A Fundamental Theory of Exchange Rates and Direct Currency Trades

In this paper we construct a two-country search model to determine the nominal exchange rate between two fiat monies. Our model allows agents to use any currency to trade for goods in all countries. However, search frictions restrict agents opportunities for instantaneous arbitrage, and hence make the nominal exchange rate determinate. The nominal exchange rate depends on the two countries economic fundamentals, including the stocks and growth rates of the two monies. Direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets. There are persistent violations of the law of one price and purchasing power parity in equilibrium, despite the fact that prices are perfectly flexible and all goods are tradeable between countries. Nominal and real exchange rates can move together in the steady state in response to money growth shocks.Exchange Rates; Search; Money; Currency Trade.

Capital Flows, Incomplete Markets, and the U.S. European Unemployment Gap

This paper investigates the relationship of the ``unemployment gap'' between the United States and Europe to the opening of international capital markets. The unemployment gap widened dramatically in the mid-1980's, a time period characterized also by significant increases in international capital flows--including substantial flows from Europe to the U.S.. The implications of capital mobility for unemployment levels and current accounts are studied in a multi-country dynamic model with incomplete international capital markets and national labor markets characterized by search and matching. The economy also features unemployment insurance financed by distorting taxes on capital and labour income. It is shown that a given difference in the generosity of unemployment benefits leads to a larger difference in unemployment rates across countries when there is some international capital mobility than in financial autarky. Moreover, the long-run effects of an opening of capital markets include an increase in the unemployment rate and an outflow of capital for high unemployment benefit countries and a reduction in the unemployment rate coupled with an inflow of capital for low benefit countries. In addition to these permanent effects, an opening of capital markets may have persistent transition effects including larger short-run differences in unemployment rates across countries and current account imbalances. Quantitatively, our model accounts for a significant share of the relative changes in both unemployment rates and international asset positions for the U.S. and several European countries since the mid-1980Unemployment, International Capital Flows

Elastic Money, Inflation, and Interest Rate Policy

Optimal monetary policy is studied in an environment in which money plays an essential role in facilitating exchange and aggregate shocks affect individual agents asymmetrically. Exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central monetary authority both controls the stock of outside money and pursues an interest rate policy that affects the rate at which private banks create inside money. We find that the optimal monetary policy requires management of both interest rates and the quantity of outside money. By controlling interest rates the monetary authority can affect the price level in the short-run and adjust households' consumption, thus providing insurance against unfavorable aggregate shocks. The feasibility of the interest rate policy requires a minimum rate of trend inflation that may be positive and in principle quite large. The paper thus links two principal components of monetary policy: the optimal interest rate policy and the optimal long-run inflation rate.banking, inside money, elastic money, monetary policy, inflation, zero bound

Housing Liquidity, Mobility, and the Labour Market

We study the interactions among geographical mobility, unemployment and home-ownership in an economy with heterogeneous locations, endogenous construction and search frictions in the markets for both labour and housing. The decision of home-owners to accept job offers from other cities depends on how quickly they can sell their houses (i.e. their liquidity), which in turn depends on local labour market conditions. Consequently, home-owners accept job offers from other cities at a lower rate than do renters, generating a link between home-ownership and aggregate unemployment. When calibrated to match aggregate U.S. statistics on mobility, housing and labour flows, our model predicts that the effect of home-ownership on aggregate unemployment is small. When unemployment is high, however, changes in the rate of home-ownership can have economically significant effects.liquidity, mobility, home-ownership, unemployment

Sticky prices: a new monetarist approach

Why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption; here it is a result. We use search theory, with two consequences: prices are set in dollars, since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral.

Real Exchange Rates, Preferences, and Incomplete Markets: Evidence, 1961-2001

Many international macroeconomic models link the real exchange rate to a ratio of marginal utilities. We examine this link empirically, allowing the marginal utility of consumption to depend on government expenditure, real money balances, or external habit. We also consider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over-identifying restrictions for every country, utility with external habit persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001.real exchange rate, consumption, marginal utility

Sticky Prices: A New Monetarist Approach

Why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption; here it is a result. We use search theory, with two consequences: prices are set in dollars, since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral.

Transcriptomes of parents identify parenting strategies and sexual conflict in a subsocial beetle

This work was funded by UK NERC grants to M.G.R. and A.J.M. an NERC studentship to D.J.P. the University of Georgia and a US NSF grant to A.J.M. and M.G.R.Parenting in the burying beetle Nicrophorus vespilloides is complex and, unusually, the sex and number of parents that can be present is flexible. Such flexibility is expected to involve specialized behaviour by the two sexes under biparental conditions. Here, we show that offspring fare equally well regardless of the sex or number of parents present. Comparing transcriptomes, we find a largely overlapping set of differentially expressed genes in both uniparental and biparental females and in uniparental males including vitellogenin, associated with reproduction, and takeout, influencing sex-specific mating and feeding behaviour. Gene expression in biparental males is similar to that in non-caring states. Thus, being ‘biparental’ in N. vespilloides describes the family social organization rather than the number of directly parenting individuals. There was no specialization; instead, in biparental families, direct male parental care appears to be limited with female behaviour unchanged. This should lead to strong sexual conflict.Publisher PDFPeer reviewe

Representability problems for coarse-grained water potentials

The use of an effective intermolecular potential often involves a compromise between more accurate, complex functional forms and more tractable simple representations. To study this choice in detail, we systematically derive coarse-grained isotropic pair potentials that accurately reproduce the oxygen-oxygen radial distribution function of the TIP4P-Ew water model at state points over density ranges from 0.88-1.30g/cc and temperature ranges from 235K-310K. Although by construction these effective potentials correctly represent the isothermal compressibility of TIP4P-Ew water, they do not accurately resolve other thermodynamic properties such as the virial pressure, the internal energy or thermodynamic anomalies. Because at a given state point the pair potential that reproduces the pair structure is unique, we have therefore explicitly demonstrated that it is impossible to simultaneously represent the pair-structure and several key equilibrium thermodynamic properties of water with state-point dependent radially symmetric pair potentials. We argue that such representability problems are related to, but different from, more widely acknowledged transferability problems, and discuss in detail the implications this has for the modeling of water and other liquids by coarse-grained potentials. Nevertheless, regardless of thermodynamic inconsistencies, the state-point dependent effective potentials for water do generate structural and dynamical anomalies.Comment: 22 page

The tyranny of distance and the gravity of resources

To what extent does geography remain an important determinant of comparative advantage and factor incomes in resource markets? We estimate gravity models for resources and find that some minerals and fuels, particularly Iron Ore and Gas, do have very high elasticities of trade with respect to distance. To assess the implications of this we then consider a simple counterfactual where location advantages are eliminated. We find that for a few countries, including Australia and New Zealand, distance barriers have a large impact of their market share