diamonds are a government s best friend burden free taxes on goods valued for their values comments one of the most startling tax policy prescriptions to appear in recent years is the diamond good tax of yew kwang ng 1987 diamond goods are goods such as diamonds precious stones and metals expensive fur coats and luxurious cars which are valued for their values more than for their intrinsic consumption effects consumers of diamond goods are viewed as deriving utility from exhibiting their wealth and or by using these goods as a store of value and or giving them as gifts of value in these cases it is the value of the good that matters most after analyzing the taxation of diamond goods ng formally asserts three propositions and a corollary his principal findings are that a change in the price of a diamond good leaves its value and the amounts of all other goods consumed and hence the utility level of the consumer unaffected proposition 1 and that the demand curve for a diamond good is a rectangular hyberbola with unit elasticity throughout the whole range where it remains a pure diamond good corollary 1 these findings form the basis for his conclusion that a pure diamond good has an infinite tax in an optimal tax system proposition 3 the taxation of diamond goods thus represents a burdenless tax policy panacea the purpose of this paper is to reconsider the microeconomic analysis of the taxation of diamond goods we show that the striking results of ng depend on the particular way in which the diamond good is specified we demonstrate that an alternative and eminently reasonable specification yields drastically different results in that ng s principal findings do not hold ng considers a representative consumer choosing among a single pure diamond good and n 1 ordinary consumption goods the utility function is assumed to be well behaved and is written

disinflation with imperfect credibility abstract this paper presents a theory of the real effects of disinflation as in new keynesian models price adjustment iis staggered across firms as in new classical models credibility is imperfect the monetary authority may not complete a promised disinflation the combination of imperfect credibility and staggering yields more plausible results than either of these assumptions alone in particular an announced disinflation reduces expected output if credibility is sufficiently low

optimal disinflationary paths abstract this paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting starting from a steady state with positive inflation a rapid disinflation is desirable when announcements of future monetary policy are fully credible disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility nevertheless the benefits of disinflation still exceed the costs disinflation often fails to be welfare improving however when lost seignorage revenues must be replaced using other distortionary taxes

the econometrics and some properties of separable matching models we present a class of one to one matching models with perfectly transferable utility we discuss identification and inference in these separable models and we show how their comparative statics are readily analyzed

disinflation effects in a medium scale new keynesian model money supply rule versus interest rate rule abstract empirical studies show that successful disinflations entail a period of output contraction using a medium scale new keynesian model we compare the effects of disinflations of different speed and timing implemented through either a money supply rule or an interest rate rule in terms of transitional output loss cold turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly furthermore gradual or anticipated disinflations deliver lower sacrifice ratios from a welfare perspective despite the temporary economic contraction the transitional welfare loss is quantitatively negligible so that disinflations are overall welfare improving the overall welfare gain is not affected by how the disinflation is actually implemented what really matters is the achievement of a permanently lower inflation rate

inflation targeting does not matter another look at oecd sacrifice ratios recently in this journal goncalves and carvalho 2009 concluded that inflation targeters were able to bring inflation down at less cost than nontargeters p 242 this comment shows that their conclusion is not robust but instead is the result of comparing a particular subset of inflation targeting it disinflations with nonsimultaneous disinflations that occurred under very different macroeconomic conditions in their sample simple extensions such as justifiably varying the treatment group of it disinflations to control for common time varying effects or to control for the maastricht treaty effects suggest that it does not matter

adaptive learning and the use of forecasts in monetary policy abstract this paper investigates monetary policy design when central bank and private sector expectations differ private agents learn adaptively the central bank has a possibly misspecified model of the economy successful implementation of optimal policy using inflation targeting rules requires the central bank to have complete knowledge of private agents learning behavior if the central bank mistakenly assumes private agents to have rational expectations when in fact they are learning then policy rules frequently lead to divergent learning dynamics however if the central bank does not correctly understand agents behavior stabilization policy is best implemented by controlling the path of the price level rather than the inflation rate

trend inflation taylor principle and indeterminacy positive trend inflation shrinks the determinacy region of a basic new keynesian dynamic stochastic general equilibrium model when monetary policy is conducted by a contemporaneous interest rate rule neither the taylor principle which requires the inflation coefficient to be greater than one nor the generalized taylor principle which requires that the nominal interest rate to be raised by more than the increase in inflation in the long run is a sufficient condition for local determinacy of equilibrium this finding holds for different types of taylor rules inertial policy rules and price indexation schemes therefore regardless of the theoretical setup the monetary literature on interest rate rules cannot disregard average inflation in both theoretical and empirical analyses

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

opportunistic and deliberate disinflation under imperfect credibility one strategy for disinflation prescribes a deliberate path towards low inflation a contrasting opportunistic approach eschews deliberate action and instead waits for unforeseen shocks to reduce inflation this paper compares the ability of these two approaches to achieve disinflation and at what cost we analyze these issues using the federal reserve s frb us model which allows alternative assumptions to be made about expectations held by agents in the economy hence the credibility of the central bank can be considered in assessing the cost of deliberate and opportunistic disinflations

adaptive learning forecast based instrument rules and monetary policy abstract this paper argues that recently popular forecast based instrument rules for monetary policy may fail to stabilize economic fluctuations in a new keynesian model of output gap and inflation determination in which private agents face multi period decision problems but have non rational expectations and learn over time if the monetary authority adopts a forecast based instrument rule and responds to observed private forecasts then this class of policies frequently induce divergent learning dynamics a central bank that correctly understands private behavior can mitigate such instability by responding to the determinants of private forecasts this suggests gathering information on the determinants of expectations to be useful

the conquest of south american inflation we infer determinants of latin american hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden markov model that assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals levels and conditional volatilities of monetized deficits drove most hyperinflations and stabilizations with a notable exception in peru where a cosmetic reform of the type emphasized by marcet and nicolini occurred

who marries whom and why this paper proposes and estimates a static transferable utility model of the marriage market the model generates a nonparametric marriage matching function with spillover effects it rationalizes the standard interpretation of marriage rate regressions and points out its limitations the model was used to estimate u s marital behavior in 1971 72 and 1981 82 the marriage matching function estimates show that the gains to marriage for young adults fell substantially over the decade unlike contradictory marriage rate regression results the marriage matching function estimates showed that the legalization of abortion had a significant quantitative impact on the fall in the gains to marriage for young men and women

sacrifice ratio in a medium scale new keynesian model a medium scale macroeconomic model with a number of nominal and real frictions that have be shown to be important for explaining observed aggregate uctuations is capable to quantitatively account for the empirically estimated sacri ce ratio after a disin ationary monetary policy this nding however is sensitive to the degrees of price and wage indexation to past in ation and to a less extent to the price and wage calvo probabilities jel classi cation e31 e5

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

inflation targeting in emerging economies panel evidence abstract this paper shows there is no evidence that the inflation targeting regime it improves economic performance as measured by the behavior of inflation and output growth in developing countries the control of common time effects results in less negative and less significant it impacts on inflation inflation volatility and output growth volatility than previously found in the literature additionally our analysis shows robust evidence of lower output growth during it adoption on balance although lower long run mean inflation signals that the central banks of emerging economies with inflation targeting are more inflation averse the costs of disinflation have not been lower than under other monetary regimes

learning in an estimated medium scale dsge model in this paper we evaluate the empirical relevance of learning by private agents in an estimated medium scale dsge model we replace the standard rational expectation assumption in the smets and wouters 2007 model by a constant gain learning mechanism if agents know the correct structure of the model and only learn about the parameters both expectation mechanisms resultin asimilarfit and onlythetransition dynamicsthatare generated byspecific initial beliefs can distinguish the two approaches if in addition agents use only a reduced information set in forming the perceived law of motion the implied model dynamics change and for some initial beliefs the marginal likelihood of the model is further improved however the estimated gain parameter is estimated to be small which suggests a crucial role for the initial beliefs to explain the improved fit the learning models with the highest posterior probabilities add some additional persistence to the dsge model that reduce the gap between the irfs of the dsge model and the more data driven dsge var model however the additional dynamics that are introduced by the learning process do not systematically alter the estimated structural parameters related to the nominal and real frictions in the dsge model jel codes c11 d84 e30 e52

the strategy structure of two sided matching markets we study two sided markets in which agents are buyers and sellers or firms and workers or men and women the agents are to form partnerships which provide them with satisfaction and at the same time make monetary transfers e g salaries or dowries the core of this market game is shown to have a particularly nice structure so that precise answers can be given to questions concerning comparative statics and manipulability the idea of using walrasian equilibrium as a mechanism for making allocations with desirable properties of fairness and efficiency has been studied extensively the scheme involves having agents specify their supply and demand functions the competitive equilibria are then calculated and allocations are made accordingly in general this procedure may run into two difficulties first nonuniqueness if there are several equilibria there may be no fair way to decide which one should be implemented and second manipulability if there is only one equilibrium an informed agent may be able to influence it by suitably falsifying his demand data however as we will show here using the walrasian mechanism does work remarkably well for a certain class of important markets these are the matching markets of our title and they include markets for single items like houses where it is assumed that traders do not wish to acquire more than one item they also include labor markets in which it is desired to match workers with jobs at suitable salaries academic markets in which students are to be assigned to educational institutions marriage markets where men and women are matched through negotiating of dowries it turns out that in these markets both the problems of nonuniqueness and manipulability can be resolved in a

the demand for money and goods in the theory of consumer choice with money when monetary balances are introduced into the consumer s utility function and budget constraint the resulting demand functions for money and for the consumption goods in general do not exhibit the standard slutsky hicks properties many researchers have studied this issue and have attempted to remedy the outcome for example see m morishima 1952 c lloyd 1964 1971 j hadar 1965 and dusansky kalman 1972 1973 their paramount goal has been to provide a neoclassical integration of money demand and consumer choice theory that will yield the traditional testable demand predictions that are the hallmark of neoclassical microeconomic theory the most recent work on this subject is by samuelson sato 1984 they convincingly demonstrate that with a weakly separable utility function it is possible to reinstate symmetry and negative semidefiniteness and to generate testable predictions in this paper however i show that these predictions are not those of traditional theory but a modification of them having alternative implications for example the assumption of a non inferior good is no longer sufficient to ensure a downward sloping own demand curve the problem is that the weak separability assumption is not sufficient to recover the traditional properties i present an alternative class of utility functions for which the commodity demand functions do exhibit the usual slutsky hicks properties this result also holds for money demand i implications of the sanuelson sato results

the incredible volcker disinflation abstract the reduction in inflation that occurred in the early 1980s when the federal reserve was headed by paul volcker is arguably the most widely discussed and visible macroeconomic event of the last 50 years of u s history inflation had been dramatically rising but under volcker the fed first contained and then reversed this process using a simple modern macroeconomic model we argue that the real effects of the volcker disinflation were mainly due to its imperfect credibility in our view the observed upward volatility and subsequent stubborn elevation of long term interest rates during the disinflation are key indicators of that imperfect credibility studying transcripts of the federal open market committee recently released to the public we find to our surprise that volcker and other fomc members likewise regarded the long term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy drawing from the transcripts and other contemporary sources we consider the interplay of monetary targets operating procedures and credibility during the volcker disinflation

disinflations in a model of imperfectly anchored expectations abstract we study disinflations under imperfect credibility of the central bank we propose a framework to model imperfectly credible announcements and use it to study the distribution of the output cost for a given disinflation imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations lower credibility increases the mean variance and skewness of the distribution of the sacrifice ratio when credibility is low disinflations become very costly for adverse realizations of the shocks but an opportunistic disinflation a disinflation implemented after a period of below trend inflation can significantly lower the sacrifice ratio with simulated data we reinterpret the reduced form evidence in sacrifice ratio regressions coefficient estimates from these regressions can be misleading for policymakers considering the cost of disinflation