can money matter for interest rate policy in this paper it is shown that money can matter for macroeconomic stability under interest rate policy when transactions frictions are non negligible we develop a sticky price model with a shopping time function which induces the marginal utility of consumption to depend on the predetermined stock of money held at the beginning of the period equilibrium stability and uniqueness are then ensured by a passive interest rate policy whereas activeness is associated with an explosive equilibrium by reacting to changes in beginning of period real balances the central bank can restore stability interest rates further depend on lagged real balances even if the central bank acts in an entirely forward looking way as under discretionary optimization if the model is revised such that end of period money provides transaction services money can in principle be neglected for a stabilizing interest rate policy discretionary monetary policy is however likely to be associated with equilibrium indeterminacy which can be avoided if interest rates are set contingent on beginning of period real balances

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

money and asset prices in a continuous time lucas and stokey cash in advance economy abstract this paper develops a continuous time version of the lucas and stokey 1987 money and interest in a cash in advance economy econometrica 55 491 513 cash in advance economy the continuous time setting allows for an exact characterization of equilibrium expected excess returns real and nominal interest rates the price level and the inflation risk premium for general preferences and stochastic processes explicit general equilibrium solutions are obtained for separable logarithmic preferences and serially correlated processes for output and money growth a characteristic feature of the economy is that even when preferences are separable in cash and credit goods money supply still affects asset prices

monetary policy aggregate uncertainty and the stock market the authors develop and analyze a simple general equilibrium model of asset pricing in a monetary economy where the growth rate in money is partially determined by the policy of the monetary authority their model implies that the relationship between stock prices and consumption risk is systematically dependent on the monetary policy regime indicates that a rise in the noise associated with a given future monetary policy unambiguously increases current stock prices and formalizes the geske roll 1983 explanation for the observed negative correlation between stock returns and inflation copyright 1995 by ohio state university press

likely effects on obesity from proposed changes to the us food stamp program abstract some have suggested that the us food stamp program fsp should be revised with a view to combating obesity among the poor in this paper we assess the likely impacts of allowing fsp participants to purchase only healthy foods when using food stamps our results indicate that fsp participants would probably increase their consumption of healthy food but the implications for their purchases of unhealthy food are not clear market wide consequences are even less clear because changing what may be purchased using food stamps would lead to higher prices for healthy foods and lower prices for unhealthy foods and these price effects would feed back into consumer decisions with adverse effects on consumption patterns of both participants and non participants in the fsp in addition more restrictive rules on the use of food stamps would discourage participation in the fsp we conclude that while reforming the fsp may indeed to lead to better diets among participants it is likely to be an ineffective and inefficient instrument for bringing about desired nutritional outcomes unless accompanied by additional policy instruments

pricing risk in economies with heterogeneous agents and incomplete markets habit formation has been proposed as a possible solution to the equity premium puzzle this paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings wealth habits and consumption i find that habit formation does indeed increase the equity premium however contrary to earlier results the habit hypothesis does not imply a price for risk as largeas the one measured in the data there are three reasons for this first households in a habits economy modify their consumption savings decision second they modify their portfolio choice these two changes in behavior diminish the consumption fluctuations faced by households third the composition of the set of agents pricing risk in the economy changes so that relatively better self insured households end up pricing risk jel d52 g12 e21 c68

inflation interest rates and welfare this paper develops a simple general equilibrium model of a monetary economy with a capital market money demand arises from a cash in advance constraint rather than from any direct role in the utility function and uncertainty gives rise to a meaningful portfolio choice between money and bonds we show that velocity is increasing in the rate of inflation and that the optimal monetary policy is that which maximizes real balances we also show that the real rate of interest is not invariant to monetary policy inflation lowers the real rate

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

inflation and asset returns in a monetary economy postwar u s data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth these patterns are closely matched quantitatively by an equilibrium monetary asset pricing model the model also implies negative correlations between expected asset returns and expected inflation and it predicts that the inflationasset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations the co movements of real asset returns inflation and money growth have been studied extensively over the past fifteen years table i displays some of the statistical properties of these series using quarterly u s data from 1959 to 1990 note first the significantly negative correlation between real equity returns and inflation note also the negative correlation between inflation and the ex post real return to nominally riskless bonds while this fact is not particularly surprising numerous studies conclude that the correlations between ex ante real asset returns and expected inflation are also negative 2 in contrast to these patterns the correlation between money growth and real equity returns is weakly positive in the data while the correlation between money growth and the real bond return is virtually zero initially these empirical patterns were viewed as anomalies negative correlations between inflation and ex post real stock returns contradict the traditional view that equities ought to act as an inflation hedge 3 negative correlations between expected inflation and ex ante real returns violate the

heterogeneity and aggregation implications for labor market fluctuations comment abstract chang and kim 2007 develop an incomplete asset markets model incorporating discrete labor supply and idiosyncratic labor productivity their results resolve long standing puzzles for bus

openness and inflation a general equilibrium model of a small open economy is developed to analyse the optimal rate of inflation under discretion once agents welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship a greater degree of openness may lead the policy maker to want to exploit the short run phillips curve more aggressively even if involves a smaller short run benefit because changes in export demand affect the terms of trade inflation can then be higher in a more open economy

more on the inflation tax and the value of equity a cash in advance macro model is presented in which dividends are distributed at the end of each p eriod but where all other money receipts may be spent immediately on output and labor markets if money grows at a constant rate only th e real price of equity will be inversely related to inflation in the steady state if the money supply is allowed to grow at an increasing rate however agent welfare will decline

unexpected inflation and bank stock returns the case of france 1977 1991 abstract this paper evaluates the impact of unexpected inflation on the stock returns of a sample of french banks it offers an empirical test of theories that have predicted an impact of inflation on the stock returns of banks the paper complements a large literature that has focused exclusively on the impact of unexpected interest rates the analysis provides empirical support to the hypothesis that in periods of volatile inflation there exists an inflation risk factor which is independent of the well documented interest rate factor

time consistent monetary policy with endogenous price rigidity abstract i characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion firms have the option to increase their frequency of price change at a cost in response to higher inflation previous studies which assume a constant degree of price rigidity across inflation regimes find two time consistent equilibria one with low inflation the other with high inflation in contrast when price rigidity is endogenous the high inflation equilibrium ceases to exist hence time consistent equilibrium is unique this result depends on two features of the analysis 1 a plausible quantitative specification of the fixed cost of price change and 2 the presence of an arbitrarily small cost of inflation that is independent of price rigidity

risk the financial market and macroeconomic equilibrium growing recognition of the importance of stock market phenomena to the real economy underscores the need for models linking exogenous uncertainty asset market performance and the rest of the economy in an optimizing framework without certainty equivalence this paper constructs a three agent model with continuous time stochastic variables uncertain private production and government expenditure and forward looking rational agents the growth rate of output physical capital accumulation financial asset returns and uncertain inflation are determined as functions of the exogenous uncertainty in the economy analysis of the model finds that increased risk associated with government policy often reverses in an explainable way the conventional comparative static predictions of nonstochastic macro models

stock returns and inflation with supply and demand disturbances we account for the relation between stock returns and inflation with two independent disturbances supply shocks and demand shocks supply shocks reflect real output shocks and cause a negative relation between stock returns and inflation while demand shocks are mainly due to monetary shocks and generate a positive relation between stock returns and inflation we show both theoretically and empirically that the stock return inflation relation varies over time and across countries depending on the relative importance of the two types of shocks our empirical evidence is based on pre and postwar periods in the united states as well as the postwar period in the united kingdom japan germany article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

risk optimal government finance and monetary policies in a growing economy optimal tax and monetary policies in a stochastic monetary growth model are investigated our findings are of three general types first both capital income taxes and monetary growth are shown to influence the economy through effective risk adjusted measures expressed as a linear function of their respective means and variances second two stochastic neutrality results relating to money and bonds the two nominal assets in the economy are identified third optimal policy rules relating to taxes bond finance and money creation are characterized an essential component of optimal financial policy is a risk adjusted balanced budget

time consistency of fiscal and monetary policy a solution this paper demonstrates how time consistency of the ramsey policy the optimal fiscal and monetary policy under commitment can be achieved each government should leave its successor with a uniq

exchange rate determination interest rates and an integrative approach to the demand for money abstract this paper presents a simple framework in which the money in the utility function miuf and the cash in advance cia approaches to the demand for money can be seen as equivalent this integrative approach to money demand is extended to a two country world and the equilibrium relationship between terms of trade exchange rates and interest rates implied by the underlying stochastic structure of the economy is discussed a theory of currency substitution is presented

asset prices commodity prices and money a general equilibrium rational expectations model an expected utility maximizing investor spends his portfolio income on commodities and real balances commodity prices and asset payoffs are determined endogenously in general equilibrium the impact of commodity prices on investor welfare yields surprising relationships among the expected returns required on financial assets real monetary disturbances can generate a neg ative positive correlation between inflation and equity payoffs but the expected nominal return on the equity can still be less greater than the nominal interest rate the expected nominal return on an indexed bond can be greater than on a nominal bond the expected real return on an equity can be lower than on an indexed bond copyright 1988 by american economic association

monopolistic competition increasing returns to scale and the welfare costs of inflation abstract this paper introduces monopolistic competition and increasing returns to scale into a monetary real business cycle rbc model to re estimate the welfare costs of inflation we first calibrate the model and show that it is capable of generating the observed aggregate fluctuations even when there are no shocks to the fundamentals in particular we demonstrate that this model matches the stylized u s business cycles facts as well as two more standard models then we find that in this model the scale parameters and the intensity of competition significantly affects the welfare cost of inflation specifically the cost is considerably higher than that in a standard rbc model with competitive markets and constant returns moreover the stronger the increasing returns and the less intense the competition the higher the welfare costs these results are confirmed in a number of model specifications

the optimal inflation tax when money reduces transactions costs abstract it has been argued that if money acts as an intermediate good the optimal inflation tax is zero this paper reexamines such a claim in the context of a model in which money reduces transactions costs it is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero the optimality of a zero inflation tax depends on the properties of the transactions costs technology in particular if the transactions costs technology does not exhibit constant returns to scale it is optimal to resort to the inflation tax

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

on the superneutrality of money in a stochastic dynamic macroeconomic model abstract this paper explores the robustness of the superneutrality of money result to the introduction of uncertainty while qualitatively superneutrality fails to obtain in our model quantitatively the observed tobin effect is insignificant the equilibrium time paths of real variables are nearly unaffected by changes in the money growth rule we argue that our conclusions reinforce the theoretical case for superneutrality

allocative effects of financial assets and the long run neutrality of money when markets are incomplete abstract we analyze the allocative role of money as a numeraire in an intertemporal general equilibrium model with incomplete financial markets and nominal financial instruments it is shown that regardless of their return specification nominal assets in net supply increase the consumption risk and trigger an endogenous monetary process which diminishes the influence of these assets on the equilibrium allocation through time the nonneutrality of money claimed in the recent literature is a temporary phenomenon only asymptotically the traditional neutrality theorems are valid

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

money and asset prices with uninsurable risks abstract we present a theory of differences of liquidity across assets based on an endogenous ranking of assets as media of exchange arising from their relative quality as hedging devices when assets have two distinct roles as intertemporal media of exchange and hedging devices buyers have generically a strict preference for paying sellers with the asset which is the relative better hedging device for sellers the consequence of this preference is that there are three monetary policy regimes and these regimes differ in which assets serve as media of exchange whether assets carry a liquidity premium and in the impact that monetary policy has on asset prices

nonconvex factor adjustments in equilibrium business cycle models do nonlinearities matter recent empirical analysis has found nonlinearities to be important in understanding aggregated investment using an equilibrium business cycle model we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs we find that while such costs lead to nontrivial nonlinearities in aggregate investment demand equilibrium investment is effectively unchanged our finding based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity is robust to the introduction of shocks to the relative price of investment goods

agricultural commodity production and trade a trade economist s view on filling us food supply gaps abstract deficiencies in the balance of the american diet have been identified which could necessitate changes in agricultural production and trade international trade has played only a small role for the products in deficit fruits vegetables and dairy products but will be critical to future market adjustments the potential to fill food supply gaps via increased imports and from us producers in the future is substantial as seen in recent worldwide trends for these products transportation costs which encouraged self sufficiency in these products in the past have declined the producer bias of agricultural policy has diminished following reforms in the 1992 and 1996 farm bills as well as in the us gatt offer evidence that potential exporters of these products may expand sales to the us and that world supplies can cope with the necessary adjustments is presented whether and how markets adjust will depend more on changes in consumer preferences than on production technology or policy an example of trade in tomato juice is used to show that new trade theory and particularly how firms market their products more so than traditional determinants of comparative advantage will dictate the path of those adjustments

on the sources of business cycles in the g 7 abstract this paper examines sources of cyclical movements in output inflation and the term structure of interest rates in the g 7 it employs a novel identification approach which uses the sign of the theoretical cross correlation function in response to shocks to catalog orthogonal disturbances we find that demand shocks are the dominant source of output and inflation fluctuations in several of the g 7 countries the proportion of term structure variability explained by different structural sources does not depend on the horizon apart from the us and canada structural shocks are nearly uncorrelated across countries

macroeconomic determinants of stock volatility and volatility premiums how does stock market volatility relate to the business cycle we develop and estimate a no arbitrage model and find that i the level and fluctuations of stock volatility are largely explained by business cycle factors and ii some unobserved factor contributes to nearly 20 to the overall variation in volatility although not to its ups and downs instead this volatility of volatility relates to the business cycle finally volatility risk premiums are strongly countercyclical even more than stock volatility and partially explain the large swings of the vix index during the 2007 2009 subprime crisis which our model captures in out of sample experiments

heterogeneity and aggregation implications for labor market fluctuations we demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock the interaction between incomplete capital markets and indivisible labor results in a low employment productivity correlation and creates a time varying wedge between the marginal rate of substitution for commodity consumption and hours and productivity our results caution against viewing the measured wedge as an inefficiency due to a failure of labor market clearing or as a fundamental driving force behind business cycles jel d31 e32 j22 j24 j31

envelope condition method with an application to default risk models we develop an envelope condition method ecm for dynamic programming problems a tractable alternative to expensive conventional value function iteration vfi ecm has two novel features first to reduce the cost of iteration on bellman equation ecm constructs policy functions using envelope conditions which are simpler to analyze numerically than rst order conditions second to increase the accuracy of solutions ecm solves for derivatives of value function jointly with value function itself we complement ecm with other computational techniques that are suitable for highdimensional problems such as simulation based grids monomial integration rules and derivative free solvers the resulting value iterative ecm method can accurately solve models with at least up to 20 state variables and can successfully compete in accuracy and speed with state of the art euler equation methods we nally use ecm to solve a challenging default risk model with a kink in value and policy functions c6 c61 c63 c68 dynamic programming value function iteration bellman equation endogenous grid envelope condition curse of dimensionality large scale sovereign debt default risk

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

exchange rate determination and asset prices in a stochastic small open economy abstract this paper constructs a stochastic general equilibrium model of a small open economy consisting of risk averse optimizing agents the stochastic processes describing the rate of monetary growth government expenditure private production and the foreign price level are taken to be exogenous determining all asset risks and returns and the equilibrium stochastic process describing the domestic inflation rate and the exchange rate the model is used to examine the effects of the means and variances of policy shocks on the equilibrium and the determinants of the foreign exchange risk premium

seigniorage and the welfare cost of inflation abstract this paper empirically investigates the restrictions embodied in a sidrauski type model for the cross relations between consumption money holdings inflation and assets returns using quarterly data for the high inflation economy in israel 1970 1988 using a set of the estimated parameters it is shown that the model s implications for seigniorage are quite different than those from a cagan type model that is while the model is able to account for the observed stability of the seigniorage gnp ratio a cagan type model predicts a laffer curve for seigniorage the estimates also imply sizeable welfare costs of inflation

monetary policy and the transaction role of money in the us the declining importance of money in transactions can explain the well known fact that u s interest rate policy was passive in the pre volcker period and active after 1982 we generalise a standard cashless new keynesian model woodford2003 by incorporating an explicit transaction role for money in the pre volcker period we estimate that money did play an important role and determinacy required a passive interest rate policy however after 1982 money no longer played an important role in facilitating transactions correspondingly the conventional view prevails and an active policy ensured equilibrium determinacy

the role of monetary policy in eliminating nonconvergent dynamic paths this paper investigates the effects of money growth on nonconvergent dynamic paths in a money in utility model when relative risk aversion is decreasing in money period two cycle and sunspot equilibria are always associated with a high rate of money supply growth however when relative risk aversion is increasing in money it is ambiguous whether they are associated with either high or low rate of money supply growth the paper also investigates the same problem in a transaction cost model the author shows that the results essentially depend on the form of the transaction cost function copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

the optimal inflation path in a sidrauski type model with uncertainty abstract in this paper it is shown that in a sidrauski type model with uncertainty the chicago rule remains valid as a prescription for the average rate of inflation although there is a systematic difference between the perfect foresight and the uncertainty case quantitatively however the difference turns out to be very small the paper shows how to calculate the optimal monetary policy as a function of the state variables using the method of parameterized expectations in terms of expected utility the optimal policy is as good as the simple policy that reduces the money supply at the rate of time preference

welfare improving credit controls abstract credit controls are generally believed to result in an inefficient allocation of resources this paper presents a counterexample it displays a general equilibrium multi good model with spatial separation for which steady state equilibria exist in which both cash i e fiat currency and trade credit are used in exchange transaction costs restrictions on the timing of trade and a positive nominal interest rate cause the laissez faire equilibrium to be nonoptimal a quantitative restriction on the use of trade credit can yield a pareto superior allocation

asset prices liquidity and monetary policy in an exchange economy i formulate a model in which money coexists with equity shares on a risky aggregate endowment agents can use equity as a means of payment so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange i characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations i also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations

money and asset prices in a cash in advance economy an asset pricing model with money introduced via a cash in advance constraint is presented the monetary velocity is variable hence money demand does not obey the trivial quantity equation the effects of disturbances in output and money growth on real balances the price level and interest rates are examined monetary policy has effects on real asset prices the fisher relation and the premium on nominal bonds are discussed the precise role of the timing of information and transactions for properties of price levels and interest rates are clarified

inflation and real stock returns revisited i introduction this article empirically reinvestigates the relationship between real stock returns and inflation according to fisher 1930 1 in an efficient market real stock returns should reflect expectations only about real factors such as growth in output and time preference of savers such that real stock returns and inflation should vary independently in other words on average investors are fully compensated for erosions in purchasing power over time however this so called generalized fisher hypothesis has received little empirical support while kaul 1990 boudoukh and richardson 1993 solnik and solnik 1997 madsen 2005 and ryan 2006 find positive or weakly positive correlation between stock returns and inflation most empirical studies including nelson 1976 fama 1981 1983 geske and roll 1983 gultekin 1983 kaul 1987 and solnik 1983 uncover a negative effect of inflation anticipated and or unanticipated on real or nominal stock returns these apparent inconsistencies between the data and the predictions of economic theory have been termed as the stock return inflation puzzle and cited as evidence of monetary nonsuperneutrality or irrationality and market inefficiency 2 to reconcile the seemingly conflicting contributions danthine and donaldson 1986 provide a rational expectations equilibrium model in which a negative relation between stock returns and inflation arises from non monetary sources e g a real output shock and a positive relation is driven by purely monetary sources stulz 1986 marshall 1992 and bakshi and chen 1996 also assert that stock returns may be negatively correlated with inflation especially when the source of inflation is related to nonmonetary factors evidently hess and lee 1999 khil and lee 2000 and lee 2003 find that while monetary shocks drive a positive correlation real fiscal or real output shocks result in a negative correlation between stock returns and inflation from a different perspective kaul 1987 1990 argues that the relation between these two variables depends on both the money demand and the money supply specifically while the combination of money demand effects with a countercyclical monetary response accentuates a negative correlation money demand shocks along with a procyclical monetary response lead to a neutral or positive correlation between real stock returns and inflation similar arguments can be found in day 1984 kaul and seyhun 1990 boudoukh richardson and whitelaw 1994 and gallagher and taylor 2002 and are supported by compelling empirical evidence see e g kim 2003 lee 1992 as an alternative this article models the real stock return inflation relationship as intrinsically dynamic explicitly distinguishing between the short run and the long run such a distinction is crucial because imperfect information rigidity and or contractual obligations are more prevalent in the short run than in the long run in that sense the response of real stock returns to inflation could differ in the short run versus long run moreover we assess the long and short run impacts of inflation uncertainty on real stock returns as argued the real costs of inflation are associated with its uncertainty greater inflation uncertainty resulting from higher inflation may lead to economic inefficiency lower real investment and unemployment thereby reducing economic growth thus it is interesting to see if there are independent effects of inflation uncertainty on real stock returns both in the short run and in the long run in so doing this article uses an innovative econometric technique to explore the long and short run relationships between real stock returns and inflation both anticipated and unanticipated and the relationships with inflation uncertainty it departs from earlier work and complements recent evidence in at least three aspects

the equity premium in brock s asset pricing model abstract in this paper we combine dynamic programming methods with projection methods for solving stochastic growth models as an application of these methods we solve brock s asset pricing model with a variety of parameterizations we focused on finding parameterizations that result in an equity premium that is high relative to the variation in consumption we show both analytically and numerically that the equity premium can be higher in a production based asset pricing model than it is in the consumption based asset pricing model even when the real output level is the same in both models

price smoothing policies a welfare analysis in post wwii experience u s monetary authorities have attempted to eliminate seasonal fluctuations in prices and nominal interest rates developments in financial markets and recently discovered empirical regularities regarding the seasonal cycle seem to make these activities questionable using a money in the utility function model this paper analyzes the welfare properties of price and interest rate smoothing policies and the sense in which the distinction between seasonal and cyclical fluctuations is relevant it is shown that smoothing policies are welfare improving but not optimal and that the origin of the shocks not the persistence of the fluctuations is relevant in formulating policies

monetary uncertainty in discrete time utility of money models abstract in a discrete time model higher variability of the future money supply affects current macroeconomic variables when beginning of period money is the argument of utility but not when end of period money is the effect is through the existence of a precautionary money demand

unemployment fears and deflationary spirals the interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features in isolation dampen them during recessions fears of unemployment stir up precautionary sentiments which induces agents to save more the additional savings may be used as investments in both a productive asset equity and an unproductive asset money but even a small rise in money demand has important consequences the desire to hold money puts deflationary pressure on the economy which provided that nominal wages are sticky increases wage costs and reduces firm profits lower profits repress the desire to save in equity which increases the fear of unemployment and so on this is a powerful mechanism which causes the model to behave differently from both its complete markets version and a version with incomplete markets but without aggregate uncertainty in contrast to previous results in the literature agents uniformly prefer non trivial levels of unemployment insurance

effects of inflation on wealth distribution do stock market participation fees and capital income taxation matter abstract the effects of a permanent change in inflation on the distribution of wealth are analyzed in a general equilibrium olg model that is calibrated with regard to the characteristics of the us economy poor agents accumulate savings predominantly in the form of money while rich agents participate in the stock market and accumulate equity higher inflation results in higher nominal interest rates and a higher real tax burden on interest income surprisingly an increase in inflation results in a lower stock market participation rate in addition savings decrease and the distribution of wealth becomes even more unequal

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

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

inventories and the business cycle an equilibrium analysis of s s policies we develop an equilibrium business cycle model where nonconvex delivery costs lead firms to follow s s inventory policies calibrated to postwar us data the model reproduces two thirds of the cyclical variability of inventory investment moreover it delivers strongly procyclical inventory investment greater volatility in production than sales and a countercyclical inventory to sales ratio our model challenges several prominent claims involving inventories including the widely held belief that they amplify aggregate fluctuations despite the comovement between inventory investment and final sales gdp volatility is essentially unaltered by inventory accumulation because procyclical inventory investment diverts resources from final production thereby dampening fluctuations in sales

exchange rate volatility the role of real shocks and the velocity of money the effects of stochastic output shocks on the behavior of ex change rates and nominal price levels is studied within the context of a two country cash in advance model the analysis of this model in contrast to the existing cash in advance literature demonstrates that exchange rates can be more volatile than price levels even though agents elasticity of substitution between foreign and domestic goods is greater than one half this possibility arises when output shocks are autocorrelated and are due to revisions in expectations that affect the terms of trade and or the velocity of money

international interest rates exchange rates and the stochastic structure of supply in a dual currency flexible exchange rate model both nominal and real foreign exchange premia depend on investor risk attitudes consumption parameters and the stochastic structure of currency and commodity supplies when supplies are random their joint correlation structure determines the sign of the premia if the money supplies are identically distributed then all foreign exchange premia regardless of the currency of denomination are zero a positive correlation between the value of a country s currency and its nominal interest rate need not indicate real interest rate movements relative bond prices can be negatively correlated with the terms of trade recently there has been a great deal of interest in the construction and use of general equilibrium models of an international economy subject to random disturbances 1 however with the exceptions of stulz 1984 domowitz and hakkio 1985 hodrick and srivastava 1986 and stockman and svensson 1987 little effort has been devoted to expressing the relationships examined in these models in terms of parameters describing the underlying stochastic processes of the exogenous variables 2 stockman and svensson incorporated international capital flows into the model of svensson 1985 and calculated covariances between investment the current account the exchange rate and the terms of trade in terms of exogenous money and commodity supplies focusing more on financial market issues domowitz and hakkio and hodrick and srivastava simplified the case in advance model of lucas 1982 by assuming that the exogenous variables are independently lognormal and that investors have loglinear utility functions a procedure which allowed them to relate the premium required on forward exchange contracts to money supply variances stulz obtained similar results in a continuous time model where real money balances enter the utility function this paper employs a model similar to that developed by domowitz and hakkio 1985 and hodrick and srivastava 1986 but its emphasis and objectives are quite different those authors were concerned only with demonstrating that a time varying risk premium is a theoretical possibility prior to conducting a series of empirical tests only loosely related to the model itself consequently they did

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

are stocks a good hedge against inflation evidence from emerging markets theory suggests that equities are a good hedge against inflation however most of the empirical evidence for industrialized economies suggests that the relationship between stock returns and inflation is negative one explanation is the negative correlation between inflation and real output growth this paper examines the relationship between inflation and stock returns for ten important emerging stock market esm markets namely chile mexico brazil argentina thailand s korea malaysia hong kong philippines and turkey during the 1990s to anticipate the results the relationship between stock returns and inflation for the whole sample period is positive and statistically significant for three of the sample esms while it is positive but statistically insignificant for a further three only for one esm is the relationship negative and statistically significant this result may be due to the role of money and the positive relationship between consumer prices and output

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

time consistency of fiscal and monetary policy the problem of time inconsistency arises from two different sources first as shown by guillermo a calvo 1978 the re is an incentive for each government to engage in an initial unanti cipated inflation second as discussed by robert e lucas and nancy l stokey 1983 there is an incentive for each government to deviat e from the path of taxes announced by the preceding government in th is paper it is shown that these two sources of time inconsistency ca n be removed by a particular method of debt management involving bot h nominal and indexed government bonds of various maturities copyright 1987 by the econometric society

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

the emergence of equilibrium cycles in a monetary economy with a separable utility function abstract this paper analyzes the dynamic properties of the monetary economy when money held during the period induces some utility it is shown that the price level and real money balances may have chaotic dynamic paths even if the utility function is separable in real money balances and consumption a crucial point is that a constraint on the utility of money yields the wealth effect that inflation will reduce the real value of assets hence as in the overlapping generations model the conflict between substitution and wealth effects may cause globally stable periodic orbits as well as the complicated dynamics

inflation human capital and tobin s q a pervasive empirical finding for the us economy is that inflation is negatively correlated with the normalized market price of capital tobin s q and growth a dynamic stochastic general equilibrium model of endogenous growth is developed to explain these stylized facts in this model human capital is the principal driver of self sustained growth long run comparative statics analysis suggests that inflation diverts scarce time resource to leisure which lowers human capital utilization this impacts growth adversely and modulates capital adjustment cost downward resulting in a decline in tobin s q for the short run a tobin effect of inflation on growth weakens the negative association between inflation and q

a money demand function with output uncertainty monetary uncertainty and financial innovations in a general equilibrium framework incorporating the money in the utility function approach we show that output uncertainty and monetary uncertainty as well as output interest rates and financial innovations affect money demand the estimated long run relationships are consistent with our postulated relation but not with the conventional one our model delivers a high income elasticity consistent with cross sectional evidence and helps resolve m1 demand puzzles the model estimated in dynamic error correction form exhibits a good level of stability and forecastability providing little support for the recent de emphasis of monetary aggregates due to the instability of money demand

industry returns and the fisher effect we investigate the cross sectional relation between industry sorted stock returns and expected inflation and we find that this relation is linked to cyclical movements in industry output stock returns of noncyclical industries tend to covary positively with expected inflation while the reverse holds for cyclical industries from a theoretical perspective we describe a model that captures both i the cross sectional variation in these relations across industries and ii the negative and positive relation between stock returns and inflation at short and long horizons respectively the model is developed in an economic environment in which the spirit of the fisher model is preserved the fisher model states that expected nominal rates of return on assets should move one for one with expected inflation this belief is generally attributed to irving fisher s 1930 work on interest rates in particular to his view that the real and monetary sectors are causally independent in an apparent contradiction to the fisher hypothesis however it is a common empirical finding that stock returns are negatively related to both expected and realized inflation 1 this negative correlation is especially surprising for stocks which as claims against real assets should compensate for movements in inflation we provide two main contributions to the existing literature on the relation between stock returns and inflation the first contribution of the article is to provide a theoretical description of the cross sectional relation between stock returns and expected inflation we describe an asset pricing model that predicts cross sectional variation in the coefficients of expected inflation across various industry portfolios an interesting feature of the model is that it synthesizes some of the more palatable features of existing explanations of the negative relation between inflation and returns of special interest is the development of the model in a money neutral world so that the basic premise underlying fisher s work is maintained since most theoretical models of the

the behavior of money velocity in high and low inflation countries this paper presents a general equilibrium model of money demand where the velocity of money changes in response to endogenous fluctuations in the interest rate the parameter space can be divided into two subsets one where velocity is constant as in standard cash in advance models and another one where velocity fluctuates as in baumol 1952 the model provides an explanation of why for a sample of 79 countries the correlation between the velocity of money and the inflation rate appears to be low unlike common wisdom would suggest the reason is the diverse transaction technologies available in different economies

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

do expected shifts in inflation affect estimates of the long run fisher relation recent empirical studies suggest that nominal interest rates and expected inflation do not move together one for one in the long run a finding at odds with many theoretical models this article shows that these results can be deceptive when the process followed by inflation shifts infrequently we characterize the shifts in inflation by a markov switching model based upon this model s forecasts we reexamine the long run relationship between nominal interest rates and inflation interestingly we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one for one

how large is the optimal inflation tax abstract i examine the title question in a competitive framework where the transaction demand for money is modeled using a cash in advance constraint and only distortionary taxes are possible empirical evidence and simulations are used to document the plausibility of the assumptions which produce the friedman rule these findings suggest that it is not a good benchmark my results suggest that an optimal monetary policy calls for nominal interest rates that can exceed 6 per year

how can the us food system deliver food products consistent with the dietary guidelines abstract for consumers diets to conform to the recommendations outlined by the food guide pyramid fgp the consumption of fat and sugar would have to decline and fruits and diary products would need to increase this study analyzed the impact of changing the prices of aggregate food groups as designated in the food guide pyramid on the number of servings that would be eaten using the results of this analysis the subsequent impact on the healthy eating index hei score was determined a series of calculations involving existing price and income elasticities and linkages between these elasticities and servings of food in the food guide pyramid were employed this study found that lowering the price of fruits meats and dairy products would result in food consumption that more closely conforms to the fgp servings recommendations but the changes are small and hei scores would not improve lowering the price of meat increases consumption of all foods except added sugars since lower meat prices frees up income to spend on other food the downside of increasing meat consumption is that it also increases the consumption of discretionary fat more than it increases the consumption of fruits and vegetables or grains fat prices would have to be increased 15 to achieve a 1 decrease in fat consumption which would raise the hei score public policy to promote healthful diets involves more than changing food prices or household income information and education about diet and health links are critical

liquidity and real activity in a simple open economy model abstract this paper analyzes the ability of an open economy version of lucas s 1990 liquidity model to account for properties of international data the focus is on the model s ability to account for exchange rate dynamics and measured effects of monetary policy shocks on exchange rates interest rates and real activities across countries the model generates a prediction that a positive domestic monetary innovation is associated with nominal and real currency depreciations however the model s predictions with respect to nominal and real exchange rate volatilities are low

idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics we examine a model of lumpy investment wherein establishments face persistent shocks to common and plant specific productivity and nonconvex adjustment costs lead them to pursue generalized s s investment rules we allow persistent heterogeneity in both capital and total factor productivity alongside low level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment level investment rates reassessing the implications of lumpy investment for aggregate dynamics in this setting we find that they remain substantial when factor supply considerations are ignored but are quantitatively irrelevant in general equilibrium the substantial implications of general equilibrium extend beyond the dynamics of aggregate series while the presence of idiosyncratic shocks makes the time averaged distribution of plant level investment rates largely invariant to market clearing movements in real wages and interest rates we show that the dynamics of plants investments differ sharply in their presence thus model based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant when establishments face large and weakly persistent idiosyncratic productivity shocks consistent with existing estimates we find that nonconvex costs do not cause lumpy investments but act to eliminate them

pairwise trade asset prices and monetary policy abstract we construct a search theoretic model where fiat money coexists with real assets and all assets can be used as a media of exchange the terms of trade in bilateral matches are determined by a pairwise pareto efficient pricing mechanism we do not have to appeal to exogenous liquidity constraints to generate asset prices that are consistent with the following facts i fiat money can be valued despite being dominated in its rate of return ii real assets with identical dividend flows can have different rates of return and iii an increase in inflation raises asset prices lowers their returns and widens the rate of return differences between assets on the normative side we show that there is a range of inflation rates that implement the first best allocation

sources and propagation of international output cycles common shocks or transmission abstract this paper studies the generation and transmission of international cycles in a multi country model with production and consumption interdependencies two sources of disturbance are considered and three channels of propagation are compared technology disturbances which are mildly correlated across countries are more successful than government expenditure disturbances in reproducing actual data the presence of a common component to the shocks and of production interdependencies appear to be crucial in quantitatively matching the properties of the data

asset pricing and the role of money in an intergenerational economy this note is an attempt to check the robustness of money in the utility function miuf models the parametrization of the utility of money is an ad hoc constraint on the economic model which does not reveal its underlying relation to the parameters of the environment such as tastes technology and endowments from which it arises in particular the various parametrizations do not suggest any interpretation in terms of different roles for money in the exchange process it thus appears that the usefulness of miuf models in economic theory depends critically on the issue of whether or not their qualitative properties are sensitive to the specification of money in the utility function we show that important qualitative conclusions hinge critically on the time specification of the monetary variables which are included in the utility function in particular the ability of common stocks to provide protection against inflation resulting from monetary and real shocks respectively depends sensitively on the way the liquidity services of money are parametrized in the individual preferences

comparative dynamics of an equilibrium intertemporal asset pricing model this paper uses recursive competitive theory to develop a general equilibrium asset pricing model in this framework all prices and rates of return are endogenously determined thus enabling us to analyze the effects of changes in preferences technological uncertainty and expectations on the structure of security prices in particular we focus on how the market risk premium varies with changes in the underlying economic environment an issue which other asset pricing models have chosen not to address

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices

the stock return inflation puzzle revisited abstract we develop a theoretical model to formalize and derive testable implications of fama s american economic review 71 1981 545 proxy hypothesis explanation of the stock return inflation puzzle using a multivariate innovation decomposition the evidence provides strong confirmation of the proxy hypothesis explanation of the puzzle in the us over the last 40 years