business cycle indicator our work is linked to two strands of research in macroeconomics first our countercyclicality results are linked to the large literature on countercyclical markups in goods markets and its effects on aggregate demand started by rotemberg and saloner 1986 and rotemberg and woodford 1992 second price cost margins that vary endogenously and countercyclically in response to the state of the economy are a necessary condition for the existence of a financial accelerator as an amplifier of business fluctuations see for example bernanke and gertler 1989 and bernanke gertler and gilchrist 1998 therefore the countercyclical nature of price cost margins that we study here provides empirical support to the large body of literature in macroeconomic theory on this financial accelerator with price cost margins in the market for credit being countercyclical credit becomes more expensive in bad times firms may delay investment and production as a result and recessions may be exacerbated

optimal commitment policy under noisy information abstract this paper studies an advantage of commitment over discretion when a central bank observes only noisy measures of current inflation and output in the context of an optimizing model with nominal price stickiness under a commitment regime if current policy turns out to be too expansionary contractionary because of the bank s information problem subsequent policies should be slightly contractionary expansionary by following this approach the central bank can improve the trade off between the fluctuations of its goal variables caused by economic shocks and their fluctuations caused by the bank s response to measurement error

health in the cities when the neighborhood matters more than income using a rich italian cross sectional dataset we estimate the effect of a neighborhood problems aggregate including pollution crime and noise on self assessed health presence of chronic conditions and limitations in daily activities we address the self selection of the residents in their neighborhoods as well as the possible endogeneity of income with respect to health through instrumental variable methods and several endogeneity tests the main novelty is the sound estimation of the neighborhood effect on health using observational data which has the advantage of providing general results that are not dependent on any experimental design this allows us to fully compare the neighborhood effect with the traditional socioeconomic determinants of health our main findings are that low quality neighborhoods are strongly health damaging this effect is comparable to the primary upper secondary education health differential and is even higher than the impact that poor economic circumstances have on health

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

price level targeting and stabilization policy we construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy prices are fully flexible and money is essential for trade our main result is that if the central bank pursues a price level target it can control inflation expectations and improve welfare by stabilizing short run shocks to the economy the optimal policy involves smoothing nominal interest rates that effectively smooths consumption across states

financial development convergence abstract we show that credit levels relative to gdp and other measures for financial development tend to converge across countries over time the results are obtained using a broad sample of countries over many years and controlling for the quality of country level institutions the efficiency of financial institutions and a range of macroeconomic variables while we find evidence for convergence in the broad sample we show that it levels off when countries reach a medium level of financial development at high levels of financial development convergence slows down even more and becomes negligible