expectations the exchange rate and the current account abstract a critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy theoretically the correlation between the exchange rate and the current account seems to be ambiguous in particular the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously lastly the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised

a theory of current account and exchange rate determinations abstract the purpose of this paper is to construct a two period two country model that derives the current account the exchange rate the terms of trade and real interest rates from optimal behavior principles this is done by constructing a model that uses money mainly as a means of exchange where the technology of exchange is flexible due to potential substitutability of time and real balances as a means of coordinating transactions the discussion results in a framework that integrates elements of net saving theories and the monetary approach into a unified structure in which the two approaches are complementary viewpoints

the distribution of money and prices in search equilibrium this article considers a search theoretic model of monetary exchange agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings determining endogenously the distributions of money and of prices i show that money is neutral if changes in the money supply are accomplished via proportional transfers however within the class of lump sum transfers an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low but when inflation is high enough the opposite effects occur

exchange rate regime reforms with black market leakages abstract many countries have multiple exchange rate regimes with black or secondary currency markets operating alongside an exchange rate pegged or determined in interbank or auction markets leakages occur across these markets necessitating careful analysis of the dynamic effects of numerous policy instruments using a model with multiple exchange rates and leakages we trace the dynamic effects on official and parallel foreign exchange markets of exchange rate unification changes in foreign exchange surrender requirements taxes on trade and capital account transactions and official exchange rate devaluation simulations based on russia s recent experience demonstrate the qualitative importance of the results

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

on the complementarity of commercial policy capital controls and inflation tax this paper studies the optimal use of distortive policies aimed at raising a given real revenue in a general equilibrium framework in which lump sum taxes are absent the policies analysed are an inflation tax commercial policy and an implicit tax on capital inflows it is shown that we would tend to avoid activating an inflation tax for small revenue needs if the policy target were allocative we would tend to use only one policy instrument thus each policy has its own comparative advantage and their combined use is justified when the target is raising government revenue

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

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

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

does payoff equity facilitate coordination a test of schelling s conjecture abstract starting from schelling 1960 several game theorists have conjectured that payoff equity might facilitate coordination in normal form games with multiple equilibria the more equitable equilibrium might be selected either because fairness makes it focal or because many individuals dislike payoff inequities as abundant experimental evidence suggests in this line we propose a selection principle called equity eq which selects the equilibrium in pure strategies minimizing the difference between the highest and smallest money payoff if only one such equilibrium exists using a within subjects experimental design furthermore we study the relative performance of eq in twelve simple 2 2 coordination games in many of these games we find that eq explains individual behavior better than a large range of alternative theories including theories of bounded rationality and several other equilibrium selection principles yet we also observe that the frequency of eq play depends on the payoff structure of the game for instance eq play diminishes when the alternative equilibrium is socially efficient and not very unfair compared with the eq equilibrium our data suggests that equilibrium selection is affected by several factors and that subjects are heterogeneous in this respect but also that equity is often a crucial factor to understand coordination

a note on dual foreign exchange markets with official rationing predetermined versus floating official exchange rate abstract this paper examines the relationship between the long run rate of inflation and the allocation of transactions between markets in economies that operate dual exchange market regimes and ration foreign exchange in the official market it shows that wider access of importers to the official market and wider access of exporters to the free market are associated with higher rates of inflation and vice versa the direction of causality among the various variables and thus the effects of economic policies depend on whether the official exchange rate is predetermined or floating

do reputation feedback systems really improve trust among anonymous traders an experimental study feedback systems are claimed to be a crucial component of the success of electronic marketplaces like ebay or amazon marketplace this article aims to compare the effects of various feedback systems on trust between anonymous traders through a set of experiments based on the trust game our results indicate that trust is significantly improved by the introduction of a reputation feedback system however such mechanisms are far from being perfect and are vulnerable to strategic ratings and reciprocation our findings indicate that some changes in rating rules may significantly improve the efficiency of feedback systems by avoiding strategic rating or reciprocation and hence stimulate trust and trustworthiness among traders in particular a system in which individuals are not informed of their partner s rating decision before making their own decision provides better results both in terms of trust and earnings

an investigation in the theory of foreign exchange controls a choice theoretic cash in advance model is constructed to examine foreign exchange controls while foreign exchange controls improve the trade balance and the balance of payments or exchange rate they reduce welfare for a distortion free small open economy this is because foreign exchange controls essentially place a quota on imports shocks to the terms of trade are shown to be transmitted negatively to the domestic economy when exchange controls are in effect devaluations are found not to have real effects finally it is argued that foreign exchange controls are not the optimal policy for attaining trade balance objectives

existence of a monetary steady state in a matching model indivisible money abstract existence of a monetary steady state is established for a random matching model with divisible goods indivisible money an arbitrary bound on individual money holdings and take it or leave it offers by consumers the background environment is that in papers by shi and by trejos and wright the monetary steady state shown to exist has nice properties the value function defined on money holdings is strictly increasing and strictly concave and the measure over money holdings has full support

a theory of focal points the paper presents a theoretical framework that distinguishes between the strategic structure of a game the existential game and the way the players describe the game to themselves each player works with a private description of the game in which strategies are identified by labels labels are generated by a stochastic labeling procedure each player chooses a decision rule which for each possible private description picks one of the available strategy labels a criterion of collective rationality is applied to choices among decision rules the implications of collective rationality are explored for a range of games with different labeling procedures copyright 1995 by royal economic society

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

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

a model of money with multilateral matching we develop a model of decentralized monetary exchange to examine the distributional effects of inflation across heterogeneous agents the agents have private information about their productivity preferences or money holdings matching is multilateral and each seller is visited by a stochastic number of buyers the good is allocated according to a second price auction in money in equilibrium homogeneous buyers hold different amounts of money leading to price dispersion we find the closed form solution for the distribution of money holdings entry of sellers is suboptimal except at the friedman rule inflation acts as a regressive tax

on the welfare gains of price dispersion can price dispersion be associated with higher levels of welfare to answer we compare two economies that differ only in the way prices are formed in the first sellers post a unique price quantity pair with no price dispersion in the second sellers post a quantity only and let prices be determined ex post by realized demand resulting in price dispersion we show that while agents trade lower quantities when prices are dispersed an intensive margin effect they also trade more often an extensive margin effect at low inflation the extensive margin dominates making agents better off with price dispersion

exchange rate management viewed as tax policies abstract the paper develops an analytical framework which demonstrates that along the lines of the celebrated lerner symmetry theorem the various forms of exchange rate management are equivalent to corresponding tax policies to highlight the salient issues we consider two specific categories of exchange rate policies the first is a dual exchange rate regime which separates exchange rates for commercial and for financial transactions and the second is a unified exchange rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions we show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing and unified pegged exchange rate policies can be usefully cast as lump sum tax cum subsidy policies the equivalence between the various characteristics of exchange rate management and tax management suggests that exchange rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies a two country model of the world economy is used to demonstrate the international transmission mechanism of these policies

money and credit redux do we need both money and credit in models with explicit roles for payment instruments we show the answer is no if credit is easy money is useless if credit is tight money can be essential but then credit is irrelevant and changes in debt limits are neutral real balances respond endogenously to leave total liquidity constant this is true for exogenous or endogenous policy and debt limits secured or unsecured credit and fairly general preferences and pricing mechanisms while we also show how to overturn some results the benchmark model suggests credit conditions matter less than some people think

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

black markets for foreign exchange real exchange rates and inflation abstract the black market foreign exchange premium is a tax on exports creating a conflict between the financing of government spending and the allocative goal of stimulating exports the premium is solved for in a model that includes private portfolio choice dual exchange markets and money financing of the fiscal deficit the inflationary implications of switching to floats as a means of unifying official and black market rates are then analyzed inflation could rise substantially if the lost revenues from exports are replaced with a higher tax on money the paper is motivated with examples from sub saharan africa

money and price dispersion we relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion in this case buyers and sellers enter matches with potentially different willingness to trade across the distribution of possible bilateral matches prices generally will differ even though agents have identical preferences and technologies we provide existence conditions for a particularly simple equilibrium pattern of exchange we prove that in the limiting case where search frictions are eliminated equilibrium prices are uniform we also show that a higher initial money stock can raise the average price level and increase price dispersion

money holdings inflation and welfare in a competitive market this paper examines an environment where money is essential and agents exchange in perfectly competitive walrasian markets agents consume and produce a homogeneous good but hold money to purchase consumption in the event of a relatively low productivity shock a walrasian market delivers a non degenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market and pricing assumptions of bilateral matching and bargaining common to search theoretic environments the model is calibrated to long run us velocity and the welfare costs of inflation are assessed for variable buyer seller ratios and persistent states of buying and selling

on inflation as a regressive consumption tax abstract evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed we build a monetary growth model consistent with key features of cross sectional household data and use this framework to study the distributional impact of inflation at the aggregate level our model economy behaves similar to standard monetary growth models within the representative agent abstraction inflation has however important distributional effects since it is effectively a regressive consumption tax thus neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy

dynamic monetary equilibrium in a random matching economy this article concerns an infinite horizon economy where trade must occur pairwise using a double auction mechanism and where fiat money overcomes lack of double coincidence of wants traders are anonymous and lack market power goods are divisible and perishable and are consumed at every date preferences are defined by utility stream overtaking money is divisible and not subject to inventory constraints the evolution of individual and economywide money holdings distributions is characterized there is a welfare ordered continuum of single price equilibria reflecting indeterminacy of the price level rather than of relative prices

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

gift exchange in a multi worker firm one of the main findings of a large body of gift exchange experiments is that in an incomplete contracts environment workers on average do not shirk and usually provide more than the minimum enforceable effort level in general 40 to 60 percent of the workers reward higher wages with higher effort these results are observed for simple one employer one worker relationships in this paper we investigate whether they generalize to the more realistic situation in which the employer employs several workers we compare a bilateral gift exchange game with a treatment in which each employer has four workers we find that effort levels in the latter treatment are only marginally lower gift exchange thus appears to be robust to increases in the size of the workforce and intention based reciprocity rather than social preferences seems to be the main driving force behind gift exchange

capital controls collection costs and domestic public debt abstract the implications of a large public debt for the implementation of capital controls for an economy where tax revenue collection is costly are examined conditions are analyzed under which policymakers will resort to capital controls to reduce the cost of recycling domestic public debt the linkages between a costly tax collection mechanism capital controls and domestic government debt are explored in terms of a two period model of optimal taxation numerical simulations are provided to illustrate how capital controls are linked to different domestic public debt levels and to different degrees of efficiency in tax revenue collection

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

burning money and pseudo first mover advantages an experimental study on forward induction abstract the mere potential for one player to burn money prior to play has been shown in theory to be an effective device to select this player s most preferred outcome e g in the battle of the sexes game j econ theory 48 1989 476 j econ theory 57 1992 36 in this study we assess the behavioral relevance of this theoretical claim it is shown that its validity depends on whether the game is played in extensive or normal form in extensive form games first movers benefit substantially from having the opportunity to burn money in advance the effect is much weaker in the normal form game however in two control treatments first movers who can select between two related games gain an advantage although standard forward induction arguments do not have any bite these results suggest that we need to make further theoretical advances to understand the role of physical timing and first mover advantages in games

the welfare cost of inflation under imperfect insurance abstract this paper examines the welfare cost of inflation in an economy where agents hold money in order to smooth consumption in the face of income variability for which there is no insurance the findings indicate that for the type of economies considered here the area under the empirical money demand curve is a poor measure of the welfare cost of inflation this area accounts for only one fourth of the true costs in the case of 5 inflation

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

the relevance of equal splits in ultimatum games abstract in this note we present a slightly altered version of the mini ultimatum game of g e bolton and r zwick 1995 games econ behav 10 95 121 more specifically we replaced exactly equal splits by nearly equal splits either slightly favoring the proposer or the responder such a minor change should not matter if behavior was robust we find however a significant change in behavior fair offers occur less often when equal splits are replaced by nearly equal splits journal of economic literature classification numbers c72 c78 c92

optimal financing of the government s budget taxes bonds or money financing of the government s budget in particular we consider taxation bond issuance and money creation as alternative means of financing these issues are not new some of them were extensively explored in the public finance literature some of them were explored in the monetary theory literature what we believe to be new however is that our work integrates the relevant elements from both strands of literature into a unified general equilibrium framework with this approach we are able to jointly determine the optimal combination of tax rates the rate of inflation and the interest rate on government bonds this type of analysis enables us to ask whether the rate of inflation should be positive or negative and to provide simple conditions on compensated demand elasticities which determine the answer it also enables us to reconsider milton friedman s optimum quantity of money rule in a public finance framework without lump sum taxes and to show how this rule should be modified in addition we provide insight into the desirability of a social security scheme by showing that such a program is undesirable when social security payments are financed

monetary and fiscal policies in a heterogeneous agent economy i study the effects of long run inflation and income taxation in an economy where households face uninsurable idiosyncratic risks i construct a tractable competitive search framework that generates dispersion of prices income and wealth i analytically characterize the stationary equilibrium and the policy effects on individual choices quantitative analysis finds that monetary and fiscal policies have distinctive effects on macro aggregates such as output savings wealth dispersion income and consumption inequalities there can be a hump shape relationship between welfare and the respective policies overall welfare can be maximized by a deviation from the friedman rule paired with distortionary income taxation

preferences intentions and expectation violations a large scale experiment with a representative subject pool we specify and estimate an econometric model which separately identifies the effects of distributional preferences and penalizing unfair proposer behavior perceived intentions on responder decisions in the ultimatum game we allow the effects of perceived intentions to depend among other things on the subjective probabilities responders attach to the possible offers the latter allows expectation violations to be a driving force for responder behavior we estimate the model on a large representative sample from the dutch population we find that the relative importance of distributional preferences and perceived intentions depends significantly on the socio economic characteristics of responders strong inequity aversion to the other player s disadvantage is found for lower educated and older respondents responders tend to punish more unequal offers made by proposers if they expect that unequal proposals are made less often

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

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

equal split in the informal market for group train travel in this paper we make use of a unique dataset collected at the central train station of the city of kiel germany group tickets are used by individual proposers looking for co travelers to share the ride with shortly before the train departure the shared ride is offered for a fixed price we observe that the prevailing price offer corresponds to an equal split of the ticket cost between the maximum possible number of co travelers this result is remarkable because the positions of the bargaining parties are clearly asymmetric and formation of the full group is not guaranteed

understanding the distributional impact of long run inflation the impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices in stationary equilibrium inflation nonlinearly alters the endogenous distributions of income wealth and consumption small departures from zero inflation have the strongest impact three features determine how inflation impacts distributions and welfare financial structure shock persistence and labor supply elasticity when agents can self insure only with money inflation reduces wealth inequality but may raise consumption inequality otherwise inflation reduces consumption inequality but may raise wealth inequality given persistent shocks and an inelastic labor supply inflation may raise average welfare

corruption and culture an experimental analysis article i nfo article history why do some people choose corruption over honesty and others not do the social norms and values prevailing in the societies in which they grew up affect their decisions in 2005 we conducted a bribery experiment and found that among undergraduates we could predict who would act corruptly with reference to the level of corruption in their home country among graduate students we could not in 2007 we replicated our result and also found that time spent in the uk was associated with a decline in the propensity to bribe although this does not explain our inability to predict graduate behaviour we conclude that while corruption may in part be a cultural phenomenon individuals should not be prejudged with reference to their country of origin

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

on the role of non equilibrium focal points as coordination devices considering a pure coordination game with a large number of equivalent equilibria we argue first that a focal point that is itself not a nash equilibrium and is pareto dominated by all nash equilibria may attract the players choices second we argue that such a non equilibrium focal point may act as an equilibrium selection device that the players use to coordinate on a closely related small subset of nash equilibria we present theoretical as well as experimental support for these two new roles of focal points as coordination devices

what limits escalation varying threat power in an ultimatum experiment abstract threat power is the ability to impose a great loss on someone else at relatively low own cost and can be measured by the ratio of other s and own loss it can be varied by assuming that rejecting an ultimatum reduces the payoff of the proposer to its share and that of the responder to its 1 share where 0 1 results demonstrate that proposers become more greedy when is high whereas responders adjust to threat power but punish greed to a high extent irrespective of own rejection cost

asset trading mechanisms and expansionary policy abstract previous authors have argued that the otimal monetary policy is contractionary if buyers value consumption substantially more than sellers there is some randomness and informational constraints make asset trading useful we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies