monetary policy asset prices and liquidity in over the counter markets we develop a model where agents can allocate their wealth between a liquid asset which can be used to purchase consumption goods and an illiquid asset which represents a better store of value should a consumption opportunity arise agents may visit a frictional over the counter secondary asset market where they can exchange illiquid for liquid assets we characterize how monetary policy affects both the issue price and the secondary market price of the asset we also show that in contrast to conventional wisdom search and bargaining frictions in the secondary asset market can improve welfare if inflation is low

declining values and the afternoon effect evidence from art auctions we study the order of sale in art auctions the final bid relative to the auctioneer s estimated price declines throughout the course of an auction a theoretical model shows that in an auction ordered by declining valuation even in the presence of risk neutral strategic bidders the price received relative to the estimate for later items in an auction should be less than the price relative to the estimate for earlier items furthermore ordering heterogeneous items by value maximizes revenue for the auctioneer

sequential auctions with informational externalities and aversion to price risk decreasing and increasing price sequences a large body of empirical research has shown that prices of identical goods sold sequentially sometimes increase and often decline across rounds this article introduces a tractable form of risk aversion called aversion to price risk and shows that declining prices arise naturally when bidders are averse to price risk when there are informational externalities there is a countervailing effect which pushes prices to raise along the path of a sequential auction even if bidder s signals are independent the article shows how to decompose the effect of aversion to price risk from the effect of informational externalities

credit and inflation under borrowerʼs lack of commitment here we investigate the existence of credit in a cash in advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts defectors are banned from the credit market but they can use money balances for saving purposes without uncertainty deflation crowds out credit completely the equilibrium allocation however is efficient if the government deflates at the time preference rate efficiency can also be restored with positive inflation for any non negative inflation rate below the optimal level the volume of credit and the real interest rate increase with inflation our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance efficiency cannot be restored if the deflation rate is nearby the rate of time preference our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion finally we present a framework where the use of money arises endogenously and show that it is tantamount to our cash in advance framework our results hold in this modified environment

coalition proof trade and the friedman rule in the lagos wright model the lagos wright model a monetary model in which pairwise meetings alternate in time with a centralized meeting has been extensively analyzed but always using particular trading protocols here trading protocols are replaced by two alternative notions of implementability one that allows only individual defections and one that also allows cooperative defections in meetings it is shown that the first best allocation is implementable under the stricter notion without taxation if people are sufficiently patient and if people are free to skip the centralized meeting then lump sum taxation used to pay interest on money does not enlarge the set of implementable allocations

money credit and banking in monetary models where agents are subject to trading shocks there is typically an ex post inefficiency since some agents are holding idle balances while others are cash constrained this problem creates a role for financial intermediaries such as banks who accept nominal deposits and make nominal loans in general financial intermediation improves the allocation the gains in welfare come from the payment of interest on deposits and not from relaxing borrowers liquidity constraints we also demonstrate that when credit rationing occurs increasing the rate of inflation can be welfare improving

a note on sequential auctions this note provides an explanation for the declining price anomaly in sequential second price auctions we illustrate how the average winning bids of risk neutral agents bidding for objects with valuations drawn from independent identical distributions are lower in later auctions than in earlier auctions when the objects are not identical we determine the optimal order in which they should be auctioned

liquidity and asset prices in a monetary model with otc asset markets abstract we study how asset prices are affected by the amount of liquidity that is available in over the counter asset markets where dealers post prices and quantities at which they are willing to buy and sell assets we find that higher levels of market liquidity lead to higher asset prices and lower bid ask spreads hence an increase in inflation which lowers market liquidity increases asset returns and decreases asset prices when agents immediate consumption needs are stochastic asset prices will fluctuate even though asset fundamentals are unchanging the fluctuations in asset prices reflect the stochastic availability of market liquidity that results from agents changing consumption opportunities

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

essential interest bearing money i examine optimal monetary policy in a lagos and wright a unified framework for monetary theory and policy analysis j polit econ 113 2005 463 484 model where trade is centralized and all exchange is voluntary i identify a class of incentivefeasible policies that improve welfare beyond what is achievable with zero intervention any policy in this class necessarily entails a non negative inflation rate and a strictly positive nominal interest rate despite the absence of a lump sum tax instrument there exists an incentive feasible policy that implements the first best allocation

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

inflation output and welfare this paper studies the effects of anticipated inflation on aggregate output and welfare within a search theoretic framework we allow money holders to choose the intensities with which they search for trading partners so inflation affects the frequency of trade as well as the quantity of output produced in each trade we consider the standard pricing mechanism for search models i e ex post bargaining as well as a notion of competitive pricing if prices are bargained over the equilibrium is generically inefficient and an increase in inflation reduces buyers search intensities output and welfare if prices are posted and buyers can direct their search search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates the friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates

liquidity constrained markets versus debt constrained markets this paper compares two different models in a common environment the first model has liquidity constraints in that consumers save a single asset that they cannot sell short the second model has debt constraints in that consumers cannot borrow so much that they would want to default but is otherwise a standard complete markets model both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates in a stochastic environment the two models have quite different dynamic properties with the debt constrained model exhibiting simple stochastic steady states while the liquidity constrained model has greater persistence of shocks

efficient monetary allocations and the illiquidity of bonds abstract we construct a monetary economy with heterogeneity in discounting and consumption risk agents can insure against this risk with money and nominal government bonds but all trades must be monetary we demonstrate that a deflationary policy a la friedman cannot sustain the constrained efficient allocation as no arbitrage imposes too stringent a bound on the return money can pay the constrained efficient allocation can be sustained when bonds have positive yields and under certain conditions only if they are illiquid illiquidity meaning that bonds cannot be transformed into consumption as easily as cash is necessary to eliminate arbitrage opportunities due to disparities in shadow interest rates

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

the declining price anomaly abstract data from wine auctions indicate that identical products sold sequentially typically follow a decreasing pattern of prices known as the declining price anomaly this is explained for both first and second price auctions by appealing to risk averse bidders earlier bids are then equal to expected later prices plus a risk premium associated with the risky future price we show that this logic rests on the assumption of nondecreasing absolute risk aversion which is necessary for pure strategy equilibrium bidding functions to exist thus decreasing absolute risk aversion implies ex post inefficiency with positive probability data from wine auctions are used to confirm the existence of the declining price anomaly journal of economic literature classification numbers d43 d44 d81 d82 l81

efficiency improvement from restricting the liquidity of nominal bonds abstract in a monetary search model with nominal bonds agents face matching taste shocks but they cannot insure borrow or trade against such shocks a government imposes a legal restriction that prohibits bonds from being used to buy a subset of goods i show that this legal restriction can increase the society s welfare in contrast to the literature this efficiency role persists in the steady state and even when the households cannot trade assets after receiving the shocks moreover it can exist when the friedman rule is available and when the restriction is only obeyed by government agents

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

asset prices and liquidity in an exchange economy i develop an asset pricing model in which financial assets are valued for their liquidity the extent to which they are useful in facilitating exchange as well as for being claims to streams of consumption goods the implications for average asset returns the equity premium puzzle and the risk free rate puzzle are explored in a version of the model that nests the work of mehra and prescott 1985

the societal benefit of a financial transaction tax we provide a novel justification for a financial transaction tax for economies where agents face stochastic consumption opportunities a financial transaction tax makes it more costly for agents to readjust their portfolios of liquid and illiquid assets in response to liquidity shocks which increase both the demand for and the price of liquid assets the higher price improves liquidity insurance and welfare for other market participants we calibrate the model to u s data and find that the optimal financial transaction tax is 1 6 and that it reduces the volume of financial trading by 17

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

a model of money and credit with application to the credit card debt puzzle many individuals simultaneously have significant credit card debt and money in the bank the credit card debt puzzle is given high interest rates on credit cards and low rates on bank accounts why not pay down the debt while economists have gone to elaborate lengths to explain this observation we argue it is a special case of the rate of return dominance puzzle from monetary economics we analyze the issue by extending standard monetary theory to incorporate consumer debt this seems interesting in its own right since developing models where money and credit coexist is a long standing challenge and it helps put into context recent discussions of consumer debt

collateral secured loans in a monetary economy abstract this paper presents a microfounded model of money where durable assets serve as a guarantee to repay consumption loans we study a steady state equilibrium where money and credit coexist in such an equilibrium a larger investment in durable capital relaxes the borrowing constraint faced by consumers we show that the occurrence of over investment and the behavior of capital accumulation depend on the rate of inflation the relative risk aversion of agents and the marginal productivity of the capital goods

the redistributive effects of inflation and the shape of money demand abstract i quantify the distributional effects of expected inflation in a sample of oecd countries using a microfounded model of money where agents differ in their consumption risk against which they can insure using money and government bonds the model is calibrated using harmonized wealth microdata from the luxembourg wealth study i find that the inflation tax is progressive for low inflation levels but it becomes regressive as inflation increases cut off points vary across countries and depend on discount factors and heterogeneity in consumption risk across agents moreover i find that the magnitude of inflation s distributional impact depends not only on wealth distribution but also and importantly on the curvature and height of the money demand curve indeed a higher and less elastic money demand leads to more regressive effects of inflation thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution

the role of trading frictions in financial markets abstract we develop a dynamic general equilibrium model to analyze the role of trading frictions in over the counter markets in our model agents face idiosyncratic preference shocks and a financial market allows them to rebalance their portfolio composed of money and bonds in response to these shocks we disentangle the effects of search and bargaining on welfare and study each one of them we show that bargaining is generally welfare improving while search frictions are not this is because search frictions do not only affect the demand for the respective assets but also their allocation

degreasing the wheels of finance can there be too much trading in financial markets we construct a dynamic general equilibrium model where agents face idiosyncratic liquidity shocks a financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks the optimal policy is to restrict access to this market because portfolio choices exhibit a pecuniary externality agents do not take into account that by holding more of the liquid asset they not only acquire additional insurance against these liquidity shocks but also marginally increase the value of the liquid asset which improves insurance for other market participants

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

some results on the optimality and implementation of the friedman rule in the search theory of money abstract i characterize a large family of monetary policies that implement milton friedman s prescription of zero nominal interest rates in a monetary search economy with multiple assets and aggregate uncertainty this family of optimal policies is defined by two properties i the money supply must be arbitrarily close to zero for an infinite number of dates and ii asymptotically on average over the dates when fiat money plays an essential role the growth rate of the money supply must be at least as large as the rate of time preference

liquidity and asset prices a new monetarist approach abstract when lenders cannot force borrowers to repay debts assets are often pledged to secure loans in this paper borrowers lose collateral once they renege on debts and exclusion of defaulters occurs probabilistically with a higher probability implying better enforcement increased efficiency in enforcement reduces asset prices while raising loan to value ratios if the rise in loan to value ratios is the dominant effect aggregate liquidity and output increase with the advance in enforcement inflation raises the repayment cost by increasing the loan rate while raising the default cost through exclusion consequently inflation raises loan to value ratios and output only when enforcement is sufficiently efficient

the challenge of monetary theory departing from custom i want to address a problem that needs to be solved rather than one that has been solved i do not have much to contribute to its solution but i believe that the problem is important and want to focus attention on it in general terms the problem is to find appropriate conceptual foundations for monetary economics i believe that we do not as yet have a suitable theoretical framework for studying the functioning of a monetary system the main obstacle to the development of such a framework is our habit of thinking in terms of frictionless organized i e walrasian markets the problem is partly a problem of language the central concepts of economics demand supply and price are concepts that presuppose a system of centralized walrasian markets we are used to thinking in terms of these concepts and we tend to apply them rather automatically to the market for money frequently without realizing that the market for money must be a rather non walrasian market if indeed it can be called a market at all more or less all the models of monetary economics that are being used in practice proceed in this way using artifical adaptations of the walrasian centralized markets model to accommodate money without actually giving an account of what the role of money in the economy is the problem is one of pure economic theory however it bears on many important questions of applied economics and economic policy to study the relation between money income and prices we need a framework which gives a satisfactory account of the relation between the monetary system and the price mechanism to study the effects of central bank open market

debt inflation and central bank independence abstract increasing the independence of a central bank from political influence although ex ante socially beneficial and initially successful in reducing inflation would ultimately fail to lower inflation permanently the smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit over time inflation would increase to accommodate a higher public debt by contrast imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions

nominal bonds and interest rates in this article i integrate the microfoundation of monetary theory with the model of limited participation to analyze the competition between nominal bonds and money the market for government nominal bonds is centralized and walrasian whereas the goods market is modeled as random matches the government imposes a legal restriction that requires all government goods to be purchased with money but not with bonds by contrast private agents can exchange between themselves with both money and bonds i show that an arbitrarily small legal restriction is sufficient to prevent matured bonds from being a medium of exchange i also analyze the effects of monetary policy with and without the legal restriction some of those effects differ significantly from traditional monetary models

liquidity premiums on government debt and the fiscal theory of the price level we construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements if the collateral constraint binds agents price in a liquidity premium on bonds that lowers the real rate on bonds in equilibrium the price level is determined according to the fiscal theory of the price level however the market value of government debt exceeds its fundamental value we then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or future taxes or spending the price dynamics are driven solely by the liquidity premium on the debt

money and dynamic credit arrangements with private information abstract we construct a model with private information in which consumers write dynamic contracts with financial intermediaries a role for money arises due to random limited participation of consumers in the financial market without defection constraints a friedman rule is optimal the mean and variability of wealth tend to fall with inflation in the steady state and the welfare effects of inflation are very small with defection constraints the effects of inflation on the distribution of welfare and consumption are large but the effect on average welfare is still small the relaxation of defection constraints resulting from higher inflation can cause a substantial increase in the real interest rate journal of economic literature classification numbers d8 e4 g2

optimal monetary policy in an economy with incomplete markets and idiosyncratic risk abstract this study investigates an incomplete markets economy in which the saving behavior of a continuum of infinitely lived agents is influenced by precautionary saving motives and borrowing constraints agents can use two types of assets interest bearing ious and money to smooth consumption money is valued because of a timing friction in the bond market in particular the bond market closes before agents observe their idiosyncratic productivity shock i find that the friedman rule is not optimal for this economy the results indicate that the optimal allocation has a rate of inflation of 10 and a positive amount of private credit held by the government a positive inflation rate transfers resources from agents with big endowments to those holding bonds which improves risk sharing and therefore welfare however for higher rates of inflation agents economize on money holdings offsetting the insurance effects and causing a reduction in welfare furthermore higher rates of inflation discourage agents from borrowing and the endogenous lower bound on bond holdings is higher than the exogenous borrowing limit high rates of inflation therefore exacerbate frictions in the bond market

sequential auctions of interdependent objects israeli cable television licenses in israel area cable television catv licenses were auctioned sequentially this paper provides evidence that i there were interdependencies among many of the franchises and that ii subscriber fees for the interdependent franchises decreased over time in this auction

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

currency and credit are equivalent mechanisms i study a pure exchange economy with many agents whose marginal utility of consumption is stochastically heterogeneous and independent of wealth with realized marginal utility of wealth private information i show that currency and credit are equivalent to a contract that is efficient when the privacy of information is viewed as a constraint and that the cash in advance constraint is an expression of an incentive constraint

bottom fishing and declining prices in sequential auctions abstract we study standard sequential auctions in which the seller chooses the order of sale and right to choose auctions in which the winner chooses her preferred item from the remaining items empirically prices in sequential auctions tend to decline and sellers often hold right to choose auctions in our setting the right to choose format guarantees declining prices and efficiency in the standard auction a buyer may submit a low bid for the first item bottom fishing despite its being her less preferred item an example shows that the standard auction has declining prices is inefficient and gives lower expected revenue than the right to choose journal of economic literature classification numbers d44 d82

mechanism design with weaker incentive compatibility constraints abstract we study an adverse selection problem where an agent is able to understate his productivity but not allowed to overstate it the solution to this problem is generally different than the solution to the standard problem where no restriction is made on the statements of the agent we identify a sufficient condition that does not depend on the distribution of types under which these two solutions coincide

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

sequential auctions of endogenously valued objects two completely informed but possibly asymmetric bidders buy or sell identical claims in sequential auctions they subsequently receive monetary prizes that depend upon the final allocation of claims iterated elimination of weakly dominated strategies leaves a unique nash equilibrium for any prize schedule prices weakly decline as the auctions progress and points of strict decline have a simple characterization for one class of prize schedules which arises naturally if duopolists bid for a scarce input the equilibrium is completely characterized many initial allocations generate the same final unequal division of claims which may be interpreted as the natural market structure journal of economic literature classification numbers d43 d44 l11

the declining price anomaly in dutch dutch rose auctions in symmetric independent private value auctions of a single object with risk neutral bidders the english second price auction has strategic simplicity it is optimal for bidders to reveal their valuation of the object and make bids accordingly in that case the auction is won by the person with the highest valuation who pays a price equal to the second highest valuation in a dutch first price auction this simplicity vanishes here winning bidders have to pay their bid to make a profit they shade their bids and bid below their valuation of the object somewhat loosely one may state that an english auction is truth revealing whereas a dutch auction requires strategic behavior the simple structure of the one unit english auction vanishes if two identical objects are auctioned sequentially now in the first round it is optimal for bidders to shade their bids to account for the option value of participating in the subsequent second round robert j weber 1983 bidders with a higher valuation also have a higher option value therefore they shade their bids in the first round by a greater amount than do bidders with a lower valuation as the auction proceeds the number of bidders decreases over the sequence of auctions the number of objects decreases as well the first fact has a negative effect on the competition for an object and the second has a positive effect both effects cancel out and prices follow a martingale as a result all gains to waiting are arbitraged away and the expected prices in both rounds are the same the latter result also holds for sequential auctions of more than two objects and does not depend on whether the auction is english or dutch this neat theoretical result is not supported by empirical research which usually finds price declines orley ashenfelter 1989 found a mild price decrease in sequential auctions of identical units of wine mcafee and daniel vincent 1993 also present empirical evidence on sequential wine auctions they found that on average the second unit of wine was sold at a price 1 4 percent lower than the price of the first unit victor ginsburgh 1998 uses data from wine auctions in which the auctioneer acted as an agent for bidders who were not present at the auction he found price declines but apparently the absent bidders entered bids that did not fit with the theory empirical studies by ashenfelter and david genesove 1992 see also jean jacques laffont 1997 and alan beggs and kathryn graddy 1997 concern heterogeneous objects they also detected price declines because of the contradiction between theory and empirical studies the declining price phenomenon is regarded to be an anomaly

outside versus inside bonds a modigliani miller type result for liquidity constrained economies when agents are liquidity constrained two options exist sell assets or borrow we compare the allocations arising in two economies in one agents can sell government outside bonds and in the other they can borrow by issuing inside bonds all transactions are voluntary implying no taxation or forced redemption of private debt we show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true however the optimal policy in each economy makes the allocations equivalent

repeated common value auctions with asymmetric bidders abstract this paper considers a first price common value auction with one sided private information among bidders an object is rented each period to the highest bidder without revealing the bids made in previous periods the paper extends single crossing arguments used in static games to show the existence of equilibrium in this repeated auction the model predicts that bidders bid more aggressively in a repeated auction than in a static auction because a higher bid increases the amount of information learned through bidding the aggressive bidding behavior also implies that the per period revenue of the repeated auction is higher than that of the one period counterpart this bidding behavior leads to a theoretical explanation for the winner s curse in repeated auctions in addition the model yields predictions like an increasing wage schedule over time and the institution of a signing bonus that are consistent with labor market observations