the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

financial intermediation reserve requirements and inside money a general equilibrium analysis abstract reserve requirements are examined in a general equilibrium context the paper develops a simple general equilibrium model that includes diverse opportunities for investment and a role for financial intermediaries two versions of the model are considered one is a thought experiment in which currency serves purely to satisfy legal reserve requirements the other is more realistic the model is used to analyze the comparative static effects of changes in reserve requirements the effects of changes in other parameters of the economy in the presence of reserve requirements and some qualitative issues raised by reserve requirements

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

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

arbitrage and existence of equilibrium in infinite asset markets this paper develops a framework for a general equilibrium analysis of asset markets when the number of assets is infinite such markets have been studied in financial economics in the context of asset pricing theories a distinctive feature of an equilibrium model of asset markets is that investors portfolio choice sets are typically not bounded below we prove that an equilibrium exists under a condition that markets are arbitrage free the markets are arbitrage free if there is a price system under which no investor has an arbitrage opportunity the concept of an arbitrage opportunity used in this paper differs from the standard concept on an arbitrage portfolio in financial markets which is a portfolio that guarantees a non negative payoff in every event a positive payoff in some event and has zero price we provide an extensive discussion of concepts of an arbitrage opportunity

money and contracts this paper presents a novel interpretation of the fact that high nominal interest rates accompany low levels of real gnp it constructs a model in which money and bonds are both held as a result of legal restrictions on the banking system open market operations may increase the equilibrium rate of interest and raise the cost of credit this increase in the cost of credit causes firms to write labour contracts in which layoffs occur more frequently the nature of optimal labour contracts is derived explicitly from assumptions about the information that is available to firms and to workers

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

a necessary and sufficient condition for the compactness of individually rational and feasible outcomes and the existence of an equilibrium abstract in an economy with arbitrary closed and convex consumption sets we show that page s journal of economic theory 1987 41 392 404 condition of no unbounded arbitrage is necessary and sufficient for compactness of the set of individually rational and feasible allocations in strictly reconcilable economies in which at most one agent may have half lines in his indifference surfaces we show that page s condition is necessary and sufficient for compactness of the set of individually rational utility possibilities for the existence of an equilibrium for non emptiness of the core and for the existence of a pareto optimal allocation these results allow one agent to be risk neutral not permitted by werner s econometrica 1987 55 1403 1418 assumption of no half lines in indifference surfaces our proofs that no unbounded arbitrage is necessary and sufficient for the existence of an equilibrium and for a pareto optimal allocation both rely on the result that non emptiness of the core implies no unbounded arbitrage

overlapping expectations and hart s conditions for equilibrium in a securities model hart j econ theory 9 1974 293 311 gave conditions for equilibrium to exist in a securities model where each agent undertakes asset transactions to maximize expected utility of wealth these conditions rule out agents wanting to undertake unbounded balanced transactions to reach a pareto superior allocation given their expectations with mild extra assumptions to make agents unwilling to risk incurring unbounded losses on their portfolios hart s conditions become equivalent to an assumption of overlapping expectations which is comparable to a much weaker form of green s common expectations econometrica 41 1973 1103 1124

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

econometric analysis of bank lending and business cycles in south africa this article examines econometric relationships between bank lending and business cycle in south africa two long run economic relationships are hypothesized between total credit and the variables namely coincidental indicators spread between lending and borrowing rates money supply stock price index inflation and banking sector specific factors included in the model of these variables only coincident indicators changes in money supply as well as capital and reserve are found to exert some influence on short run total credit availability

liquidity flows and fragility of business enterprises abstract this paper develops a macroeconomic model in which funds are channeled to entrepreneurs through long term relationships between entrepreneurs and lenders the flow of funds to a relationship may be low causing it to break up due to insufficient liquidity multiple pareto ranked steady states emerge from complementarity between financial intermediation reflected by the number of relationships and households incentives to provide funds this complementarity also serves as a mechanism for propagating aggregate shocks financial collapse may become inescapable if a shock destroys sufficiently many relationships

wage stickiness and the non neutrality of money a cross industry analysis abstract the paper provides an empirical test of sticky wage models of business fluctuations by focusing on industry level cross sectional implications that emerge this breaks the observational equivalence existing at the aggregate level between rational expectations long term contracting and imperfect information models the specific implication tested is whether output responses to nominal disturbances industry phillips curve slopes are inversely related to wage indexation elasticities the phillips curve slopes are found to vary across industries for the canadian economy but bear no relationship to indexation elasticities casting doubt on the role of nominal wage rigidity in generating the observed non neutrality of money

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 liquidity effect and money demand abstract i suggest a liquidity effect model in which financial intermediation costs are determined by aggregate economic activity an expansionary monetary shock leads to a persistent contraction in the loan deposit rate spread a persistent liquidity effect and a persistent real expansion a feature of this expansion is that nominal prices respond sluggishly to monetary shocks as an equilibrium outcome

why money talks and wealth whispers monetary uncertainty and mystique this paper analyzes the effect of monetary uncertainty on the inflationary bias and the variance of output and inflation monetary policy uncertainty is modeled as a shock to the central banker s preference for inflation stabilization relative to output stabilization that cannot be observed by the public we find that the mean and variance of inflation increase with the variance of this preference shock however unlike other studies we find that monetary uncertainty may very well have a positive effect on output stabilization and therefore also on society s welfare

asset market equilibrium with short selling this paper presents simple conditions and a simple proof of the existence of equilibrium in asset markets where short selling is allowed and satiation is possible unlike standard non satiation assumptions the one used here is weak enough to be reasonable in the mean variance capital asset pricing model and in asset market models where investors maximize expected utility and where total returns to individual assets may be negative this paper analyses the existence of equilibrium in exchange economy models where choice sets may be unbounded below and satiation is likely there are two main examples of such models one is an asset market model where investors maximize expected utility and the total return to individual assets may be negative with positive probability the other is the mean variance capital asset pricing model capm where investors do not necessarily maximize expected utility but instead maximize a function of only the mean and variance of return to their portfolios in both of these models the investors choice sets will be unbounded if short selling is allowed to short sell a share of an asset means to borrow it and sell it promising to buy it back and return it to the lender at a later date formally short selling corresponds to holding a negative number of shares if unlimited short selling is allowed then there is no limit to how large negative numbers of shares can be held and therefore the choice sets are unbounded satiation can also occur both in the mean variance model and in the expected utility model unless there is a riskless asset in the expected utility model there may be satiation if the individual assets have negative returns with positive probability as the investor gets more and more shares the potential positive returns get larger and larger but so do the potential negative returns if the investor is very averse to large negative returns then he may eventually be satiated and not want any more shares in the mean variance model the expected return to an investor s portfolio increases as he holds more and more shares of the assets but so does the variance of return it may be that at some point the additional expected return gained from adding more shares to the portfolio is not sufficient to compensate for the increase in variance if so then there will be satiation satiation in the mean variance model iie analysed in nielsen 1987 1988 the expected utility model with short selling has been used in many specific analyses of portfolio selection and asset pricing to name but one connor 1984 studies arbitrage pricing in a general equilibrium model where there are no short sales restrictions the mean variance capm is of course very prominent in the finance literature because the

an evaluation of alternative monetary policy rules in a model with capacity constraints a small model of the u s output inflation nexus is used to examine the implications of two policy rules one where the interest rate responds to contemporaneous inflation and one where the response is a forecast of future inflation the model is asymmetric in that positive deviations of aggregate demand from potential are more inflationary than negative deviations are disinflationary with asymmetry following a myopic rule and allowing the economy to overheat requires deep or protracted recessions to control inflation whereas following a forward looking rule not only reduces volatility but also raises the equilibrium level of output shifts in the stance of monetary policy influence the economy and financial markets with a considerable lag as long as a year or more the challenge of monetary policy is to interpret current data on the economy and financial markets with an eye to anticipating future inflationary forces and to countering them by taking action in advance alan greenspan 1994 p 609

the time varying nairu and its implications for economic policy the nairu the unemployment rate consistent with a constant rate of inflation is estimated in this paper as a parameter allowed to vary over time value is determined in an econometric model where the inflation rate depends on its past values demand and supply shocks the nairu estimated for the gdp deflator varies over the past forty years within 5 4 to 6 5 percent its estimated value for the most recent quarter 1996 q2 is 5 6 percent the nairu has declined in recent years in response to global competition immigration other factors weakening labor s bargaining position and the rapidly declining prices of computers and other electronics

when and how much to talk credibility and flexibility in monetary policy with private information abstract this paper analyzes the role of noisy or imprecise announcements in mitigating the basic credibility problem in monetary policy based on a model where the monetary authority s private information gives rise to an unavoidable trade off between flexibility and credibility the analysis finds that noisy announcements can serve as a meaningful form of communication to make that trade off more favorable however such talk is not cheap the analysis predicts that those central banks who can speak more precisely are those who are less likely to speak at all

the distribution of money balances and the nonneutrality of money recent monetary models with explicit microfoundations are made tractable by assuming that agents have access to centralized markets after one round of decentralized trade given quasi linear preferences this makes the distribution of money degenerate which keeps the models simple but precludes the discussion of distributional effects of monetary policy we generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically we show that unexpected symmetric lump sum money injections may increase short run output and welfare whereas asymmetric injections may increase long run output and welfare

expected social welfare under a convex phillips curve and asymmetric policy preferences this paper evaluates the expected social welfare implications of monetary policy with a convex phillips curve under a symmetric loss function and an asymmetric loss function corresponding to the opportunistic approach to disinflation the convex asymmetric specification yields an inaction range of inflation shocks for which the optimal monetary policy setting does not adjust for parameter estimates relevant to the united states numerical simulations show that the symmetric loss function dominates the asymmetric alternative in expected social welfare terms asymmetric policy preferences enhance social welfare only under extreme parameter values this result is robust to sensitivity analysis with respect to inflation variability and the degrees of phillips curve convexity and preference asymmetry thereby supporting arguments for a tough anti inflationary stance by the federal reserve regardless of the true social loss function

liquidity effects monetary policy and the business cycle this paper presents a flexible price quantitative general equilibrium model with the property that a positive money supply shock drives the nominal interest rate down and aggregate employment output and the real wage up these implications are broadly consistent with postwar u s data the two key features of the model that are responsible for its properties are 1 money shocks have a heterogeneous impact on agents and 2 ex post inflexibilities in production give rise to a very low short run interest elasticity of money demand in our model the extent of the drop in the interest rate after a positive money supply shock depends on the degree to which production is ex post inflexible given sufficient ex post inflexibility the model conforms well with the view widely held within the u s federal system that the short run interest rate elasticity for total reserves is very close to zero copyright 1995 by ohio state university press

social polarisation in global cities theory and evidence this paper examines the debate over social polarisation in global cities it focuses on the claims made by sassen that the processes of economic change in such cities are leading to a growing polar

one for some or one for all taylor rules and interregional heterogeneity we document a novel empirical phenomenon the u s federal reserve appears to set interest rates partly in response to regional economic disparities this result is robust even after controlling for factors such as the central bank s forecasts and a battery of explanatory variables we argue that this likely does not reflect an explicit concern about regional differences by policymakers but instead can be explained by a model with nonlinear regional phillips curves consistent with the predictions of this model we find that the federal reserve responds disproportionately to fluctuations in low unemployment states alternative explanations cannot account for this finding

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

the intertemporal substitution model of labour market fluctuations an empirical analysis the paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply first log linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations second a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption the influence of expected future real wages and interest rates is captured by the consumption variable the empirical results do not support the intertemporal substitution model

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

the cross sectional dynamics of the us business cycle 1950 1999 abstract modern interest in business cycles has focussed on the co movements and correlations in the major macroeconomic aggregates in this paper we offer another dimension to business cycle analysis which looks at the time series of cross sectional distributions of the growth rates of sales by us quoted companies from 1950 to 1999 we detect correlations between aggregate business cycle fluctuations and the higher moments of the cross sectional distribution we find a significant negative correlation between the rate of growth of gdp and the cross sectional variance and skewness of growth rates of sales on the other hand there is positive correlation at business cycle frequencies with kurtosis in order to explore this further we turn to the dynamic evolution of firms and analyse the sensitivity of growth rates to aggregate shocks conditioning on firm size the results suggest that despite considerable heterogeneity macroeconomic shocks have pervasive effects that are however more pronounced for firms in the middle range of growth this has implications for both macro and industrial economics

social polarisation economic restructuring and welfare state regimes the central argument of this paper is that it is misconceived to view social polarisation of occupational structure and incomes in global cities as either inevitable or as a direct product of econo

repeated lending and business fluctuations a note abstract a borrower lender relationship is modelled and the effects of temporary shocks on lending policy are studied the loan rate is shown to respond sluggishly thereby influencing shocks effects on borrower survival in some cases dampening them

the cross industry effects of unanticipated money in an equilibrium business cycle model abstract this paper examines the differential real effects of monetary policy across industries the purpose is to test whether these differential effects can be accounted for by an incomplete information rational expectations model of the business cycle in the lucas barro tradition such a model implies a positive relation across markets between the variability of market specific shocks and the reduced form output effect of a monetary shock this proposition is tested using industry level post war u s data and support is found the exploration also uncovers other interesting industry level and aggregate results

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

distinguished lecture on economics in government what central bankers could learn from academics and vice versa academic writing about monetary policy has been useful to practical central bankers but more of certain aspects of the economists way of thinking could profitably be imported on the other hand academics could improve their analysis and make it more useful to policymakers if they would pay more attention to certain real world aspects of monetary policy the author draws on his experience at the federal reserve board to point out a number of specific lessons for each side

a new theory of aggregate supply macroeconomic theory contains two competing explanations of business cycle fluctuations according to the intertemporal substitution mechanism its observed variations in employment represent the optimal response of labor supply to misperceived variations in the expected real rate of interest a competing theory is offered by the literature on overlapping contracts that attributes employment variations to contracted nominal wage rigidities such rigidities prevent prices from adjusting in a way that would allow quantities to mimic the theoretical predictions of the walrasian marketclearing model both of these theories incorporate the property that employment converges in the long run to a natural rate of employment this paper develops an alternative theory it presents a model of an economy in which agents are rational utility maximizers with perfect foresight of future prices nevertheless the competitive equilibrium is pareto inefficient this situation arises because the economy does not contain a complete set of markets perfect capital markets do not exist because of asymmetric information ai a complete set of futures markets does not exist because agents have finite lives and trades cannot be negotiated with the unborn these two sources of market failure are modeled by embedding a theory of ai contracts into an overlapping generations model olg in which a critical role is played by the additional assumption that in some states of nature bankruptcy may be a binding constraint the nonexistence of futures markets generates a model with the property that government debt is real wealth which implies that fiscal policy can have a permanent effect on the real rate of interest the bankruptcy constraint translates changes in the rate of interest into changes in the frequency of contract default simply stated a high interest rate increases the probability that a firm will go bankrupt or that it will layoff workers in sharp contrast to either the new classical or the sticky price contract explanations of business cycle fluctuations this theory is not a natural rate theory even in the long run it predicts that the steady state employment level is an endogenous variable which varies systematically with fiscal policy

inflation and productive activity in a multiple matching model of money abstract this paper investigates the relationship between money growth inflation and productive activity in a dynamic general equilibrium multiple matching framework where trade frictions are manifested by limited consumption variety productive activity and matching in the goods market are endogenized by a time allocation decision of work and search effort we find that a high degree of complementarity between participation in the labor and goods markets creates a channel by which inflation can positively influence production and output this feature arises when household preferences for consumption variety is sufficiently large and it can also lead to the multiplicity of monetary equilibria

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

arbitrage and the existence of competitive equilibrium a general equilibrium model of markets for commodities and assets is considered the author develops the notion of a price system that admits no arbitrage opportunity and demonstrates the fundamenta l role of this concept for the theory of the existence of a competiti ve equilibrium a price system admits no arbitrage opportunity for a consumer if every bundle of desired commodities has a positive market value the author proves that the existence of a price system that a dmits no arbitrage opportunity for all consumers is sufficient for th e existence of an equilibrium copyright 1987 by the econometric society

monetary policy regimes and beliefs this paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic stochastic general equilibrium model in this model monetary policy periodically switches between low and high money growth regimes when individuals cannot observe the regime directly they must draw inferences over regime type based on historical money growth rates the authors show that for an empirically plausible money growth process beliefs evolve slowly in the wake of a regime change as a result their model is able to capture some of the observed persistence of real and nominal variables following such a regime change

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

the u s phillips curve the case for asymmetry abstract recent statistical rejections of convexity in the phillips curve have been uninformative because researchers have employed measures of business cycle gaps that are inconsistent with the implications of convexity the paper shows that identifying convexity in the phillips curve will become even more difficult if policymakers are successful in avoiding large boom and bust cycles to the extent that convexity in the phillips curve is used as a rationale for stabilization policy our findings present an interesting conundrum because successful policymakers will further weaken the empirical evidence on which such policies are based

overlapping risk adjusted sets of priors and the existence of efficient allocations and equilibria with short selling the theory of existence of equilibrium with short selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences no arbitrage conditions are given in terms of risk adjusted priors a sufficient condition for existence of efficient allocations is the overlapping of the interiors of the risk adjusted sets of priors or the inexistence of mutually compatible trades with non negative expectation with respect to any risk adjusted prior these conditions are necessary when agents are not risk neutral at extreme levels of wealths it is shown that the more uncertainty averse or risk averse the agents the more likely are efficient allocations and equilibria to exist

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

capacity constraints idiosyncratic demand uncertainty and the dynamics of inflation abstract this paper contributes to the theoretical modeling of inflation dynamics by analyzing the interplay between production inflexibilities and price setting behavior we formalize the capacity constraint hypothesis within the context of a new keynesian framework a key result shows how the dynamics of inflation depend on the distribution of utilization rates across firms in the economy the measure of resource utilization explicitly derived here allows the study of interesting dynamics absent in current formulations of the phillips curve

implicit contracts with asymmetric information and bankruptcy the effect of interest rates on layoffs this paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors firms have more information than do the owners of the factors of production and they are also subject to limited liability we show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information the firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined we show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates recent literature in the area of implicit contracts has shown considerable interest in the assumption of asymmetric information henceforth a i papers by azariadis 1982 green and kahn 1982 and grossman and hart 1981 have all shown that a i will interfere with optimal risk sharing but although these models produce non walrasian outcomes it is not clear that they are capable of explaining the observed variations in employment over the business cycle in the absence of a link between the level of employment and other macroeconomic variables these new versions of contract theory are open to the charge that they are presenting a complicated explanation of frictional unemployment one potential link between variations in output and variations in intertemporal prices is suggested by models which explicitly allow for the possibility of bankruptcy sappington 1983 has shown that bankruptcy will generate inefficient outcomes even between risk neutral agents and farmer 1984 has shown that if sappington type contracts are incorporated into a macroeconomic structure then the resulting model predicts that bankruptcies will vary countercyclically over the business cycle although bankruptcy is important however it is unlikely that bankruptcies alone will account for all of the output loss during a recession the purpose of this paper is to show that the assumptions of a i and limited liability will generate a model in which the employment level is inefficient and in which the magnitude of this inefficiency varies systematically with the expected real rate of interest this model predicts that the observed increase in the incidence of layoffs during recessions is directly attributable to the effects of high interest rates on aggregate supply some evidence of the phenomenon to be explained is presented below

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

monetary policy in a financial crisis what are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis under what conditions will a cut stimulate output and employment and raise welfare under what conditions will a cut have the opposite effects we answer these questions in a general class of open economy models where a financial crisis is modeled as a time when collateral constraints are suddenly binding we find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy then a cut in the interest rate is most likely to result in a welfare reducing fall in output and employment when these frictions are absent a cut in the interest rate improves asset positions and promotes a welfare increasing economic expansion

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

in search of the liquidity effect in a modern monetary model abstract this paper examines the impact of a monetary policy shock in a dynamic stochastic general equilibrium model with sticky prices and financial market frictions first we examine the shortcomings of monetary models emphasizing these frictions individually the model then is specified to limit the response of prices and savings to a current period monetary disturbance our results show that this model can account for the following key responses to an expansionary monetary policy shock a fall in the nominal interest rate a rise in output consumption and investment and a gradual increase in the price level finally a detailed sensitivity analysis shows the model s results depend on the parameters assigned to critical structural features

is there a cost channel of monetary policy transmission an investigation into the pricing behavior of 2 000 firms the paper exploits a unique panel covering some 2 000 italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production it has been argued that this mechanism may explain the dimension of the real effects of monetary policy give a rationale for the positive short run response of prices to interest rate increases the price puzzle and call for a more gradual monetary policy response to shocks we find robust evidence in favor of the presence of a cost channel of monetary policy transmission proportional to the amount of working capital held by each firm the channel is large enough to have non trivial monetary policy implications

labor contracts under asymmetric information when workers are free to quit this paper examines the impact of workers ability to quit on the performance of labor contracts between workers and privately informed firms while the need to induce workers to remain with the firm necessarily lowers total welfare the effect on employment levels is to reduce the magnitude of the inefficiency due to asymmetric information whether this inefficiency is under or overemployment the model predicts that employment distortions increase with the strength of lock in effects on workers a prediction which contrasts with the results of efficiency wage models and which may help in empirical testing of labor contract theory

armen alchian s contribution to macroeconomics i introduction this essay examines alchian s contribution to the theory and practice of macroeconomics we have the task of reviewing alchian s contributions in an area that represents only a tiny fraction of his body of work citations to his work on the theory of the firm greatly outnumber those on money and inflation nevertheless we find that many of the major developments in macroeconomics in the last two decades follow paths that were pointed out in the late 1950s and early 1960s by armen alchian much of it in collaboration with reuben kessel alchian s ideas about macroeconomics were developed in a fertile environment at ucla in conversations with colleagues such as karl brunner and jack hirshleifer as well as with graduate students such as allan meltzer and rachael and ted balbach a signature of alchian s work was his great ability to clarify the issues he was careful to distinguish the effects of money versus real shocks of anticipated versus unanticipated inflation and to work through the impact of an event to the general equilibrium consequences he understood that real world problems such as incomplete information might explain apparently noneconomic behavior but unlike many macroeconomists of that time he did not abandon microeconomic principles when explaining nominal real interactions alchian s views were a clear contrast to those of prominent macroeconomists of the day who argued that aggregate monetary policies could not be used to stabilize the price level at full employment because of asymmetric rigidities in markets that prevented the downward adjustment of any nominal price as part of the process of adjusting relative prices 1 the conventional wisdom of the day led to policies that ultimately caused two decades of accelerating and costly inflation both the rational expectations revolution and developments in modeling the microfoundations of business cycles were a reaction to this experience and to the apparent failure of standard macroeconomic analysis alchian s 1970 work on the effect of private information was one of the original articles in this microfoundation literature although he used a narrative approach rather than the highly structured mathematical models available to researchers today alchian was more than two decades ahead of the real business cycle economists in asking researchers to explore economic explanations fully before adopting explanations based on market failure money illusion and irrational behavior this paper is organized in four parts the first part describes alchian s work involving the fundamental role of money in society king and plosser 1986 93 wrote but in the explosion of formal modeling of monetary economies in the postwar period brunner and meltzer 1971 and alchian 1977 stand nearly alone in stressing the idea that monetary arrangements economize on the information production that would otherwise be necessary to mitigate problems of moral hazard in the exchange of commodities the second part discusses alchian and klein s work on the measurement of inflation this measurement problem appears to be more obvious when inflation is low and the variance of price indexes is dominated by real factors this work was generally neglected at the time it was written perhaps because inflation accelerated so rapidly that the real factors became less important now that inflation has declined to moderate levels the measurement problems are resurfacing the third part of the paper documents alchian s insight into the problems and intellectual developments that followed the erratic inflation policies of the u s government in the 1960s and 1970s in a 1962 journal of political economy article he and reuben kessel set forth a description of the events that occur as an economy shifts from one steady state inflation regime to another this work revealed an understanding of the importance of credibility for the policymaker that was missing from much of the writing about macro policymaking in the subsequent three decades

optimal monetary policy with a nonlinear phillips curve abstract the analysis of optimal discretionary monetary policy under a non linear phillips curve is shown to yield results that are in marked contrast to conventional results that are drawn from the linear paradigm specifically we show that there exists a deflation bias in expected output while the inflation bias cannot be signed preference uncertainty however adds to expected inflation

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

what is a liquidity crisis abstract this paper investigates the role of liquidity it is argued that the firm holds money as a guarantee of solvency to its contractual partners by holding liquid assets the firm is able to increase the efficiency of its contracts variations in the opportunity cost of holding money cause variations in the firm s demand for money and consequent variations in the frequency of contract failures this mechanism is suggested as an alternative explanation of the observed relationship between money income and interest rates

the nonlinear phillips curve and inflation forecast targeting symmetric versus asymmetric monetary policy rules we study a simple small dynamic economy that a policymaker is attempting to control via use of a monetary policy rule the model features a convex phillips curve in that positive deviations of aggregate demand from potential are more inflationary than negative deviations are disinflationary using dynamic optimization techniques we find that the form of the optimal monetary policy reaction function is asymmetric we show that in the optimal rule the interest rate is a nonlinear function of the deviation of inflation from its target and of output from potential with asymmetry optimal monetary policy becomes more active as uncertainty about the impact of policy increases we thus provide an important and novel theoretical reason why increased uncertainty can lead to more aggressive rather than toward more cautious optimal policies

nonlinearity in the fed s monetary policy rule this paper investigates the nature of nonlinearities in the monetary policy rule of the us fed using the flexible approach of hamilton 2001a we find that while there is significant evidence of nonlinearity for the period to 1979 there is little such evidence for the subsequent period possible asymmetries in the fed s reactions to inflation deviations from target and the output gap in the 1960s and 70s may tell part of the story but do not capture the entire nature of the nonlinearity the inclusion of the interaction between inflation deviations and the output gap as recently proposed appears to characterize the nonlinear policy rule more adequately

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

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

time series representations of economic variables and alternative models of the labour market accepting the hypothesis that the time series facts of the aggregate labour market may be summarized by the linear autoregressive and moving average representations of wages prices unemployment and interest rates implies that a useful theory ought to lead to predictions about these representations following this approach this paper first catalogues many of the time series facts about the aggregate labour market and then compares them against alternative models of the labour market based on the intertemporal substitution and staggered contract hypotheses

liquidity transaction costs and real activity this paper studies the liquidity effect in a pecuniary transaction cost model to model the asymmetric impact of monetary injections we consider two behavioral assumptions sluggish money demand and sluggish firm investment it is found that under reasonable parameterization the model is capable of generating a dominant liquidity effect our result suggests that with alternative monetary specifications and behavioral assumptions general equilibrium models are still useful for studying the liquidity effect at business cycle frequencies

contracts constraints and consumption the paper compares implications of three kinds of models of households consumption behaviour the basic permanent income model several models of liquidity constrained households and a model of an informationally constrained efficient contract these models are distinguished in terms of implications regarding the present discounted values of net trades to households at various levels of temporary income and the households marginal rates of substitution martingale consumption is studied as an approximation to the predicted consumption process of the efficient contract model

production inflexibilities and the cost channel of monetary policy this article shows how the existence of production inflexibilities in the form of capacity utilization constraints conditions the magnitude of the response of macroeconomic variables to a money supply stimulus capacity is modeled under explicit microfoundations where the existence of idiosyncratic demand uncertainty generates variable utilization rates across firms in this context money has real effects due to non fisherian effects stemming from limitations in households access to the financial market firms capacity constraints generate a convex aggregate supply curve which is a feature of the economy that has important implications for the conduct of monetary policy

human capital and self enforcing contracts this essay analyzes labor contracts as a device for rearranging factor incomes over time under conditions of extreme adverse selection in particular the lack of verifiable public information about future compensation prevents finitely lived workers from borrowing against their earnings specific human capital is used as an incentive to implement intertemporal self enforcing contracts between workers and firms after proposing a necessary and sufficient condition for the existence of such contracts the resulting equilibrium earnings profiles are explored along with the effects of imperfections in the credit market on the way workers choose jobs and allocate time between current production and training copyright 1988 by the editors of the scandinavian journal of economics

on equilibrium in hart s securities exchange model in this paper we use a no unbounded arbitrage condition to give a very direct proof of the existence of equilibrium in hart s unbounded securities exchange model j econ theory 9 1974 293 311 we also examine the relationship between the no unbounded arbitrage condition and the sufficiency conditions of hart ibid and hammond j econ theory 31 1983 170 175 we present an example to show that if traders are not sufficiently risk averse then hammond s overlapping expectations condition is not in general equivalent to the no unbounded arbitrage condition or hart s sufficiency conditions and therefore is not sufficient to guarantee the existence of equilibrium we also present an example to show that it is possible for the no unbounded arbitrage condition to hold without overlapping expectations and therefore it is possible for equilibrium to exist without overlapping expectations

regional and sectoral evidence of the macroeconomic effects of labor reallocation a panel data analysis this paper revisits the sectoral shifts hypothesis by examining unemployment fluctuations for 48 u s states over the period 1990 01 2011 12 we develop a panel approach that incorporates dynamics parameter heterogeneity aggregate factors and cross sectional dependence our findings provide support for a positive and significant effect of the employment dispersion index on unemployment this outcome is robust under alternative specifications and measures of employment dispersion the empirical evidence corroborates the presence and relevance of cross sectional dependence and heterogeneity among states the results show that once unobserved common factors and cross state heterogeneity are taken into account labor reallocation has a significant effect on unemployment that is half the size of the estimate when cross sectional dependence is not taken into account

common currencies vs monetary independence we study the optimal monetary policy in a two country open economy model under two monetary arrangements a multiple currencies controlled by independent policy makers b common currencies with a centralized policy maker our findings suggest that i monetary policy competition leads to higher long term inflation and interest rates with large welfare losses ii the inflation bias and the consequent losses are larger when countries are unable to commit to future policies iii the welfare losses from higher long term inflation dominates the welfare costs of losing the ability to react optimally to shocks

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

social polarization in global cities measuring changes in earnings and occupational inequality abstractsocial polarization in global cities measuring changes in earnings and occupational inequality regional studies there is a paradox in the scholarly contributions to the social polarization debate studies that rely on occupational descriptions to measure employment change produce results that take the form of a professionalizing pattern of growth by contrast studies that rank occupations by income to measure employment change produce evidence in support of social polarization this study applies both methods to measure employment change in greater johannesburg south africa from 1996 to 2012 in order to demonstrate why these different methods produce such different results the results have important implications for how statistical evidence is used to test the social polarization hypothesis

on the different notions of arbitrage and existence of equilibrium in this paper we first prove an equilibrium existence theorem for finite dimensional economies with unbounded below consumption sets we only assume that the individually rational utility set is compact and use the demand approach instead of the standard negishi s approach we next compare the different concepts of no arbitrage that have been used in the literature and give conditions for equivalence between absence of arbitrage and existence of equilibrium lastly we introduce the concept of strong unbounded arbitrage and show that the absence of strong unbounded arbitrage implies the compactness of the individually rational utility set journal of economic literature classification numbers c62 d50

asymmetric monetary policy rules in australia abstractin this study the hypothesis that the reserve bank of australia rba implements an asymmetric monetary policy rule is tested we estimate both linear and asymmetric monetary policy reaction functions for the period before inflation targeting was adopted for the period when inflation targeting was explicitly adopted and for the full sample period the results of the linear monetary policy rules are consistent with the estimates reported from other studies that estimate linear monetary policy rules for australia on the other hand the results of estimating the asymmetric monetary policy rules for the pre inflation targeting period shows that the rba had reacted symmetrically suggesting that it had acted with the same aggressiveness towards both inflation and output gaps of the same magnitude over both phases of the business cycle however for the inflation targeting period the results show that the rba had reacted asymmetrically in its policy response to the inflation gap output gap or both

social polarisation or professionalisation another look at theory and evidence on deindustrialisation and the rise of the service sector the debate over whether or not the deindustrialisation of cities is accompanied by the occupational and income polarisation of their working populations has been characterised by some confusion ove

credit rationing and effective supply failures the topic of this paper is among the oldest and most fundamental in monetary theory how and why does monetary policy affect real economic activity traditional answers hold that the central bank can manipulate aggregate demand by engineering expansions or contractions of the medium of exchange in its monetarist variant this story posits a direct link between something called m and aggregate spending in its keynesian variant the story holds that adjustments in asset prices brought about by a change in m lead to more spending especially on capital goods in either case short run stickiness of prices is needed to translate some of the changes in demand into movements of real output in recent years these conventional stories have become increasingly implausible as stiglitz and i blinder and stiglitz i 983 have argued elsewhere with money becoming more and more difficult to define it is becoming increasingly difficult to believe that the central bank can cause a recession by contriving a shortage of an arbitrary subset of assets called m put differently the point seems both simple and compelling if there are ready substitutes for money control of money will not give the authorities much leverage over the real economy hence this paper develops an explanation for how central bank policy affects

asymmetric effects of positive and negative money supply shocks this paper examines whether positive and negative money supply shocks have symmetric effects on output the results are consistent with the hypothesis that positive money supply shocks do not have an effect on output while negative money supply shocks do have an effect on output this finding is independent of whether or not expected money is assumed to affect output the results reported in this paper imply that the fed could increase the growth rate of real output by reducing the standard deviation of unexpected changes in the money supply

the welfare implications of foreign exchange intervention abstract this paper examines the welfare implications of foreign exchange intervention in a two country two currency general equilibrium model with limited participation in financial markets and cash in advance constraints on transactions both sterilized and nonsterilized intervention operations have significant impacts on the allocation of liquidity in international financial markets and therefore affect real economic activities the welfare effects of shocks to monetary policy sterilized and nonsterilized foreign exchange interventions are examined and compared the design of welfare maximizing intervention policy rules is also discussed