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 manner. Since preference shocks are private information, in a record-keeping economy, the planner's constrained allocation trades off efficient risk sharing against production efficiency in the search market. In the absence of record-keeping, the government uses flat money as a substitute for dynamic contracts to induce truthful revelation of preferences. Inflation affects agents' incentive constraints and so distortionary taxation of money may be needed as part of the optimal policy even if lump-sum taxes are available.Money ; Taxation

Random matching and money in the neoclassical growth model: some analytical results

I use the monetary version of the neoclassical growth model developed by Aruoba, Waller and Wright (2008) to study the properties of the model when there is exogenous growth. I first consider the planner's problem, then the equilibrium outcome in a monetary economy. I do so by first using proportional bargaining to determine the terms of trade and then consider competitive price taking. I obtain closed form solutions for the balanced growth path of all variables in all cases. I then derive closed form solutions for the transition paths under the assumption of full depreciation and, in the monetary economy, a non-stationary interest rate policy.Monetary policy ; Econometric models

Assessing the political viability of labor market reform : the case of employment protection - commentary

Labor market

Independence + accountability: why the Fed is a well-designed central bank

In 1913, Congress purposefully created the Federal Reserve as an independent central bank, which created a fundamental tension: how to ensure the Fed remains accountable to the electorate without losing its independence. Over the years, there have been changes in the Fed’s structure to improve its independence, credibility, accountability, and transparency. These changes have led to a better institutional design that makes U.S. policy credible and based on sound economic reasoning, as opposed to politics. In times of financial and economic crisis, there is an understandable tendency to reexamine the structure of the Federal Reserve System. A central bank’s independence, however, is the key tool to ensure a government will not misuse monetary policy for short-term political reasons.Federal Reserve System ; Federal Reserve System - Independence ; Banks and banking, Central ; Monetary policy - United States

Performance contracts for central bankers

Banks and banking, Central

Optimal stabilization policy with endogenous firm entry

Monetary policy has significant but overlooked effects on entry and exit of firms. We study optimal monetary stabilization policy in a DSGE model with microfounded money demand and endogenous firm entry. Due to a congestion externality affecting firm entry, the optimal policy deviates from the Friedman rule in all states even though all prices are fully flexible. In contrast to previous Ramsey model with flexible price, our calibration exercises suggest that the model can generate a high volatility of the nominal interest rate which is a direct consequence of policy actions to control entry.Monetary policy ; Econometric models

Central bank design in general equilibrium

We study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital-theoretic, general equilibrium economy. In the absence of an institutional arrangement, there is a continuum of steady state equilibria indexed by rates of inflation ranging from the Friedman rule to high a high level. The social optimum is associated with the Friedman rule.. We consider three institutional arrangements for determining monetary policy. The first, unconditional majority voting, always leads to a substantial inflation bias. The second, a simple form of bargaining which we interpret as a policy board, generally improves on the unconditional majority voting outcome. Finally, we consider a form of constitutional rule which always achieves the social optimum.Monetary theory ; Banks and banking, Central

Outside versus inside bonds: a Modigliani-Miller type result for liquidity constrained economies

When agents are liquidity constrained, two options exist - sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government bonds (outside bonds) and in the other they can borrow (issue inside 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 but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.Financial markets ; Bond market ; Liquidity (Economics)

Money and Capital

money, capital, inflation, welfare

Dual-currency economies as multiple-payment systems

Monetary search models are valuable for studying how a second currency's acceptability arises endogenously in an economy that lacks a stable domestic currency and other more sophisticated payment systems. Search models' basic assumptions (absence of credit, lack of smoothly functioning banking systems, reliance on currency as the sole medium of exchange, and primitive trading environments) are not necessarily consistent with modern financial systems. They do, however, provide good descriptions of transitional and developing economies, particularly in the countries of the former Soviet Union, and may yield helpful policy prescriptions.Money ; Monetary theory