exchange rates and the fiscal theory of the price level abstract this paper addresses exchange rate determination under a nominal interest peg in a two country cash in advance model under two types of cash in advance constraints if both governments peg the nominal interest rate on domestic bonds there is a continuum of equilibria each consistent with different nominal exchange rates and real resource allocations the well known finding of equilibrium uniqueness under a nominal interest rate peg in a closed economy does not survive in a multi country multi currency setting

sunspots currency substitution and inflationary finance abstract this paper explores some issues surrounding inflationary finance of government deficits in a two country world with currency substitution each country s monetary policy is assumed to be subordinate to fiscal policy private agents knowing that the monetary authorities cannot commit themselves to fixed policy rules substitute among the two monies each monetary authority is then forced to accomodate the actions of the fiscal authorities and private agents by setting monetary growth rates consistent with their decisions this framework offers some interesting insights into the behavior of nominal exchange rates and their co movements with relative money supplies and government deficits

smuggling non fundamental uncertainty and parallel market exchange rate volatility we explore a model where smuggling and a parallel currency market arise owing to government restrictions that prevent agents from legally holding foreign exchange despite such restrictions agents are able to diversify their savings holding both domestic and parallel foreign cash basing their portfolio allocation on current and prospective parallel exchange rates we attribute movements in parallel rates to non fundamental uncertainty the model generates equilibria with both positive and nega tive parallel premia and correlations between illegal trade and the premium the model has the novel implication that currency speculation drives smuggling affecting real activities in all sectors of the economy jel classification f31

residential spatial growth with perfect foresight and multiple income groups abstract this paper presents explicit solutions for expanding monocentric cities with two or more income groups housing is durable but deteriorates over time and redevelopment cannot take place landlords have perfect foresight the utility function and housing technology are cobb douglas population per capita income and transportation costs per mile change at constant percentage rates the model is solved analytically using an infinite time horizon as development proceeds outward a constant fraction of land is developed with high income housing and the remaining land is reserved for future low income development at any time housing is constructed at one distance for high income consumers and at a lesser distance for low income consumers high income housing is first occupied by high income consumers then filters to low income consumers and is ultimately abandoned low income housing is first occupied by low income households and ultimately abandoned

can currency competition work abstract can competition among privately issued fiat currencies work only sometimes and partially to show this we build a model of competition among privately issued fiat currencies a purely private arrangement fails to implement an efficient allocation even though it can deliver price stability under certain technological conditions although currency competition creates problems for monetary policy it is possible to design a policy rule that uniquely implements an efficient allocation

speculation incomplete currency market participation and nonfundamental movements in nominal and real exchange rates abstract this paper studies possible nonfundamental movements in nominal and real exchange rates arising from a world economy with speculation incomplete participation in international currency markets and nontraded goods the model is capable of generating equilibria which display comovements in nominal and real exchange rates not unlike those observed in actual economies

financial crises and liquidity shocks a bank run perspective abstract in contrast with the financial multiplier literature this note explores a case in which the shock triggering a financial crisis stems from the financial sector itself it is not a shock stemming from the real sector which gets amplified by say agency problems the basic intuition is provided by the bank run literature of the diamond and dybvig 1983 variety financial development is modeled as a mechanism that endows real assets e g land and capital with liquidity however liquidity can be impaired by shocks that are equivalent to a bank run liquidity creation enhances real asset prices while a liquidity crunch generates asset price collapse this bubble looking episode is not driven by standard fundamentals although it is fully in line with rationality in this context devoid of other frictions like price stickiness the note examines the effect of monetary policy in the absence of nominal rigidities it shows that preventing price deflation is not enough to offset relative to output asset price meltdown but lower policy interest rates increase relative asset prices and steady state output moreover in the neighborhood of a first best capital allocation an increase in the liquidity of capital may lower the welfare of the representative individual even if the higher liquidity of capital is sustainable and hence not destroyed by future crash illustrating the possibility of excessive financial innovation an extension of the basic model supports the conjecture that low policy interest rates may have given further incentives to the development of shadow banking

currencies and the allocation of risk the welfare effects of a monetary union in a general equilibrium model with incomplete asset markets nominal securities and mean variance preferences a monetary union is desirable when the gain from eliminating excess volatility of nominal variables exceeds the cost of reducing the number of currencies with which to hedge risks copyright 1998 by american economic association

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

international financial intermediation and aggregate fluctuations under alternative exchange rate regimes this paper presents a two country overlapping generations model in which financial intermediation arises endogenously as an incentive compatible means of economizing on monitoring costs because of the existence of transactions costs money markets in the two countries are segmented and investors have differential access to international credit markets the model is used to generate predictions about the role of international intermediation in determining the nature of business cycle phenomena across alternative exchange rate regimes disturbances are propagated by a credit allocation mechanism which also lends a novel flavor to the model s long run properties

legal restrictions and international currencies an experimental approach abstract this paper integrates theory and experiments to explore how policy rules related to government interventions can affect economic allocations and the international status of a currency using a two country two currency search model we study two types of government interventions 1 legal restrictions impacting a seller s ability to accept a foreign currency and 2 reductions to the cost a seller must pay to accept a foreign currency the first intervention can be viewed as a way to capture a decrease in capital controls while the second can be viewed as a way to explore the impact of reducing information costs associated with using a foreign currency our results indicate that abolishing legal restrictions that impact a seller s ability to accept a foreign currency can increase both quantities traded and the number of trades involving two types of currencies additionally the international status of currencies is significantly enhanced when sellers face very low foreign currency acceptance costs

interest rate rules for fixed exchange rate regimes abstract this paper shows that properly designed interest rate rules can be consistent with maintaining exchange rate stability it sheds light on the relation between interest rate rules exchange rate regimes and determinacy of the rational expectation equilibrium in a modern macroeconomic framework

evolutionary dynamics of currency substitution abstract this paper examines the issues related to the competition between two currencies in an agent based computational economic model the economic environment is a two country overlapping generations economy with no restrictions on foreign currency holdings governments of both countries finance their deficits via seignorage agents make decisions about their savings and portfolio decisions they use the genetic algorithm to update their decision rules the results presented in the paper show that the currency of the country that finances larger of the two deficits becomes valueless the adjustment process is characterized by a flight away from the currency used to finance the larger of the two deficits the economy converges to a stationary equilibrium that corresponds to a single currency economy

the inflation discipline of currency substitution abstract we examine the argument that currency substitution should be encouraged since it provides an inflation discipline in highly stylized games of national welfare maximization we find that as currency substitution increases currency survival comes to dominate all other considerations and inflation rates do indeed come down however we find no reason to think that these competitive inflation rates will be optimal the discipline embodied in currency substitution may be too weak or too strong it may be a poor substitute for direct coordination of monetary and fiscal policies we try to relate our analysis to recent u k proposals

the behavior of the exchange rate in the genetic algorithm and experimental economies this paper studies the behavior of the exchange rate in the kareken wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm the analysis shows that a stationary monetary equilibrium of the kareken wallace model is not stable under the genetic algorithm dynamics the fluctuations in the genetic algorithm exchange rate are driven by fluctuations in the portfolio fractions which change over time in response to the inequality between the rates of return on two currencies further both the genetic algorithm simulations and the experiments with human subjects were characterized by continuing fluctuations of the exchange rate with first period consumption values close to a stationary value

exchange rate volatility and international trade a general equilibrium analysis abstract we analyze the relation between exchange rate volatility and the volume of international trade in a general equilibrium stochastic endowment economy with imperfect international commodity markets and treating both variables as endogenous even in the simplest model the sign of the relation depends on the source for the change in volatility for instance more volatility of the endowments and higher costs to international trade both boost exchange risk and lower welfare but the first increases the expected volume of trade while the second decreases trade note that even the inter equilibria relation between trade and welfare is ambiguous

on the value of virtual currencies nous construisons un modele d analyse pour cerner les facteurs qui influent sur le taux de change des monnaies virtuelles trois elements importent tout d abord l utilisation actuelle d une monnaie virtuelle comme moyen de paiement ensuite la decision d investisseurs prospectifs d acheter de la monnaie virtuelle et de controler ainsi l offre de ce type de monnaie enfin les facteurs qui determineront ensemble l adoption d une monnaie virtuelle par les consommateurs et son acceptation par les commercants

endogenous multiple currencies in this paper i study a model in which households can decide which currency or currencies they will accept i provide a simple set of assumptions that are sufficient to prevent the indeterminacy of the exchange rate in the sense of kareken and wallace 1981 in a two country model stable equilibria have either a single currency or national currencies i also show currency substitution occurs as an endogenous response to high growth in the stock of a currency

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

an information based theory of international currency abstract this paper develops an information based theory of international currency based on search frictions private trading histories and imperfect recognizability of assets using an open economy search model with multiple competing currencies the value of each currency is determined without requiring agents to use a particular currency to purchase a country s goods strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements while some inflation can benefit the country issuing an international currency the threat of losing international status puts an inflation discipline on the issuing country when monetary authorities interact in a simple policy game the temptation to inflate can lead optimal policy to deviate from the friedman rule the calibrated model can produce a welfare cost of losing international status for the issuing country larger than previous findings though estimates depend critically on inflation rates and information costs

the effects of government housing policies in a vintage filtering model abstract long run and short run effects of low income government housing policies are examined in a model that treats housing as a durable good which declines in quality over time short run and long run market equilibria are characterized rent subsidies are analyzed in detail and results for other policies are presented

some simple bitcoin economics abstract we provide a model of an endowment economy with two competing but intrinsically worthless currencies dollar bitcoin dollars are supplied by a central bank to achieve its inflation target while the bitcoin supply grows deterministically our fundamental pricing equation implies in its simplest form that bitcoin prices form a martingale mutual impatience implies absence of speculation price volatility therefore does not invalidate the medium of exchange function bitcoin block rewards are not a tax on bitcoin holders they are financed with a dollar tax we discuss monetary policy implications bitcoin production taxation welfare and entry and characterize the range of equilibria

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

exchange rate indeterminacy in portfolio balance mundell fleming and uncovered interest rate parity models with full stock flow accounting respected the two country open economy portfolio balance model has just two independent equations for asset market clearing it can determine home and foreign interest rates but not the exchange rate if asset market equilibria vary smoothly over time the balance of payments equation in the mundell fleming model is not independent and cannot set the exchange rate either the familiar fixed reserves floating rate vs endogenous reserves fixed rate dichotomy does not exist and fundamentals based econometric models of the exchange rate are bound to fail an alternative is a two country is lm model with exchange rate dynamics added its dynamic properties under uncovered interest rate parity are briefly explored copyright 2004 oxford university press

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

indeterminacy and volatility of exchange rates under imperfect currency substitution i introduction this paper presents a model of exchange rate determination under currency substitution its primary objective is to examine the implications of currency substitution for the behavior of exchange rates in a general equilibrium model under uncertainty the basic framework used here is the cash in advance model of lucas 1982 which is extended to allow for substitution among currencies it is well known that under perfect currency substitution foreign exchange rates may become indeterminate and behave independently of fundamental economic variables the reason is that the objects traded in foreign exchange markets are fiat currencies which unless supported by binding legal tender laws have no fundamental economic value when agents have unrestricted access to currency markets and are free to use any currency as the means of payment currency demands are entirely determined by speculation and consequently equilibrium exchange rates become indeterminate e g see kareken and wallace 1981 increased integration of financial markets reduces the costs and the risks of holding balances in multiple currencies 4 this creates more opportunities for currency substitution and it is reasonable to assume that agents are free to use any currency as the means of the payment in some of their international transactions for example suppose some percentage of transactions involving the u s exports to germany can be paid with either u s dollars or german marks agents will look at the opportunity costs i e u s and german nominal interest rates and expected exchange rate changes to decide what combination of the two currencies to use in these transactions if the potential costs and benefits of holding the two currencies are similar then agents will be indifferent between the two currencies we show that this could lead to exchange rate indeterminacy and nonfundamental volatility and change the effectiveness of monetary policies in our cash in advance framework agents are allowed to use any currency in some of their transactions called unrestricted transactions to make different currencies attractive at different times we allow the governments to follow timevarying monetary policies as a result agents will change their currency holdings to maximize the risk adjusted return on their portfolio subject to the constraint that specific currencies must be used as the means of payment in their restricted transactions 2 to answer specific questions about the behavior of exchange rates we obtain closed form solutions for agents demand functions equilibrium interest rates and the equilibrium exchange rate it turns out that two types of equilibrium exist in the first type the two currencies have different risk return profiles such that agents will prefer to use only one of them in unrestricted transactions in this case the exchange rate will be determined by fundamentals however as a large percentage of transactions become unrestricted the equilibrium exchange rate becomes more volatile under this type of equilibrium the effectiveness of monetary policies are changed currencies of countries that have high nominal interest rates will not be in demand for use in unrestricted transactions 3 this lack of demand means that any increase in the money supply of a high nominal rate country will lead to a larger increase in its rate of inflation and thus a larger reduction in the value of its currency in other words increased currency substitution increases the sensitivity of the currency values to changes in the money supply of high nominal rate countries also we show that as national economies become more integrated and more opportunities for currency substitution arise currencies of countries with high nominal interest rates would decline substantially the reason is that higher opportunity costs are associated with holding these currencies and thus agents will fully take advantage of currency substitution to reduce their holdings of these currencies reducing the value of these currencies

time consistency and the feasibility of alternative exchange rate regimes abstract in a stochastic cash in advance model of an open economy a fixed exchange rate regime is dynamically inconsistent and hence economically infeasible in a cournot nash equilibrium if there are no exogenous constraints imposed on government behaviour and nominal interest rates are strictly positive on the other hand a perfectly floating exchange rate regime is feasible but it cannot sustain any international asset trade however a noncooperative equilibrium with nonzero asset trade and a fixed exchange rate regime may become feasible when we allow policymakers to employ trigger retaliation strategies

a model of bimetallism bimetallism has been the subject of considerable debate was it a viable monetary system was it desirable in our model the amounts of each metal are split between coined metal satisfying a cash in advance constraint and uncoined metal yielding utility the ratio of the monies in the cash in advance constraint is endogenous bimetallism is feasible we find a continuum of steady states indexed by the constant exchange rate of the monies bimetallism is not desirable among steady states welfare under monometallism is higher than under any bimetallic equilibrium long run trends in gold and silver production placed limits on the maintenance of bimetallism at any given ratio but its sudden collapse in 1873 remains a puzzle

a strategy for launching the euro abstract this paper analyzes the constraints european union law places on the 1 january 1999 choices of irrevocably fixed conversion rates between the euro and the currencies of emu members states current eu legislation notably the maastricht treaty requires that the bilateral currency conversion factors implied by the 1 january 1999 choices equal closing market exchange rates on 31 december 1998 given that legal constraint there still exist several strategies for choosing the relative prices of emu member currencies against the euro unfortunately most of these have potentially damaging side effects one approach based on official stage 2 offers of contingent euro forward contracts with value dates at the start of stage 3 allows a highly credible preannouncement of the bilateral currency conversion factors to be set at the start of emu that approach assumes however that no prospective emu members can withdraw between their selection in may 1998 and the start of stage 3

explaining the time varying effects of oil market shocks on us stock returns abstract this paper documents time variation in the relation between oil price and us equity returns based on both reduced form and structural analyses our reduced form analysis suggests that the sign of the relation between real oil returns and real stock returns has changed over time and that in the recent period this relation has turned positive since early 2007 but started increasing since 2005 based on our structural analysis we find that oil specific demand shocks have had positive effects on the us stock market since 2009 as opposed to oil supply shocks which have no large effects on stock returns we also show that the time variation in the parameters of the structural var is very well explained by the level of the us short term interest rate and shifts in consumer confidence

sustainable balance of trade deficits abstract this paper analyzes a model of overlapping generations in which there are two currencies there are two agents born in each period and these agents have completely heterogeneous preferences and endowments the paper shows that there are monetary equilibria in which one country can sustain a trade deficit whose present value is arbitrarily close to that of its trading partner s entire stream of resources hence there may be no limit to the present value of a country s trade deficit even if the equilibrium for the world economy satisfies an intertemporal efficiency criterion

government finance with currency substitution abstract we analyze seigniorage in an overlapping generations model where a friction induces a precautionary demand for a weaker currency the friction which is modeled as a transactions cost is viewed as an inverse measure of currency substitutability governments finance spending with costly income taxation or seigniorage we show that if governments act independently money growth is suboptimally low if currencies are sufficiently substitutable and too high otherwise if money growth is suboptimally low increasing substitutability lowers it further however since greater substitutability is associated with smaller real costs of exchanging money welfare need not fall

economic organization with limited communication this paper presents formal stylized representations of communication accounting systems oral assignment portable object written message and telecommunication systems are considered the environments that allow this formalization are characterized by spatial separation private information and a need to keep track of past actions transfers and shocks in environments that have spatial separation and private information beneficial multilateral arrangements can depend critically on agents ability to communicate to one another values of contemporary shocks and to keep track of histories of past transfers or past announced shocks this paper formalizes this idea and focuses on com

nonfundamental uncertainty and exchange rates this paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals this is demonstrated in the context of a two currency one good model with three agent types and cash in advance constraints a crucial feature is that the type i agents for i 1 2 must satisfy a cash in advance constraint by holding currency i while type 3 agents can satisfy it by holding either currency it is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist

currency areas and monetary coordination we integrate a monetary search model into open economy macro to analyze the gains from coordinating on inflation search frictions and local congestion lead to a determinate exchange rate between two currencies relative prices deviate from the law of one price because the deviations depend on the cross country differential in money growth each country is tempted to inflate to exploit the deviations policy coordination reduces inflation and improves welfare for all countries in contrast to traditional models the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country s currency

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

international asset pricing with time varying risk premia abstract recent empirical evidence that forward exchange rates are biased predictors of future spot rates can also be interpreted as evidence against the hypothesis of a constant risk premium consequently reconciliation of this evidence with efficient international capital markets requires the existence of time varying risk premia this paper modifies kouri s 1977 asset pricing model to allow time varying exected returns on assets eliminates the assumption of a risk free real asset and derives the characteristics of the risk premia in the forward market as well as the equilibrium yield relationships among the equities and riskless nominal bonds of all countries

inflation expectations and qualitative government policy in ecuador 1970 1982 abstract a model of constrained money demand for a dominated domestic currency is specified it is found that the model traces the evolution of the course of inflation when applied to the experience of ecuador and provides an interpretation for the differing statistical relationship between money and prices during the estimation period

growth trade and international transfers abstract this paper analyzes the simplest neoclassical economy in which agents have finite lives and there is sustained per capita growth the growth rate of the world economy depends upon countries savings propensities and common technology trade can reverse an economy s autarkic growth trajectory and a country with a high savings rate runs a current account surplus if a surplus country expands aggregate demand while a deficit country contracts analogously world growth increases an appropriate international policy can change the path of the world economy from stagnation to growth

a liquidity based resolution of the uncovered interest parity puzzle a new monetary theory is set out to resolve the uncovered interest parity puzzle uip puzzle it explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle a key concept in our model is that nominal bonds carry liquidity premium due to their medium of exchange role as either collateral or means of payment in this framework no arbitrage condition ensures a positive comovement of real return on money and nominal bonds thus when inflation in one country becomes relatively lower i e real return on this currency is relatively higher its nominal bonds should also yield higher real return we show that their nominal returns can also become higher under the economic environment where collateral pledgeability and or liquidity of nominal bonds and or collateralized credit based transactions are relatively bigger since a currency with lower inflation is expected to appreciate the high interest currency does indeed appreciate in this case i e the uip puzzle is no longer an anomaly in our model our liquidity based theory in fact has interesting implications on many empirical observations that risk based explanations find difficult to reconcile with

money time preference and external balance in monetary economies international differences in rates of time preference do not in general lead to long run trade imbalances in sharp contrast with butter s 119811 results on non monetary overlapping generation economies this claim is documented within the context of a simple two country framework in which new immortal families enter each economy over time with the two countries differing only in their subjective discount rates even if consumers are more impatient at home than abroad trade is balanced in the long run in the presence of valued fiat currencies in constant supply and the current account is indeterminate this abstract was borrowed from another version of this item

state currencies and the transition to the u s dollar clarifying some confusions farley w grubb s recent papers on the early u s monetary system would be important contributions to the common currency area literature were not most of their historical assertions questionable and their key assumption that the medium of exchange can be inferred from the unit of account dubious we contend that after 1781 most americans eschewed government paper money in favor of full bodied coins and convertible bank liabilities and that contrary to grubb s claim bankers did not foist the constitutional clause banning state emissions onto an unsuspecting public

currency substitution under finance constraints the perfect foresight continuous time couterpart of lucas and stokey s cash in advance model is generalized to the case of two currencies the money demand function for eac currency has as arguments the endowments of goods associated with each denomination various monetary shocks are investigated including permanent and temporary changes in levels and growth rates it is shown that substitution can be an important factor in explaining the possible negative transmission of inflation the amount of volatility of exchange rates and the degree tp which exchange rate movements approximate a random walk

limited commitment and the legal restrictions theory of the demand for money this paper addresses the rate of return puzzle of monetary theory similarly to the legal restrictions theory of the demand for money we assume that government bonds are subject to a minimum purchase requirement differently from this theory however we assume that intermediaries when issuing private notes cannot commit to always redeem them first we study an environment with legal restrictions to intermediation and show that cash and interest bearing bonds both circulate in the economy then we drop the legal restrictions and show that also with active intermediation under limited commitment there is an equilibrium with rate of return dominance a positive interest rate provides the intermediaries with the incentive to issue and redeem their notes

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

adverse incentives in the taxation of foreigners abstract sovereign policymakers will opt for too much of the public good if their tax falls partially on foreigners they myopically calculate that an increase in public spending is only partially financed by a decrease in home consumption the rest comes from foreign consumption which they do not care about this paper presents an example with seignorage taxes in a two country model with cash in advance constraints the inefficiency is characterized by an inflation bias too much public spending and large fiscal deficits curiously the countries most able to impose such taxes seem to have abstained from doing so

irrelevance of open market operations in some economies with government currency being dominated in rate of return this paper describes an environment in which government issued currency is dominated in rate of return and in which there obtains a modigliani miller theorem for government open market operations earlier modigliani miller theorems for government finance have been stated for environments in which government issued currency is not dominated in rate of return in equilibrium since government issued currency is widely observed to be dominated in return it is useful to study how modigliani miller theorems hinge on absence of rate of return dominance

money banking and the determination of real and nominal exchange rates the authors consider a model where spatial separation limited communication and stochastic relocation create a role for banks and country specific currencies the same factors also permit a deviation from the law of one price the authors examine how monetary policies influence real and nominal rates of exchange and real and nominal rates of interest under both fixed and flexible exchange rate regimes they also demonstrate that both regimes are characterized by an indeterminacy of both the real and the nominal rate of exchange copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

gmm estimates of currency substitution between the canadian dollar and the u s dollar this paper investigates the empirical strength of currency substitution between the canadian dollar and the u s dollar euler equations implied by a small open economy money in the utility function model are estimated and tested by hansen s generalized method of moments procedure the major empirical finding is that both the elasticity of currency substitution and the share of u s currency in the production of canadian liquidity services are economically small even though the combined domestic and u s real balances appear to provide statistically significant economizing on transactions costs copyright 1994 by ohio state university press

currency substitution risk premia and the taylor principle abstract this paper studies the equilibrium determinacy properties of a simple interest rate rule in a small open economy subject to currency substitution i e the use of a foreign currency for domestic transactions and risk premia on foreign borrowing it shows that if currencies are substitute in the provision of liquidity services the rule s response to inflation has to be sufficiently above unity for the equilibrium to be locally determinate this reinforced taylor principle requirement appears to be more binding in economies characterized by a larger elasticity of currency substitution more debt elastic country risk premia and intermediate degrees of dollarization in transactions

moneyspots extraneous attributes and the coexistence of money and interest bearing nominal bonds it is folklore among monetary theorists that under laissez faire without ad hoc assumptions that favor money over bonds there do not exist equilibria in which government issued fiat money coexists with nominal default free interest bearing government bonds with similar physical characteristics this proposition is the basis for the strongest version of the rate of return dominance puzzle in this paper i show that if as has been the case throughout monetary history the physical object used as fiat money is heterogeneous in an extraneous attribute then there exist equilibria in which money coexists with interest bearing bonds

currency substitution under nonexpected utility some empirical evidence this paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for israel from 1978 to 1988 we find that the elasticity of intertemporal substitution is less than one the elasticity of currency substitution is greater than one relative risk aversion is about seven and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services in most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent s objective function the methodology of this paper can be applied to other interesting cases of currency substitution copyright 1993 by ohio state university press

on the role of tax subsidy scheme in money search models this article investigates the roles of policy in search models with divisible money recently real indeterminacy of stationary equilibria has been found in both specific and general search models with divisible money thus if we assume the divisibility of money it would be quite difficult to make accurate predictions of the effects of simple monetary policies therefore in this article we introduce a certain tax subsidy scheme and show that this is effective in selecting a determinate efficient equilibrium in other words for a given efficient equilibrium and for any real number 0 a certain tax subsidy scheme induces a locally determinate equilibrium within the neighborhood of the given equilibrium moreover the size of the tax subsidy can be arbitrarily small

currency substitution capital mobility and money demand abstract this paper re examines the currency substitution cs issue by specifying a general portfolio balance pb model where domestic residents demand for foreign money is distinguished from their demands for foreign non monetary assets the latter possibility which reflects international capital mobility as opposed to cs per se is already a key feature in the open economy macro literature the inclusion of foreign money leaves the usual asset demand functions unchanged in the pb model that ignores cs at least as far as the appropriate rate of return arguments and their signs are concerned although this suggests that cs is of limited importance in macro modelling it implication for the estimation of money demand functions is pursued an initial attempt is made to empirically isolate the separate efects of high capital mobility and currency substitution for canada germany the united kingdom and the united states the results while not conclusive due to high multicollinearity problems bring into question the empirical as well as the theoretical relevance of currency substitution

bitcoin 1 bitcoin 2 an experiment in privately issued outside monies the value of bitcoin depends upon self fulfilling beliefs that are hard to pin down we demonstrate this for the case where bitcoin is the only form of money in the economy and then generalize the message to the case of multiple bitcoin clones and or a competing sovereign currency some aspects of the indeterminacy we describe would no longer hold if bitcoin were an interesting bearing object

on the relationship between the exchange regime and the portfolio rules of optimizing agents the paper utilizes the overlapping generations framework to derive demand functions for money and capital we show that many of the macroeconomic comparisons of alternative exchange regimes are not legitimate since changing the exchange regime alters the portfolio rules of rational agents one cannot simply postulate a set of asset demand equations and then hold various income interest rate and wealth elasticities constant when the exchange regime changes having derived the demands for money and capital from optimizing behavior we show how changing the exchange regime affects expected capital holdings and expected utility levels of optimizing agents

size persistence and interrelation of nominal and real shocks some evidence from four countries abstract one of the major themes in karl brunner s work is the comparative size persistence and interaction of real and monetary impulses the paper uses a univariate multi state kalman filter to forecast quarterly values of money prices output velocity and exchange rates during the bretton woods and post bretton woods monetary regimes and to compute shocks or impulses vector autoregression is used to relate the shocks and to compare the two regimes several propositions are tested including the phillips curve currency substitution reverse causation and the role of monetary impulses as a cause of fluctuations in output and prices

optimal and time consistent exchange rate management in an overlapping generations economy abstract this paper analyzes exchange rate management in a simple overlapping generations model this framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage when the chief concern is to provide a desirable store of value a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate the same is true when the government is concerned with maximizing total expected seigniorage although more intervention is typically desirable when generating seigniorage is the major objective when seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value a national currency may not be viable in the absence of exchange controls such controls may be justified in this situation

nominal prices and interest rates in general equilibrium endowment shocks the outstanding problem of neoclassical monetary theory has been to determine the effect of changes in the money stock on nominal prices and interest rates the classic result is that in the absence of money illusion contracts fixed in nominal terms and other such impedimenta money is neutral thus a doubling of the money stock results in a doubling of the nominal price level and in no change in nominal interest rates except at most for a temporary liquidity effect while the price level is rising to its new level during the adjustment period the nominal interest rate might temporarily drop this neutrality result has conventionally been proved in a static framework in intertemporal models it is necessary to distinguish between static neutrality and dynamic neutrality if a model displays dynamic neutrality fluctuations in the money stock immediately induce a proportional change in the nominal price level and no change in nominal interest rates or any real variable this property is different from and stronger than static neutrality which in dynamic models states only that if the money stock at all dates is doubled so will be the price level at all dates the effects of exogenous shocks in the monetary growth rate on nominal prices and interest rates are analyzed a representative individual rational expectations framework is adopted and a demand for money is generated by entering money in the utility function the effects of monetary shocks on inflation and interest rates are shown to depend on the autocorrelation of the monetary growth rate for example under serial independence the inflation rate equals the monetary growth rate and the nominal interest rate is nonrandom while under positive negative autocorrelation the nominal interest rate is affected positively negatively by positive growth rate shocks i am grateful to the staff of the federal reserve bank of philadelphia to the finance groups at the university of southem california and virginia polytechnic institute and to c j lacivita dan peled john seater and jon sonstelie for valuable comments on earlier drafts

self confirming price dispersion in monetary economies abstract in a monetary economy we show that price dispersion arises as an equilibrium outcome without the need for costly simultaneous search or any heterogeneity in preferences production costs or search technologies a distribution of money holdings among buyers makes sellers indifferent across a set of posted prices leading to a non degenerate price distribution this price distribution in turn makes buyers indifferent across a range of money balances rationalizing the non degenerate distribution of money holdings we completely characterize the distribution of posted prices and money holdings in any equilibrium equilibria with price dispersion admit higher maximum prices than observed in any single price equilibrium and feature an increasing density of prices in contrast to existing theories price dispersion reduces welfare by creating mismatch between posted prices and money balances inflation exacerbates this welfare loss by shifting the distribution towards higher prices

dynamic exchange rate equilibria with uncertain government policy in this paper we link two exchange rate literatures by showing how threats of asset controls yields determinate exchange rates in general equilibrium models with otherwise perfect capital markets and by showing how for certain sequences of threats exchange rate determination may be well explained by monetary variables we find that in general there exists no natural exchange rate and market rates may be sensitive to changed perceptions about future exchange rate intervention

the dynamics of inflation and currency substitution in a small open economy abstract this paper analyzes the relationship between money and inflation in a small open economy where domestic and foreign currencies are perfect substitutes as means of payment it is shown that if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled there will be an adjustment period during which domestic inflation adjusts to equal the foreign inflation rate the model captures the stylized fact that temporary increases in the inflation rate may have permanent effects in the use of foreign currency even without the introduction of dollarization costs

currency substitution in a production economy abstract this paper examines a small open economy with endogenous employment using an intergenerational model under floating rates risk averse workers enhance their welfare through currency substitution workers currency substitution behavior produces a phillips curve with anticipated exchange rate movement and domestic inflationary expectation as explanatory variables the dependence of the level of equilibrium employment on the terms of trade is demonstrated finally the association between exchange rates and current accounts is examined in relation to the role of money

what to stabilize in the open economy we consider the question how best to maintain price level stability in an open economy and evaluate three possible policy choices a a constant money growth rate rule b a fixed exchange rate and c a policy of explicit commitment to a price level target in each case we assume that policy is conducted by injecting reserves into or withdrawing reserves from the banking system in evaluating the three regimes we adopt the criterion that the best policy should leave the least scope for indeterminacy and excessive economic volatility in a steady state equilibrium the choice of regime is largely irrelevant any steady state equilibrium under one regime can be duplicated by an appropriate choice of the control variable under any other regime however we show that the sets of equilibria under the three regimes are dramatically different when all countries follow the policy of fixing a constant rate of money growth there are no equilibria displaying endogenously arising volatility and there is no indeterminacy of equilibrium under a regime of fixed exchange rates indeterminacies and endogenously arising fluctuations are impossible if and only if the country with the low reserve to deposit ratio is charged with maintaining the fixed rate finally when one country targets the time path of its price level under very weak conditions there will be indeterminacy of equilibrium and endogenously arising volatility driven by expectations

moneyspots and coexistence in the pure theory of money a reply to neil wallace a response to a letter to the editor from the author of the article moneyspots extraneous attributes and the coexistence of money and interest bearing nominal bonds in the august 2013 issue is presented