The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending

The choice of either the rate of monetary growth or the nominal interest rate as the instrument controlled by monetary authorities has both positive and normative implications for economic performance. We reexamine some of the issues related to the choice of the monetary policy instrument in a dynamic general equilibrium model exhibiting endogenous growth in which a fraction of productive government spending is financed by means of issuing currency. When we evaluate the performance of the two monetary instruments attending to the fluctuations of endogenous variables, we find that the inflation rate is less volatile under nominal interest rate targeting. Concerning the fluctuations of consumption and of the growth rate, both monetary policy instruments lead to statistically equivalent volatilities. Finally, we show that none of these two targeting procedures displays unambiguously higher welfare levels.monetary policy targets, productive government spending.

Speculating against an overconfident market

We distinguish two components of self-confidence in a financial market: private confidence measures the self-confidence level of speculators, while public confidence measures the confidence level they attribute to their competitors. We then study how independent changes in these components affect the equilibrium trading strategies. We conduct the analysis in a financial market with imperfect competition where investors submit limit orders. We calculate the unique linear symmetric equilibrium as well as the major indicators of the market. In addition to providing a partial explanation for the excess volatility of asset prices as well as for trading volume unexplained by the arrival of new information, our model highlights the differences between the effects of public versus private confidence.overconfidence, financial markets, imperfect competition

Stochastic Dominance and Absolute Risk Aversion

In this paper we propose the infimum of the Arrow-Pratt index of absolute risk aversion as a measure of global risk aversion of a utility function. We then show that, for any given arbitrary pair of distributions, there exists a threshold level of global risk aversion such that all increasing concave utility functions with at least as much global risk aversion would rank the two distributions in the same way. Furthermore, this threshold level is sharp in the sense that, for any lower level of global risk aversion, we can find two utility functions in this class yielding opposite preference relations for the two distributions.Risk aversion, Stochastic Dominance, Thriftiness

Consumption Externalities, Habit Formation, and Equilibrium Efficiency

We analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subjected to both habit formation and consumption spillovers. We also discuss how consumption externalities and habits interact to generate an inefficient dynamic equilibrium. Finally, we characterize optimal tax policies aimed to restore efficient decentralized paths.Habit Formation, Consumption Externalities, Equilibrium Efficiency

Growth Effects of Taxation under Altruism and Low Elasticity of Intertemporal Substitution.

An increase in the tax rate on capital income may raise the rate of economic growth when the elasticity of intertemporal substitution is low and intergenerational transfers are absent. Since the strength of the bequest motive depends on tax rates, this paper provides conditions under which taxing capital income, and then reducing the labor income tax, is more growth enhancing than the classical policy of zero taxes on capital income, and vice versa.

Endogenous Growth, Human Capital, and Bequests in a Life-Cycle Model.

This paper investigates the relationship between growth and efficiency in an overlapping generations economy in which altruistic parents endow their children with human capital (education) and leave physical bequests. The author gives conditions under which the physical bequest motive is not operative in a balanced equilibrium when human capital exhibits externalities. He also shows that the efficient rate of growth is lower than the competitive one if the economy is bequest-constrained and externalities from education are not very strong. Some fiscal policy experiments are performed for both bequest-constrained economies and unconstrained ones. Copyright 1995 by Royal Economic Society.