Transaction costs and institutions: investments in exchange

This paper proposes a simple model for understanding transaction costs – their composition, size and policy implications. We distinguish between investments in institutions that facilitate exchange and the cost of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk adverse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues

Transaction costs and institutions: investments in exchange

This paper proposes a simple model for understanding transaction costs – their composition, size and policy implications. We distinguish between investments in institutions that facilitate exchange and the cost of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk adverse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues

On the Interaction of Monetary and Fiscal Policy

In this paper we review some fundamental issues that have been identified by macroeconomists in discussing the co-ordination of monetary and fiscal policy. As Sargent and Wallace (1981) graphically illustrated, the consolidated public sector present-value budget constraint means that monetary and fiscal policy are ultimately joint decisions. However, as we show in a quantitative general equilibrium model, even when fiscal solvency is not an issue, monetary and fiscal policy may still need to be co-ordinated

Inflation Targeting, Transparency and Interest Rate Volatility: Ditching 'Monetary Mystique' in the UK

Monetary authorities often seem reluctant to discuss the conduct of monetary policy. There is a concern that greater openness in monetary policy-making may lead to volatility in financial markets, and specifically in interest rates. To date there is very little direct empirical evidence; however, recent changes in the monetary policy framework in the UK provide an opportunity to gain some insight on this issue. First, the authors present a model of monetary policy showing that the volatility that would otherwise occur to aggregate prices is transmitted to the rate of interest in a tightly specified nominal regime. Under some circumstances, information flows may add to volatility; if volatility is harmful, then central bankers may be right to be reticent. However, the evidence suggests that even though volatility has risen in the recent past, there is no evidence that this volatility is directly attributable to increased information flows per se

S,s Pricing in a General Equilibrium Model with Heterogeneous Sectors

We study the impact of two-sided nominal shocks in a simple dynamic, general equilibrium (S,s)-pricing macroeconomic model comprised of heterogeneous sectors. The simple model we develop has a number of appealing empirical implications; it captures why some sectors of the economy have systematically more flexible prices, the smooth dynamics of aggregate output following a monetary shock, and a degree of price asynchronization. Incorporating multiple sectors is central to arriving at these three results.Price rigidity, Ss pricing, macroeconomic dynamics.

Transaction Costs and Institutions

This paper proposes a simple framework for understanding endogenous transaction costs - their composition, size and implications. In a model of diversification against risk, we distinguish between investments in institutions that facilitate exchange and the costs of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues.Exchange costs, transaction costs, general equilibrium, institutions..

Aggregate Dynamics with Heterogeneous Agents and State-Dependent Pricing

This paper examines the consequences of (S,s) pricing rules in a dynamic economy with heterogeneous costs of price adjustment. We construct the stationary distributions for aggregate output and prices for our model economy. As a result of our assumption of heterogeneous costs we find that: (i) Some sectors change prices more regularly than others; (ii) Price changes are asynchronized (relative prices may be moving in opposite directions in different sectors); (iii) The economy may be more sensitive to demand shocks. There is broad empirical support for the predictions of the model.Price rigidity, (Ss) pricing, macroeconomic dynamics.

Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State

Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.Price Stickiness, Rotemberg Model, Costly Price Adjustment.

Aggregation and Optimization with State-Dependent Pricing: A Comment

A key argument in Caplin and Leahy (1997) states that the correlation between monetary shocks and output is falling in the variance of the money supply. We demonstrate that this conclusion depends on solving for the correlation in the non-stationary state of the model. In the stationary state, that correlation is initially rising.Ss pricing, money-output correlations, macroeconomic dynamics.

The Impact of Simple Fiscal Rules in Growth Models with Public Goods and Congestion

In this paper we examine the implication of a simple class of fiscal rules for long-run economic growth and welfare. The golden rule of public finance (GRPF) that we examine is motivated by institutional arrangements in countries such as Germany and the UK. We find that rules which seek to limit government borrowing to productive investment spending have a clear justification in terms of growth and welfare when government provided goods are otherwise excessively provided. Even in the case where it is private consumption that is excessive, the GRPF is likely to be good from a growth perspective, but the welfare effects are more ambiguous.