Game-theoretic foundations of monetary equilibrium : [Version 30 September 2013]

Monetary theorists have advanced an intriguing notion: we exchange money to make up for a lack of enforcement, when it is difficult to monitor and sanction opportunistic behaviors. We demonstrate that, in fact, monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude enforcement — external or not. Simply put, monetary systems cannot operate independently of institutions — formal or informal — designed to monitor behaviors and sanction undesirable ones. This fundamental result is derived by integrating monetary theory with the theory of repeated games, studying monetary equilibrium as the outcome of a matching game with private monitoring

Developing a unified pipeline for large-scale structure data analysis with angular power spectra -- I. The importance of redshift-space distortions for galaxy number counts

We develop a cosmological parameter estimation code for (tomographic) angular power spectra analyses of galaxy number counts, for which we include, for the first time, redshift-space distortions (RSD) in the Limber approximation. This allows for a speed-up in computation time, and we emphasise that only angular scales where the Limber approximation is valid are included in our analysis. Our main result shows that a correct modelling of RSD is crucial not to bias cosmological parameter estimation. This happens not only for spectroscopy-detected galaxies, but even in the case of galaxy surveys with photometric redshift estimates. Moreover, a correct implementation of RSD is especially valuable in alleviating the degeneracy between the amplitude of the underlying matter power spectrum and the galaxy bias. We argue that our findings are particularly relevant for present and planned observational campaigns, such as the Euclid satellite or the Square Kilometre Array, which aim at studying the cosmic large-scale structure and trace its growth over a wide range of redshifts and scales.Comment: 18 pages, 11 figures, 4 tables. New expression for RSDs in Limber approximation (Eq. 9), much easier to implement in numerical codes. Results on "conservative scenario" slightly change

Two monetary models with alternating markets : [Version 28 October 2013]

We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money — reduced-form vs. explicit role — neither induces theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to one difference equation. The equations do not coincide only if price distortions are differentially imposed across models. To illustrate, when cash prices are equally distorted in both models equally large welfare costs of inflation are obtained in each model. Our insight is that if results differ, then this is due to differential assumptions about the pricing mechanism that governs cash transactions, not the explicit microfoundation of money

Price Dispersion with Directed Search.

We study a market where identical capacity-constrained sellers compete to attract identical buyers, via price advertisements. Once buyers reach a store, prices might be renegotiable in a manner that is responsive to excess demand. We focus strongly symmetric equilibria, proving their existence and providing explicit solutions for the distributions of advertised and sale prices as functions of market characteristics. Since variations in the posted price can affect the store’s attractiveness and the incidence of haggling, the model endogenizes the ‘pricing convention’ prevailing in the market and generates several empirically testable predictions on market behavior.Directed Search ; Endogenous Trading Mechanisms ; Market Frictions ; Price Dispersion

The coordination value of monetary exchange: Experimental evidence

Under what conditions can cooperation be sustained in a network of strangers? Here we study the role of institutions and uncover a new behavioral foundation for the use of monetary systems. In an experiment, anonymous subjects could cooperate or defect in bilateral random encounters. This sequence of encounters was indefinite; hence multiple equilibria were possible, including full intertemporal cooperation supported by a social norm based on community punishment of defectors. We report that such social norm did not emerge. Instead, the availability of intrinsically worthless tokens favored the coordination on intertemporal cooperation in ways that networks of strangers were unable to achieve through social norms.

Cooperation among strangers: an experiment with indefinite interaction

We study the emergence of norms of cooperation in experimental economies populated by strangers interacting indefinitely and lacking formal enforcement institutions. In all treatments the efficient outcome is sustainable as an equilibrium. We address the following questions: can these economies achieve full efficiency? Which institutions for monitoring and enforcement promote cooperation? Finally, what classes of strategies are employed to achieve high efficiency? We find that, first, cooperation can be sustained even in anonymous settings; second, some type of monitoring and punishment institutions significantly promote cooperation; and, third, subjects dislike indiscriminate strategies and prefer selective strategies.experiments, repeated games, cooperation, equilibrium selection, prisoners’ dilemma, random matching

Efficient Monetary Allocations and the Illiquidity of Bonds.

We construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with both money and nominal government bonds, but all trades must be monetized. We demonstrate that a deflationary policy a la Friedman cannot sustain the efficient allocation. The reason is that no-arbitrage imposes a stringent bound on the return money can pay. The efficient allocation can be sustained when bonds have positive yields and – under certain conditions – only if they are illiquid. Illiquidity – meaning bonds cannot be transformed into consumption as efficiently as cash – is necessary to eliminate arbitrage opportunities.Money ; Heterogeneity ; Friedman Rule ; Illiquid Assets