the welfare effects of the reagan deficits a portfolio choice approach i introduction the election of ronald reagan as u s president in 1980 prompted a series of changes in tax policy that combined with an increase in spending led to a large increase in the ratio of debt to gross domestic product gdp work by yotsuzuka 1987 kimball and mankiw 1989 and woodford 1990 demonstrates that increases in public debt can be welfare improving ameliorating asset market imperfections or incompleteness i divide the u s population into three asset holding classes and construct a general equilibrium asset portfolio model to analyze the differential welfare implications of the succession of tax cuts and increases in the united states between 1982 and 1997 i conclude that in contrast to a counterfactual policy of smoothing tax rates across the whole period the policy of first lowering and then raising taxes benefited the large population that initially only invested in low risk assets chiefly in the middle of the income distribution at the expense of those who either owned equities mostly higher income or held no financial assets at all mostly lower income domar and musgrave 1944 were the first to study the effects of taxation on portfolio choice their work focused on the effects of loss offsets on risk taking mossin 1968 and stiglitz 1969 1972 extended this work by adding agents with general expected utility functions ben gad 2000 extended their partial equilibrium analysis to a two period general equilibrium model with a two state stochastic endowment economy and demonstrated that when capital markets are imperfect deficit finance has differential effects on households in section ii i construct a two period general equilibrium extension of the mossin stiglitz portfolio choice model with holdings of each asset constrained to be nonnegative in section iii i divide the households in the 1983 89 panel of the survey of consumer finances scf into three groups those who held no financial assets other than cash in 1982 those who only held low risk financial assets in 1982 checking accounts savings accounts money market accounts bonds and finally those whose asset portfolios included higher risk equities i calculate income and social insurance tax rates for each household and then average the results by asset holding class for each year between 1981 and 1997 the scf reveals large differences in portfolio holdings among households in the united states in my model the differential portfolio behavior is endogenous a by product of both the different sizes of idiosyncratic shocks to labor income experienced by members of the different groups and the generalized stone geary utility function used to model individual preferences the nonconstant heterogeneous rate of relative risk aversion implied by agent s uniform preferences permits this portfolio model to accommodate both the very high equity premiums observed in the data and the fact that most u s households chose not to invest in the stock market using a previous study of earnings variance based on panel study of income dynamics psid data the variances of uninsured idiosyncratic risk for the representative members of each group are imputed to ensure consistency between observed portfolio behavior and asset returns the baseline model is solved for the preference parameters and expected earnings using the scf and u s macroeconomic data in section iv i describe the changes in u s fiscal policy during the reagan bush and clinton administrations in section v i replace the 1982 97 average tax rates used to parameterize the model with a separate average tax rate for each of the two periods of the model during the first period most tax rates are set to the lower values of the period between 1982 89 the policy is self financing taxes in the second period rise to keep the debt gdp ratio at the end of the second period no higher than at the beginning of the first

the exercise of market power in laboratory experiments douglas d davis and charles a holt march 1998 introduction many aspects of antitrust policy are influenced by the possibility that sellers in concentrated markets may have the power to raise prices above competitive levels of course anyone can raise price so the issue is whether a change in structure e g a merger will allow one or more sellers to raise price profitably a price increase by one seller diverts sales to others so a firm is more likely to have market power when its competitors have limited capacity to expand their sales thus a merger that reduces competitors capacity may create market power in laboratory experiments any treatment that reassigns units of capacity from one seller to another may create or destroy market power even if the aggregate supply curve is unchanged for example giving one seller a relatively large endowment of infra marginal low cost units may make it less risky for this seller to raise price and forego the sale of high cost units thus it is not surprising that experiments with apparently similar supply and demand structures may yield different price outcomes as discussed below there are a number of other ways in which structural changes can affect the degree of power that sellers enjoy market power can also be sensitive to the trading institution and this is the context that power issues first arose in experimental economics for example the public posting of uniform prices in a posted offer auction eliminates the incentive to offer discounts on marginal units that arises in a double auction in fact smith 1981 found that even monopolists are sometimes unable to maintain prices above competitive levels in double auctions whereas supra competitive prices are the norm in postedoffer monopolies similarly holt langan and villamil 1986 found that sellers in concentrated double auctions were sometimes able to raise prices but that prices fell to competitive levels in about half of the sessions despite the high concentration of seller capacity davis and williams 1991 replicated the holt langan and villamil results for double auctions and then used the same market

hysteresis in a simple model of currency substitution abstract a cash in advance model in which the cost of buying goods with a foreign currency is decreasing in the economy s accumulated experience in transacting in the foreign currency is shown to display hysteresis in money velocity that is a temporary increase in expected inflation can cause a permanent increase in velocity in addition the model implies that the domestic currency does not have to dominate the foreign currency in rate of return to induce agents to stop using the foreign currency finally inflation rates that trigger currency substitution need not be associated with steady states in which the domestic currency disappears from circulation

gift exchange versus monetary exchange theory and evidence abstract we study the lagos and wright 2005 model of monetary exchange in the laboratory with a finite population of sufficiently patient agents this model has a unique monetary equilibrium and a continuum of non monetary gift exchange equilibria some of which pareto dominate the monetary equilibrium we find that subjects avoid the gift exchange equilibria in favor of the monetary equilibrium we also study versions of the model without money where all equilibria involve non monetary gift exchange we find that welfare is higher in the model with money than without money suggesting that money plays a role as an efficiency enhancing coordination device jel c92 d12 e40 z13

financial innovation and the transactions demand for cash we document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives we extend the baumol tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost this modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology such as the increasing diffusion of bank branches and atm terminals we characterize the solution of the model which qualitatively reproduces several empirical patterns we estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns the estimates are used to quantify the expenditure and interest rate elasticity of money demand the impact of financial innovation on money demand the welfare cost of inflation and the benefit of atm ownership

when does a central bank s balance sheet require fiscal support abstract using a simple general equilibrium model we argue that it would be appropriate for a central bank with a large balance sheet composed of long duration nominal assets to have access to and be willing to ask for support for its balance sheet by the fiscal authority otherwise its ability to control inflation may be at risk this need for balance sheet support a within government transaction is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank s balance sheet is merged with that of the rest of the government

the role of financial sector competition for monetary policy in this paper we examine the impact of competition in the banking industry on financial market activity in particular we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing in addition spatial separation and private information generate a transactions role for money interestingly we demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy under perfect competition higher rates of money growth lead to lower interest rates and a higher volume of lending activity in contrast in a monopoly banking sector money growth restricts the availability of funds and raises the cost of borrowing

competitive behavior in market games evidence and theory we explore whether competitive outcomes arise in an experimental implementation of a market game introduced by shubik 1972 market games obtain pareto inferior strict nash equilibria in which some markets are closed we find that subjects do not coordinate on autarkic nash equilibria but favor more efficient nash equilibria in which all markets are open as the number of subjects participating in the market game increases the nash equilibrium they achieve approximates the associated walrasian equilibrium of the underlying economy motivated by these findings we investigate theoretically whether evolutionary forces lead to walrasian outcomes in market games we introduce a strong version of evolutionary stable strategies sess f orfinite populations our concept requires stability against deviations by coalitions of agents a small coalition of trading agents is sufficient for pareto improving trade to be generated in addition provided that agents lack market power nash equilibria corresponding to approximate competitive outcomes constitute the only approximate sess

how effective are rewards programs in promoting payment card usage empirical evidence card issuers have mainly relied on rewards programs as their main strategy to increase usage however there is scarce evidence on the effectiveness of these programs this paper is addressing two topics which could have important managerial and public policy implications i it estimates the impact of rewards on the use of cards and ii it quantifies their economic effects in terms of the cash substitution we find that rewards may significantly modify choice for card payments their economic impact also varies significantly across types of rewards and merchant activities additionally rewards seem to be more effective for debit cards

the costs and beliefs implied by direct stock ownership this paper develops and estimates an economic model of the costs and beliefs required to rationalize household direct stock ownership in the model investors believe they can learn information about individual stock returns through costly research the model identifies the distributions of both research costs and beliefs about the predictability of individual stock returns identification depends only on households wealth and portfolio choices the model also provides a novel explanation for many empirical features of household portfolios parameter estimates suggest that most households have modest beliefs about the benefits of individual stock research although a minority must expect extraordinary returns data are available at https doi org 10 1287 mnsc 2017 2791 this paper was accepted by neng wang finance

a panel data analysis of the fungibility of foreign aid the donor community has been increasingly concerned that development assistance intended for crucial social and economic sectors might be used directly or indirectly to fund unproductive military and other expenditures the link between foreign aid and public spending is not straightforward because some aid may be fungible this article empirically examines the impact of foreign aid on the recipient s public expenditures using cross country samples of annual observations for 1971 90 for the base sample of 14 developing countries it finds that aid is not fungible at the aggregate level and there is no associated tax relief increasing the number of countries however makes aid fungible moreover results based on the main sample indicate that aid is fungible in three out of five sectors examined developing country governments receiving earmarked concessionary loans for agriculture education and energy reduce their own resources going to these sectors and use them elsewhere only loans to the transport and communication sector are fully spent on the purposes intended by donors because most aid appears to be fungible the rate of return on a specific donor funded project tells little about the impact of that assistance a better approach may be to tie foreign aid to an overall public expenditure program that provides adequate resources to crucial sectors

the optimality of a simple market mechanism strategic behavior in a finite market can cause inefficiency in the allocation and market mechanisms differ in how successfully they limit this inefficiency a method for ranking algorithms in computer science is adapted here to rank market mechanisms according to how quickly inefficiency diminishes as the size of the market increases it is shown that trade at a single market clearing price in the k double auction is worst case asymptotic optimal among all plausible mechanisms evaluating mechanisms in their least favorable trading environments for each possible size of the market the k double auction is shown to force the worst case inefficiency to zero at the fastest possible rate

an evolutionary model of bargaining abstract individuals from two populations of bargainers are randomly matched to play the nash demand game they make their demands by choosing best replies based on an incomplete knowledge of the precedents and occasionally they choose randomly there is no common knowledge over the long run typically one division will be observed almost all of the time this stochastically stable division is close to the nash solution when all agents in the same population are alike when the populations are heterogeneous a generalization of the nash solution results if there is some mixing between the two populations the stable division is fifty fifty journal of economic literature classification number c78

the n dimensional bailey divisia measure as a general equilibrium measure of the welfare costs of inflation abstract this paper shows that in economies with several monies the bailey divisia multidimensional consumers surplus formula may emerge as an exact general equilibrium measure of the welfare costs of inflation provided that preferences are quasilinear

the demand for money financial innovation and the welfare cost of inflation an analysis with household data we use microeconomic data on households to estimate the parameters of the demand for currency derived from a generalized baumol tobin model our data set contains information on average currency deposits and other interest bearing assets the number of trips to the bank the size of withdrawals and ownership and use of atm cards we model the demand for currency accounting for adoption of new transaction technologies and the decision to hold interest bearing assets the interest rate and expenditure flow elasticities of the demand for currency are close to the theoretical values implied by standard inventory models however we find significant differences between individuals with an atm card and those without the estimates of the demand for currency allow us to calculate a measure of the welfare cost of inflation analogous to bailey s triangle but based on a rigorous microeconometric framework the welfare cost of inflation varies considerably within the population but never turns out to be very lar

competitivity in auction markets an experimental and theoretical investigation the authors report successive rounds of theory and laboratory experiments investigating price taking behavior and market efficiency they focus on the impact of structural parameters as well as trading institution the structural parameters involve noncompetitive supply and demand and a new odd lot trading procedure for divisible goods the trading institutions include the continuous double auction and the one shot clearinghouse as well as a new quantities only clearinghouse institution the authors present and justify an as if complete information theory that explains the competitive outcomes and that correctly predicts highly noncompetitive outcomes in quantities only clearinghouse markets copyright 1995 by royal economic society

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

precautionary motives and portfolio decisions theory predicts that under certain restrictions on preferences prudent consumers will allocate relatively more funds to riskless assets when there is uninsurable background risk this paper analyzes empirically the relevance of precautionary motives for the structure of household wealth to this end a new and rich data source from the netherlands is exploited the question of primary concern is what impact if any does the presence of income uncertainty have on the structure of dutch households portfolios we employ various semi parametric estimators both for cross sections and for panel data to assess the response of households portfolios to uninsurable background risk we find some but not unanimous support for the view that portfolios become less risky as income uncertainty increases

the spectre of deflation a review of empirical evidence what explains the widespread fear of deflation this article reviews the history of thought economic history and empirical evidence on deflation with a view to answering this question it also outlines informally the main effects of deflation in applied monetary models the main finding is that for both historical and contemporary deflations there are many open empirical questions that could be answered using the tools economists use to study inflation and monetary policy more generally qu est ce qui explique la peur tres repandue de la deflation ce memoire fait un tour d horizon de l histoire de la pensee economique de l histoire economique et des resultats empiriques quant aux effets de la deflation en vue de repondre a cette question on fait aussi echo informellement aux effets principaux de la deflation dans les modeles monetaires appliques ce qui ressort principalement de ce travail est que tant pour les deflations dans l histoire que dans le monde contemporain il y a bien des questions empiriques encore irresolues auxquelles on pourrait donner une reponse en utilisant l outillage mental que les economistes utilisent pour etudier l inflation et la politique monetaire plus generalement sp c tre n thing that is thought to be seen but has no material existence haunting presentiment of ruin war madness etc

money liquidity and welfare abstract this paper develops an analytically tractable bewley model of money demand to shed light on some important questions in monetary theory such as the welfare cost of inflation it is shown that when money is a vital form of liquidity to meet uncertain consumption needs the welfare costs of inflation can be extremely large with log utility and parameter values that best match both the aggregate money demand curve suggested by lucas 2000 and the variance of household consumption agents in our model are willing to reduce consumption by 3 4 to avoid 10 annual inflation the astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer stock insurance value of money thus hindering consumption smoothing at the household level such an inflation induced increase in consumption risk at the micro level cannot be captured by representative agent models or the bailey triangle although the development of financial intermediation can mitigate the problem with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the bailey triangle our findings provide a strong justification for adopting a low inflation target by central banks especially in developing countries where money is the major form of household financial wealth

on inflation as a regressive consumption tax abstract evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed we build a monetary growth model consistent with key features of cross sectional household data and use this framework to study the distributional impact of inflation at the aggregate level our model economy behaves similar to standard monetary growth models within the representative agent abstraction inflation has however important distributional effects since it is effectively a regressive consumption tax thus neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy

liquidity risk and financial competition implications for asset prices and monetary policy abstract this paper studies the implications of banking competition for capital markets and monetary policy in particular i develop a two sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential banks insure depositors against such risk and invest in the economy s assets in this setting i compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector unlike previous work banks can have market power in both deposits and capital markets compared to a perfectly competitive financial sector i demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation assets prices and the degree of risk sharing furthermore multiple steady states can emerge and the economy becomes subject to poverty traps more importantly market power in financial markets may overturn the tobin effect present under a perfectly competitive financial sector this necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation

price formation in single call markets this paper reports a laboratory experiment designed to examine the price formation process in a simple market institution the single call market the experiment features random values and costs each period so each period generates a new price formation observation other design features are intended to enhance the predictive power of the bayesian nash equilibrium bne theory developed recently for this trading institution we find that the data support several qualitative implications of the bne but that subjects bid and ask behavior is not as responsive to changes in the pricing rule as the bne predictions bids and asks tend to reveal more of the underlying values and costs than predicted particularly when subjects are experienced nevertheless observed trading efficiency falls below the bne prediction the results offer more support for the bne when subjects compete against nash robot opponents a simple learning model accounts for several of the deviations from bne

the fungibility of aid earmarked for hiv aids control programs summary this paper investigates fungibility of official development assistance oda for hiv aids control adding to the debate regarding consequences of scaling up this type of oda a theoretical model yields two estimable equations in public health spending and non health spending with oda for hiv aids as the key regressor the equations are estimated using data for 52 countries from 2003 to 2009 results suggest oda for hiv aids is not fungible across the 52 countries fungibility and other constraints to effective use of increased oda in health sectors are country specific issues oda for hiv aids must be delivered via mechanisms specific to country contexts

why do people save in cash distrust memories of banking crises weak institutions and dollarization abstract the paper analyzes why households hold sizeable shares of their assets in cash at home rather than at banks a phenomenon that is widespread in many economies but for which information is scarce using survey data from ten central eastern and southeastern european countries i document the relevance of this behavior and show that cash preferences cannot be fully explained by whether people are banked or unbanked the analysis reveals that a lack of trust in banks memories of past banking crises and weak tax enforcement are important factors moreover cash preferences are stronger in dollarized economies where a safe foreign currency serves as a store of value

on the welfare cost of inflation and the recent behavior of money demand post 1980 u s data trace out a stable long run money demand relationship of cagan s semi log form between the m1 income ratio and the nominal interest rate with an interest semi elasticity of 1 79 integrating under this money demand curve yields estimates of the welfare cost of modest departures from friedman s zero nominal interest rate rule for the optimum quantity of money that are quite small the results suggest that the federal reserve s current policy which generates low but still positive rates of inflation provides an adequate approximation in welfare terms to the alternative of moving all the way to the friedman rule jel e31 e41 e52

the evolution of walrasian behavior consider an evolutionary context where a given number of quantity setting oligopolists tend to mimic successful behavior occasionally experimenting with some small probability in this context it is shown that the unique long run outcome of the process has all firms playing walrasian i e choosing an output that maximizes profits when taking the market clearing price as given

extensive margins and the demand for money at low interest rates we argue that the relevant monetary decision for the majority of u s households is not the fraction of assets to be held in interest bearing form but whether to hold any such assets at all we call this the decision to adopt the financial technology we show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets this implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations we do so with the 1989 survey of consumer finances we find that a the elasticity of money demand is very small when the interest rate is small b the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets and c the cost of adopting financial technologies is negatively related to participation in a pension program at intere

an experiment on the efficiency of bilateral exchange under incomplete markets abstract we test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market in this model traders choose asset holdings constrained by a technology frontier next each trader experiences a random shock which makes only one type of asset profitable in a general equilibrium environment with incomplete markets this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal this behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices we find that when markets are incomplete a bilateral exchange can slightly mitigate the extent of pecuniary externalities and weakly increase welfare

market games as social dilemmas abstract in an experimental exchange market based on shapley and shubik 1977 two types of players with different preferences and endowments independently submit quantities of the goods they wish to exchange in this context although the nash equilibria of the game involve zero or minimum trade we obtain intense trade close to levels that maximize social welfare going a step forward we implement communication within pairs of traders from the same horizontal and opposite vertical sides of the market overall we find that horizontal communication tends to reduce bids whereas vertical communication has no effect

the case for a financial approach to money demand the distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels even controlling for life cycle effects this is a puzzle for theories which directly link money demand to consumption such as cash in advance cia money in the utility function miuf or shopping time models this paper shows that the joint distribution of money and nancial assets can be explained by an incomplete market model when frictions are introduced into financial markets money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets

borrowing costs and the demand for equity over the life cycle abstract we construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing the key model ingredient is a wedge between the cost of borrowing and the risk free investment return borrowing can either raise or lower equity demand depending on the cost of borrowing a borrowing rate equal to the expected return on equity which we show roughly matches the data minimizes the demand for equity alternative models with no borrowing or limited borrowing at the risk free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings

the non monotonic relationship between seigniorage and inequality we present an analysis of how political factors may come into play in the equilibrium determination of inflation we employ a standard overlapping generations model with heterogenous young age endowments and a government that funds an exogenous spending via a combination of non distortionary income taxes and the inflation tax agents have access to two stores of value fiat money and an inflation shielded yet costly asset the model predicts that the relationship between elected reliance on the inflation tax for revenue and income inequality may be non monotonic we find robust empirical backing for this hypothesis from a cross section of countries jel classification e5 p16

aid the public sector and the market in less developed countries a reply the article in this journal by mosley et al i987 concludes its analysis of aid effectiveness as demonstrating inability of development aid over more than twenty years to provide a net increment to overall growth in the third world p 636 this note purports to show that this conclusion which is ostensibly distressing as the authors claim is not warranted the section of the study which is the basis of the conclusion cited and the subject of this note is a cross section regression analysis full details of which are shown in mosley et al table 3 the note is concerned with the relation between the dependent variable specified as the growth rate of real gdp per cent per annum hereafter gdp and aid specified as a percentage of gdp hereafter aid the aid results with only two significant positive coefficients in one subsample certainly give no basis for claiming aid effectiveness in terms of gdp growth the intention in this note is to interpret the results which are assumed to be valid this is made possible by the fact that the authors have helpfully provided the full input set of mean values derived from the raw data from this it is possible to calculate the gdp aid relationship for each country for the second and third period the procedure for deriving these relationships is as follows for each country the mean values of the time series of gdp and aid are extracted from the data for i 960 70 and for i 970 80 using i 960 70 as the base the signs of the change in the levels of the gdp and aid mean values between periods are recorded this is repeated for i980 4 with i970 80 mean values as the base the relationship between the two signs is an indication of the effect of aid on gdp in the period in which the change in levels is effected thus in the case of an increase in aid being combined with a decrease in gdp the latter must have fallen relatively to the former and aid effectiveness is negative mutatis mutandis for the other three sign combinations thus generating the appropriate gdp aid relationship for each country in each period a frequency distribution of the four sign combinations relating to the full sample is presented in table i since the signs of the changes in the levels of gdp and aid are derived by making explicit the arithmetic relationship implicit in the data they form a valid base from which to draw conclusions without requiring any test of

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

the welfare cost of inflation revisited the role of financial innovation and household heterogeneity notre analyse demontre que le ratio monnaie consommation augmente avec l ge des menages et decroit avec la consommation et que ce ratio a fortement augmente dans le contexte de tres bas taux d interet des dernieres annees nous elaborons un modele a generations imbriquees de la detention de monnaie pour des motifs de transaction dans lequel nous introduisons des effets d ge l utilisation de la monnaie augmente avec l ge des menages des effets de cohorte les jeunes generations font appel a des technologies financieres plus evoluees et des effets temporels les taux d interet nominaux influent sur la detention de monnaie

demand for cash with intra period endogenous consumption abstract we extend the literature on the demand for money by relaxing the assumption of a constant rate of consumption although total consumption is still fixed over the period agents can choose more than one rate of consumption and cash depletion in the period to minimize the cost of money management consistent with empirical evidence we find that agents do not smooth intra period consumption instead their rate of consumption will be positively related to their cash position this positive correlation depends on the volatility of the consumption process

sectoral money demand and the great disinflation in the united states estimates of the welfare costs of inflation based on bailey 1956 are typically computed using aggregate money demand models yet the behavior of money demand may vary across sectors thus the impact on welfare of inflation regime shifts may differ between households and firms we specifically investigate the sectoral welfare implications of the shift from the great inflation to the present regime of low and stable inflation for this purpose we estimate different functional specifications of money demand for u s households and nonfinancial firms using flow of fund data covering four decades we find that the benefits were significant for both sectors

fiscal illusion and the grantor government empirical studies indicate that unconditional intergovernmental grants have a flypaper effect several authors have modeled recipient government spending under fiscal illusion to explain this phenomenon in short grants reduce the perceived marginal cost of recipient government output this paper develops a more general model of illusion that incorporates the grantor government thereby eliminating inconsistencies encountered in previous models the more general model implies that grant finance increases the perceived marginal cost of grantor government output thus grant induced illusion should have two effects an increase in recipient output and a decrease in grantor output the empirical work supports this hypothesis

aid infrastructure and fdi assessing the transmission channel with a new index of infrastructure official development assistance oda and foreign direct investment fdi are widely perceived to be alternative means of supplementing domestic savings and promoting economic development in low and middle income countries however possible complementarities of aid and fdi have received limited attention so far it remains open to debate whether aid could render recipient countries more attractive to fdi by removing specific bottlenecks that prevent higher fdi inflows in particular we raise the hypothesis that aid specifically targeted at economic infrastructure helps developing countries attract higher fdi inflows through improving their endowment with infrastructure in transportation communication energy and finance by performing 3sls estimations we explicitly account for dependencies between three structural equations on the allocation of sector specific aid the determinants of infrastructure and the determinants of fdi we find strong and robust evidence that aid in infrastructure is effective in improving the recipient countries endowment with infrastructure in sharp contrast other aid is not effective in improving infrastructure infrastructure consistently proves to be an important determinant of developing countries attractiveness to fdi consequently only targeted aid promotes fdi indirectly through the infrastructure channel in addition aid in infrastructure has direct effects on fdi it appears that foreign investors anticipate longer term effects of aid on the country s endowment with infrastructure and expect aid financed infrastructure to serve them particularly well

segmented asset markets and optimal exchange rate regimes abstract this paper revisits the issue of the optimal exchange rate regime in a flexible price environment the key innovation is that we analyze this question in the context of environments where only a fraction of agents participate in asset market transactions i e asset markets are segmented under this friction alternative exchange rate regimes have different implications for real allocations in the economy in the context of this environment we show that flexible exchange rates are optimal under monetary shocks and fixed exchange rates are optimal under real shocks

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

liquid markets and competition abstract a market is liquid if no individual s actions have a big effect on the prices of goods traded in that market perfectly competitive markets are therefore perfectly liquid it is well known that market liquidity can be achieved by increasing the number of traders so that individual trades are small compared to total trades we show that even when there are only few traders market liquidity can be achieved through large short sales in which net trades are small relative to gross trades in particular for a natural variant of the market game which permits unlimited short sales we show that there is always a nash equilibrium allocation arbitrarily close to a competitive equilibrium allocation of course not all ne are near competitive only the large short sales ne are nearly liquid and hence close to ce

money and velocity during financial crises from the great depression to the great recession abstract this study models the demand for a broad monetary aggregate m2 from the great depression through the great recession key to the model is the interaction between a measure of time variation in economic agents perceived financial risk and an index of the cost of portfolio adjustment the finding of a useful money demand relationship suggests that skepticism regarding the indicator role of a broad liquid money aggregate as a policy guide may be exaggerated further our model provides some guidance for policymakers who face the challenge of unwinding large balance sheets as risk premia return to normal and velocity adjusts

financial market participation and the apparent instability of money demand abstract this paper uses multi period cross sectional data on financial assets holdings to shed light on the postwar stability of money demand in the united states i first present a new measure of the evolution of financial market participation by relating participation to the extensive margins of money demand and quantify the influence of wealth on participation decisions i then relate the increase in participation to the period of missing money and to the subsequent higher interest rate elasticity of monetary aggregates the paper indicates that time series estimations of money demand relationships are inherently flawed and tend to inappropriately suggest instability

the opportunity for conspiracy in restraint of trade an experimental study a study is a limited exploration into the relationship between the opportunity for conspiracy in restraint of trade and the resulting market performance laboratory experimental methods are applied to separate competing theories the competitive model predicts well relative to cartel models nevertheless when measurements are taken relative to the performance of markets where conspiracies are not possible the effects of attempted conspiracies can be determined

nigeria during and after the oil boom a policy comparison with indonesia nigeria and indonesia provide an interesting contrast with regard to performance and policy during and after the oil boom roughly a decade after the first oil shock nigeria is faced with several economic problems including a serious decline in its agricultural sector and a deteriorating external debt situation while some decline in the nonoil traded goods sector reflects efficient adjustment to the oil boom policy with regard to public expenditure exchange rates pricing and the trade regime could exacerbate such decline and impede readjustment as the boom subsides the links between oil prices deficits inflation and real exchange rate appreciation are analyzed and nigerian and indonesian fiscal and exchange rate and agricultural and foreign borrowing strategies are compared it is concluded that with the exception of cuts in the deficit since 1984 nigerian policy following the boom has not been conducive to adjustment to the current period of low oil prices and high real interest rates corrective measures and policy options are discussed

are profit maximisers the best survivors a darwinian model of economic natural selection abstract this paper demonstrates that the friedman conjecture that profit maximisation summarises appropriately the conditions for firm survival is not generally true if firms have market power profit maximisers are not necessarily the best survivors because of the possibility of spiteful behaviour of the following kind say a firm forgoes profit maximisation and thus decreases its survival chances but its deviation from maximisation harms its profit maximising competitors more than itself though the firm will be less likely to survive than it would if it maximised its profits it will still be more likely to survive than its competitors

welfare costs of inflation when interest bearing deposits are disregarded a calculation of the bias abstract most estimates of the welfare costs of inflation are devised considering only noninterest bearing assets ignoring that since the 1980s technological innovations and new regulations have increased the liquidity of interest bearing deposits we investigate the resulting bias sufficient and necessary conditions on its sign are presented along with closed form expressions for its magnitude two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest bearing monies may lead to a non negligible overestimation of the welfare costs of inflation an intuitive explanation is that such assets may partially make up for the decreased demand of noninterest bearing assets due to higher inflation

retrading in market games when agents are not price takers they typically cannot obtain an efficient real location of resources in one round of trade this paper presents a non cooperative model of imperfect competition where agents can retrade allocations consistent with edgeworth s idea of recontracting we show a there are pareto optimal allocations including competitive equilibrium allocations that can be approximated arbitrarily closely when trade is myopic i e when agents play a static nash equilibrium at every round of retrading b any converging sequence of allocations generated by myopic retrading can be supported along some retrade proof subgame perfect equilibrium path when traders anticipate future rounds of trading

welfare consequences of gradual disinflation in emerging economies emerging economies display considerable inequality in monetary asset holdings rendering the recent disinflation nontrivial using a small open economy model with uninsurable idiosyncratic risk this paper shows that a gradual decline of 12 in the quarterly inflation rate leads to an aggregate welfare gain of 0 40 in consumption equivalent terms the poor gain less than the economy on aggregate despite holding a more inflation prone financial portfolio this is because unequal cash holdings make inflation tax payments of the poor much smaller than those of the rich when inflation tax revenues finance redistributive transfers that provide insurance cross sectional gains become even more dispersed

is foreign aid fungible the case of indonesia this paper considers whether foreign aid given for specific categories of expenditure is fungible among them and whether aid reduces tax effort by the recipient government models developed to analyze the fiscal relations among different levels of government in the united states are applied to analysis of the impact of foreign aid econometric analysis of data for indonesia reveals that aid is largely spent as the donors intended that aid does not lead to a reduction in tax effort and that aid is not diverted to nondevelopment current expenditures copyright 1990 by royal economic society

foreign aid and the question of fungibility this paper analyzes whether the foreign assistance provided for specific categories of expenditure is shifted among them contrary to the wishes of donors it also considers whether aid reduces the tax effort of recipient governments econometric results are presented for the dominican republic that show that the fungibility of aid has resulted in a thwarting of the intentions of donors an attempt is made to account for the observed differences in behavior of individual countries in altering expenditures copyright 1993 by mit press

market power in oral double auctions this paper reports the results of a series of oral double auction experiments in which some traders possess market power a market is set up in which the configuration of the supply and demand curves leads to an asymmetry between buyers and sellers in their abilities to influence transactions prices this market structure does not always lead to convergence to the competitive equilibrium price despite the competitive nature of the oral double auction institution the nonconvergence occurs most frequently in the experiments involving experienced subjects