Descriptions of Working Papers:
Monetary Economics
Money, Credit and Banking Journal of Economic Theory (July 2007)
(With Aleksander Berentsen and Gabriele
Camera)
In many situations, some people hold large money balances but have no particular urgency to spend them while others are liquidity constrained. This problem creates a role for financial intermediaries who accept nominal deposits and make nominal loans. We show that financial intermediation improves the allocation away from the Friedman rule. The gains in welfare come from the payment of interest on deposits and not from relaxing borrowers’ liquidity constraints. We also demonstrate that increasing the rate of inflation can be welfare improving when credit rationing occurs.
(With S. Borağan Aruoba and Randall
Wright)
We extend micro-founded models of money with both centralized and decentralized markets to include capital. Although we consider several versions, in the baseline model, capital produced in the centralized market is an input in the decentralized market. We calibrate the model, and find the following. With bargaining in the decentralized market, inflation has virtually no impact on investment, but still affects consumption and welfare: going from 10% inflation to the Friedman rule is worth around 3.5% of consumption. With price taking the same policy works quite differently: now capital increases 12%, and although the steady state gain is also 3.5%, the transition cost cuts it to 1.9%. Although we also find big distortions from fiscal policy, even if we must make up the revenue with proportional taxes, eliminating inflation may still be desirable. Finally, we quantify the impact of holdup problems in bargaining models.
Bargaining and the Value of Money Journal of Monetary Economics (November
2007)
(With S. Borağan Aruoba and Guillaume
Rocheteau)
Search models of monetary exchange have typically relied on Nash (1950) bargaining, or strategic games that yield an equivalent outcome, to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a search model with divisible money, we show that the properties of the bargaining solutions do matter both qualitatively and quantitatively for questions of first-degree importance in monetary economics such as: (i) the efficiency of monetary equilibrium; (ii) the optimality of the Friedman rule; (iii) the welfare cost of inflation and (iv) inflation and capital accumulation.
Optimal Stabilization Policy with Endogenous Entry
(With Aleksander Berentsen)
We
construct a dynamic stochastic general equilibrium model where money is essential
for trade to study optimal monetary stabilization policy. A novel aspect of our
model is that firm entry is endogenous. We compare the optimal stabilization policy
when all prices are flexible and when some are sticky. Due to an externality affecting
firm entry, the central bank deviates from the Friedman rule. In contrast
to
other sticky price models, under the optimal policy, the zero lower bound on nominal
interest rates never binds. Calibration exercises suggest that the nominal interest
rate should have been i) much more volatile if productivity shocks were the
only aggregate disturbance and ii) substantially smoother if preference shocks were
the main aggregate shock.
Price-level Targeting and Stabilization Policy
(With Aleksander Berentsen)
We
construct a dynamic stochastic general equilibrium model to study optimal monetary
stabilization policy. Prices are fully flexible and money is essential for
trade. Our main result is that if the central bank pursues a price-level
target, it can control inflation expectations and improve welfare by
stabilizing short-run shocks to the economy. The optimal policy involves
smoothing nominal interest rates which effectively smoothes consumption across
states.
Outside Bonds versus Inside Bonds
(With Aleksander Berentsen)
When agents are liquidity constrained, two options exist — borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds.
Intensive versus Extensive Margin Tradeoffs in a Simple Monetary Search Model forthcoming in Les Annales d'Economie et Statistique.
(With Sébastien Lotz and Andrei Shevchenko)
We introduce ex-post heterogeneity into monetary search models with lotteries. Hetero-geneity allows lotteries over goods to exist in equilibrium. These lotteries over goods create an intensive margin (expected production in a match) that is non-existent in all indivisible goods monetary search models. We then show there can be a tradeo¤ between the intensive margin and extensive margin (number of matches) when choosing the optimal monetary stock.
Dynamic Taxation, Private Information and Money
The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In `middle age', agents receive preference shocks and trade amongst themselves in an anonymous search market. Since preference shocks are private information, in a record-keeping economy without money, the planner's allocation trades off efficient risk sharing against production efficiency in the search market and average consumption when old. For a government to replicate this outcome in a monetary economy without record-keeping, distortionary taxation of money balances is needed if other taxes are constrained to be lump-sum and/or linear in nature.
Technical Appendix for Camera, Craig and Waller "Currency Competition in a Fundamental Model of Money" Journal of International Economics December 2004.