optimal pricing of intraday liquidity abstract this paper presents a general equilibrium model where intraday liquidity is needed because the timing of payments is uncertain a necessary and sufficient condition for an equilibrium to be efficient is that the nominal intraday interest rate be zero even when the overnight rate is strictly positive because a market for liquidity may not achieve efficiency this creates a role for the central bank i allow for the possibility of moral hazard and study policies commonly used by central banks to reduce their exposure to risk i show collateralized lending achieves the efficient allocation while for certain parameters caps cannot prevent moral hazard

optimal monetary policy in a cash in advance economy i introduction this paper addresses the issue of optimal monetary policy within a particular general equilibrium model of the monetary transmission mechanism the model analyzed is a member of the recent class of liquidity models of the monetary business cycle 1 these liquidity models are something of a growth industry partly because they are potentially consistent with a monetary equilibrium in which monetary injections drive down nominal rates of interest and stimulate real activity stylized facts supported by evidence presented in for example christiano and eichenbaum 1992 an unexplored question is the role of monetary policy in these models this paper makes an attempt at remedying this deficiency by analyzing optimal monetary policy in a model with liquidity effects as in the liquidity models mentioned above the model analyzed here is constructed by imposing two trading frictions on an otherwise frictionless arrow debreu environment 2 the first is a requirement that all transactions be carried out in a decentralized fashion with the use of cash this friction is the well known cash in advance constraint first suggested by clower 1967 but now quite commonplace in models of monetary equilibrium as in lucas and stokey 1987 and cooley and hansen 1989 i impose this constraint because it is a tractable way of introducing a transactions demand for cash the qualitative results would be unaffected if a more general transactions technology was employed the second friction is unique to the liquidity models i assume that private agents cannot quickly move cash across markets this assumption of sluggish cash flow presumably motivated by transactions costs that are not explicitly modeled implies that cash may not be equally valued across markets with its value in a particular market determined by the amount of cash or liquidity contained in the market this friction introduces the so called liquidity effects on asset prices and real activity the paper proceeds as follows the next section develops the basic model and discusses the effects created by the assumed trading frictions section iii explores optimal monetary policy the nature of the trading frictions introduces a role for activist monetary policy in particular to the extent that the central bank can adjust liquidity more rapidly than the private sector there is a welfare improving role for monetary policy in some cases interest rate smoothing is a good idea while in others optimal policy will increase interest rate variability section iv links the results to the optimum quantity of money literature and offers up a few conclusions ii a model of monetary non neutrality the economy is populated with three types of agents households firms and financial intermediaries there are numerous identical agents of each type so that all behave as atomistic competitors given this assumption i will confine my discussion to a representative agent of each type the representative household is made up of two members a shopper and a worker the shopper s role is to use the household s assets to acquire consumption goods during each period while the worker supplies some portion of the household s time endowment equal to 1 each period to firms in exchange for payment the household s preferences over uncertain consumption and leisure streams are given by e summation of beta sup t u c sub t v 1 l sub t where t 0 to infinity where beta is an element of 0 1 c sub t and l sub t are time t consumption and work effort respectively v is increasing and concave and mathematical expression omitted the expectation is over realizations of the economy wide shocks the expression s sub t is an element of s subset r denotes the state of the world at time t where s is a compact set these states are i i d across time with a distribution function given by

global imbalances and financial fragility the united states is currently engulfed in the most severe financial crisis since the great depression the crisis was triggered by the crash in the real estate bubble and amplified by the extreme concentration of risk in a highly leveraged financial sector conventional wisdom is that both the bubble and the risk concentration were the result of mistakes in regulatory policy an expansionary monetary policy during the boom period of the bubble and failure to reign in the practices of unscrupulous lenders in this paper we argue that while correct in some dimensions this story misses two key structural factors behind the securitization process that supported the real estate boom and the corresponding lever age first over the last decade the us has experienced large and sustained capital inflows from foreigners seeking us assets to store value caballero emmanuel farhi and pierre olivier gourinchas 2008 second especially after the nasdaq tech bubble and bust excess world savings have looked predominantly for safe debt investments this should not be surprising because a large amount of the capital flow into the us has been from foreign central banks and governments that are not expert investors and are merely looking for a store of value krishnamurthy and annette vissing jorgenson 2008 in this paper we develop a stylized model that captures the essence of this environment the model accounts for three facts observed during the boom and bust phases of the current crisis first during a period of good shocks which we interpret as the period up to the end

value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards abstract we present an algorithm for approximating the solution to discrete time stochastic dynamic programs with inequality constraints the algorithm exploits the state preference approach to choice under uncertainty to reduce the dimensionality of the state space and polynomial approximation to improve computational efficiency it is particularly useful in financial applications involving liquidity and credit constraints and more than one asset the algorithm provides information about the derivatives of the value function and therefore risk aversion along with asset demands

us investment in global bonds as the fed pushes some emes pull we analyse reallocations within the international bond portfolios of us investors the most striking empirical observation is a steady increase in us investors allocations towards emerging market local currency bonds unabated by the global financial crisis and accelerating in the post crisis period part of the increase in emerging market economy eme allocations is associated with global push factors such as low us long term interest rates and unconventional monetary policy as well as subdued risk aversion expected volatility but also evident is investor differentiation among emes with the largest reallocations going to those emes with strong macroeconomic fundamentals such as less volatile inflation and more positive current account balances

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

the derivation and interpretation of the lucas supply function comment most likely reason for this anomaly is that a large number of the bank failures prior to march 1933 were the result rather than the cause of the rise in the currencydeposit ratio trescott s regressions thereby may increase the degree of feedback raising the measured correlation but biasing upward the estimated effect of bank failures the 1930 panic may have been largely exogenous as noted earlier by wicker but the endogeneity of the subsequent crises has never been seriously questioned if life is to be restored to the view that bank failures were the sole cause of the rise in the currency deposit ratio then those failures must first be shown to be exogenous all that trescott has shown is that one component of the demand for money was highly correlated with bank failures that correlation was never in doubt but it is not sufficient evidence for the conclusions that he draws

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

on the evolution of the monetary policy transmission mechanism this paper investigates whether the monetary transmission mechanism has changed or whether apparent changes are due to changes in the volatility of exogenous shocks also the question of whether any changes have been gradual or abrupt is considered a mixture innovation model is used which extends the class of time varying vector autoregressive models with stochastic volatility the advantage of our extension is that it allows us to estimate whether where when and how parameter change is occurring our empirical results indicate that the transmission mechanism the volatility of exogenous shocks and the correlations between exogenous shocks are all changing

taste change in the united kingdom 1900 1955 a search is made for violations of the axiom of revealed preference in aggregate consumption data for the united kingdom no such violations are found this is taken as evidence that tastes remained constant throughout the period under study the strength of this evidence is estimated within the context of a particular model of taste change

interest rates and inflation a consensus has emerged among practitioners that the instrument of monetary policy ought to be the short term interest rate that policy should be focused on the control of inflation and that inflation can be reduced by increasing short term interest rates at the center of this consensus is a rejection of the quantity theory such a rejection is a difficult step to take given the mass of evidence linking money growth inflation and interest rates increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates these observations need not rule out a constructive role for the use of short term interest rates as a monetary instrument one possibility is that increasing short term rates in the face of increases in inflation is just an indirect way of reducing money growth sell bonds and take money out of the system another possibility is that while control of monetary aggregates is the key to low long run average inflation rates an interest rate policy can improve the short run behavior of interest rates and prices the shortrun connections among money growth inflation and interest rates are very unreliable so there is much room for improvement these possibilities are surely worth exploring but doing so requires new theory the analysis needed to reconcile interest rate policies with the evidence on which the quantity theory of money is grounded cannot be found in old textbook diagrams

interpreting a stochastic monetary growth model as a modified social planner s problem abstract using a stochastic cash in advance growth model similar to that studied by cooley and hansen 1989 it is demonstrated that the competitive monetary equilibrium can be expressed as the solution to a modified social planner s problem hence by employing standard dynamic optimization techniques and the second welfare theorem to the modified social planner s problem the equilibrium of the monetary economy can be studied

the optimum quantity of money in a stochastic economy individuals in a monetary economy face both economy wide and individualspecific risks friedman s 1969 assertion that the price level should fall at the rate of time preference must be modified when such risks are present bewley s 1983 conjecture that the modified deflation should proceed at a rate greater than the rate of time preference is demonstrated to be true in special cases but false in general moreover the indeterminacy of equilibrium bewley found is eliminated by the inclusion of a transactions demand for money

optimal monetary policy what we know and what we don t know in this article i examine the current state of knowledge about optimal monetary policy i distinguish between two literatures basic and applied the basic literature is explicit about the frictions that generate a positive value for money and make it socially beneficial the applied literature is not i describe the recent lessons about monetary policy that we have learned from each literature and discuss how the two distinct approaches may be usefully combined

capital inflows and the u s housing boom we estimate an open economy vector autoregressive var model to study the effect of capital inflow shocks on the u s housing market we look at different external shocks that generate capital inflows to the u s in particular saving glut shocks and foreign monetary policy expansions the shocks are identified with theoretically robust sign restrictions derived from an open economy dynamic stochastic general equilibrium dsge model our findings suggest that capital inflows that result from saving glut shocks have a positive and persistent effect on real house prices and real residential investment

the safe asset share we document that the percentage of all u s assets that are safe has remained stable at about 33 percent since 1952 this stable ratio is a rare example of calm in a rapidly changing financial world over the same time period the ratio of u s assets to gdp has increased by a factor of 2 5 and the main supplier of safe financial debt has shifted from commercial banks to the shadow banking system we analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe asset share and its role within the overall economy

safe asset scarcity and aggregate demand safe asset scarcity and aggregate demand ricardo j caballero emmanuel farhi mit harvard university pierre olivier gourinchas university of california at berkeley january 26 2016 this paper was presented at the 2016 aea meetings in the session global reserve assets in a low interest rate world a1 we thank olivier blanchard gita gopinath and our discussant mark gertler for their comments caballero mit department of economics 77 massachusetts avenue building e52 528 cambridge ma 02139 phone 617 253 0489 email caball mit edu farhi department of economics harvard university littauer 318 1805 cambridge street cambridge ma 02138 usa phone 617 496 1835 email efarhi fas harvard edu gourinchas uc berkeley dept of economics 697d evans hall 3880 berkeley ca 94720 phone 510 643 3783 email pog berkeley edu

observational equivalence of the overlapping generations and the cash in advance economies abstract this paper demonstrates that any equilibrium in an overlapping generations economy a la grandmont 1985 can be supported as an equilibrium in a cash in advance economy a la lucas and stokey 1987 and vice versa thus business cycles could occur at real life frequencies

drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions abstract this paper discusses the problems associated with using information about the signs of certain magnitudes as a basis for drawing structural conclusions in vector autoregressions we also review available tools to solve these problems for illustration we use dahlhaus and vasishtha s 2019 study of the effects of a u s monetary contraction on capital flows to emerging markets we explain why sign restrictions alone are not enough to allow us to answer the question and suggest alternative approaches that could be used

identifying the global transmission of the 2007 2009 financial crisis in a gvar model abstract the paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis dealing with identification and the large dimensionality of the empirical exercise with a global var approach the findings highlight the diversity of the transmission process while liquidity shocks have had a more severe impact on advanced economies it was mainly the decline in risk appetite that affected emerging market economies the tightening of financial conditions was a key transmission channel for advanced economies whereas for emerging markets it was mainly the real side of the economy that suffered moreover there are some striking differences also within types of economies with europe being more adversely affected by the fall in risk appetite than other advanced economies

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

evaluating international financial integration under leverage constraints abstract the global financial crisis has undermined many economists views about the benefits of open financial markets anecdotal evidence seems to indicate that financial linkages may propagate shocks during crises this paper develops a simple two country model in which financial liberalisation across countries takes place in the presence of credit market distortions within countries countries may be subject to macro risk coming from productivity shocks and direct shocks to the credit system financial shocks three different degrees of financial linkages between countries are examined it is shown that the type of financial integration is critical for both macroeconomic outcomes and welfare in particular financial integration in bond markets alone may increase aggregate consumption volatility and reduce welfare financial integration in both bond and equity markets generates high positive co movement across countries but is welfare improving

optimal random monetary policy with nominal rigidity abstract this paper studies a money in the utility function model with imperfect competition and one period ahead nominal price setting under standard assumptions on preferences friedman s rule setting the money growth rate equal to the household time discount factor generates an equilibrium that is optimal within the class of deterministic policies we then provide conditions under which a random monetary policy increases ex ante expected welfare relative to friedman s rule the result obtains because random policy can reduce the distortion associated with imperfect competition our result exhibits original features relative to existing cases of welfare improving random monetary policy such as polemarchakis and weiss j econom theory 15 1977 345

money and output a test of reverse causation this paper attempts to explain the correlation between money and output at various leads and lags with a model in which money is largely neutral and endogenously responds to output money is endogenous because both monetary policy and deposit creation are endogenous parameters are selected according to the simulated moments estimation technique while the estimated model succeeds along some dimensions in matching properties of postwar u s data its failure to match key patterns of lead lag correlations seems to cast doubt on the ability of endogenous money determination by itself to quantitatively account for the observed money output correlations copyright 1996 by american economic association

monetary growth innovations in a simple cash in advance asset pricing model abstract this paper contributes to the existing literature in the rational expectations cash in advance asset pricing general equilibrium model in two directions first we show that by allowing a variable velocity of circulation an increase in the conditional variance of the money growth process triggers an increase in the demand for money relative to stocks and bonds with a consequent reduction in stock and bond prices which is the opposite of the current result in the literature with constant unitary velocity second we explicitly show how the sequential markets and specific timing of information fits exactly into the notion of irreversibility in the sense that when faced with uncertainty agents might find optimal to delay decisions in order to wait for the arrival of new information

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

intertemporal substitution and the role of monetary policy policy irrelevance once again recently marini i985 demonstrates that feedback policy is effective in barro s i976 model even in the absence of differentially informed agents or non proportional money transfers in particular marini demonstrates that a policy rule with feedback to the current money stock from disturbances dated t 2 or further in the past will be effective at fully stabilising output in barro s model this paper demonstrates that this policy effectiveness result is dependent on an implicit assumption that the length of private agents horizon falls short of the length of the lags in the feedback rule more generally this paper points out that a crucial feature of barro s i976 model is the specification of the decision horizon of private agents relative to the lag on demand disturbances in the monetary rule if the feedback lag in the monetary rule exceeds the horizons of private agents then monetary policy can stabilise output if the horizon of private agents is equal to or exceeds the lags in the monetary rule

the dynamics of inflation with constant deficit under expected regime change a model that describes the dynamics of inflation with a fully anticipated stabilization program is developed it is shown that with a constant deficit an economy tends to stay at the neighborhood of the lower of the two state inflation rates that are compatible with the deficit further increasing inflation rates prior to the stabilization are compatible only with deficits that are lower than the maximal feasible staedy state deficits and with a stabilization program that reduces the demand for real balances if these conditions are not met inflation decreases towards the stabilization date it is argued that the data generated by actual inflationary episodes fit the conditions described above and corroborate the model this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

perils of unconventional monetary policy abstract unconventional monetary policy by relaxing restrictions on the composition of the balance sheet of the central bank compromises control over the stochastic path of inflation or in open economies over the stochastic path of exchange rates if the composition of the balance sheet is unrestricted then the path of inflation is indeterminate this is the case under pure quantitative easing where the target is the size of real money balances in contrast credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought and thus can implement a determinate path of inflation the composition of the portfolios traded by monetary fiscal authorities also determines premia in asset and currency markets

interest rate rules vs money growth rules a welfare comparison in a cash in advance economy abstract this paper considers the welfare consequences of two particularly simple rules for monetary policy an interest rate peg and a money growth peg the model economy consists of a real side that is the standard real business cycle model and a monetary side that amounts to imposing cash in advance constraints on certain market transactions the paper also considers the effect of assuming a rigidity in the typical household s cash savings choice the competitive equilibrium of the economy is not pareto efficient partly because of two distortions a distortion on the capital accumulation decision and a distortion on portfolio choice that arises from the assumed rigidity the principal result of the paper is that the interest rate rule but not the money growth rule entirely eliminates these two distortions and is thus the benevolent central banker s policy choice

house prices capital inflows and macroprudential policy this paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities we develop a two country dynamic stochastic general equilibrium dsge model with heterogeneous households and collateralised debt the model predicts that external shocks are important in driving current account deficits that are coupled with run ups in house prices and household debt in this context optimal policy features an interest rate response to credit and a ltv ratio that countercyclically responds to house price dynamics by allowing an interest rate response to changes in financial variables the monetary policy authority improves social welfare because of the large welfare gains accrued to the savers the additional use of a countercyclical ltv ratio that responds to house prices increases the ability of borrowers to smooth consumption over the cycle and is pareto improving domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy

the shortage of safe assets in the us investment portfolio some international evidence this paper develops a bayesian global var gvar model to track the international transmission dynamics of two stylized shocks namely a supply and demand shock to us based safe assets our main findings can be summarized as follows first we find that positive supply sided shocks lead to pronounced increases in economic activity which spills over to foreign countries the impact of supply sided shocks can also be seen for other quantities of interest most notably equity prices and exchange rates in europe second a demand sided shock leads to an appreciation of the us dollar and generally lower yields on us securities forcing investors to shift their portfolios towards foreign fixed income securities this yields sizable positive effects on us output equity prices and a general decrease in financial market volatility

does money explain asset returns theory and empirical analysis a cash in advance model of a monetary economy is used to derive a money based capm m capm which allows us to implement tests of asset pricing restrictions without consumption data a test as in fama and macbeth of the model suggests that the money betas have some explanatory power for the cross sectional variation of expected returns however the model is rejected using conditional information consistent with our predictions estimates of the curvature parameter are lower than those of the consumption capm c capm and pricing errors of the m capm tend to be smaller than those of the c capm while the relation between asset prices and real macroeconomic variables such as aggregate consumption has been extensively investigated less attention has been devoted to the relation between monetary aggregates and asset prices that arises from models which incorporate a monetary sector it is often argued that one possible reason for the rejection of the consumption oriented capm c capm is the absence of monetary considerations this paper takes a step towards encompassing money into the c capm and proposes a moneybased capm m capm that can be tested without using consumption data this m capm is interesting in the way it captures the time series and crosssectional variation in stock returns and it provides insights in the possible misspecification of existing c capm models the setup is based on the cash in advance model of lucas and stokey 1987 in which some consumption goods are financed with outside money i e cash and some are financed with inside money e g bank deposits the pricing results of this paper differ from those of other monetary models such as those considered by finn hoffman and schlagenauf 1990 or singleton 1985 which focus on the role of outside money in affecting the marginal utility of consumption instead we concentrate on inside money in asset pricing the focus on inside money is appealing because inside money reflects conditions in