Deficit financing in overlapping generation economies with habit persistence

In this paper, we study how deficit financing is affected by the introduction of habit formation in an otherwise standard Gale (JET, 1973) economy in which the government is a net lender and young agents are borrowing rather than saving. We find that the amount of deficit the government is able to float into the economy is lower when habits are present. This finding is due to the fact that habit persistence puts a cap on borrowing.Deficit Financing.

Market Structure and the Banking Sector

We propose a simple framework to explore how different market structures in the banking system affect credit allocation, and how deposits and number of entrepreneurs affect the equilibrium number of banks in the economy. We find that within the Marshallian aggregate surplus perspective, the number of entrants in the banking system is always larger than the socially optimal number of banks.and Entry

Consequences of Modeling Habit Persistence

In this paper, we study the stationary and non-stationary equilibria of a deterministic, pure exchange, two-period overlapping generations model with habit persistence. We show that preferences with multiplicative habits can lead to quite different equilibrium outcomes compared to subtractive ones. The two most commonly adopted habit specifications can differ in terms of homotheticity, gross substitutability, and uniqueness of equilibria. We illustrate these differences in terms of steady state equilibria, as well as local dynamics.Multiplicative and subtractive habit persistence, multiple equilibria, equilibrium dynamics

Consequences of Modeling Habit Persistence

In this paper, we study the stationary and non-stationary equilibria of a de- terministic, pure exchange, two-period overlapping generations model with habit persistence. We show that preferences with multiplicative habits can lead to quite different equilibrium outcomes compared to subtractive ones. The two most commonly adopted habit specifications can differ in terms of homotheticity, gross substitutability, and uniqueness of equilibria. We illustrate these differences in terms of steady state equilibria, as well as local dynamics.Multiplicative and subtractive habit persistence, multiple equilibria, equilibrium dynamics

Optimal monetary and fiscal policies in a search theoretic model of monetary exchange

In this paper we study optimal monetary and fiscal policies, and the welfare costs of inflation, within the Lagos and Wright (2005) framework. Monetary equilibria may be inefficient without fiscal policy tools due to bargaining frictions. We show that subsidies in decentralized markets can be implemented to alleviate underproduction, while money is still essential. Deviations from the Friedman rule may be large, and having fiscal and monetary policies in place results in considerable welfare gains. When fiscal policies are held constant, the welfare costs of increasing inflation may be as high as 8% of lifetime consumption. When lump sum monetary transfers are not available, a positive production subsidy may be inflationary and welfare reducing. However, sales taxes in the decentralized market and production taxes in the centralized market may increase welfare. The optimality of the Friedman rule in this case depends crucially on the bargaining power of the buyer, and equilibria are not first best.Monetary policy ; Fiscal policy

A macroeconomic analysis of obesity

This paper tries to understand the underlying causes of the rapid increase in obesity rates over recent decades. In particular, we propose a dynamic general equilibrium model to derive the quantitative implications of a decline in the relative (monetary and time) cost of food prepared away from home on the caloric intake of the average American adult over the last forty years. Two channels that lower this relative cost are considered. First, productivity improvements in the production of food prepared away from home. We and that this channel is qualitatively consistent with expenditure trends in food items, but falls short of accounting for the magnitude of the observed changes. We then consider actual declines in income taxes and in the gender wage gap, which increase the cost of preparing food at home from scratch. Our model accounts for three quarters of the observed changes in calorie consumption, and is consistent with trends in aggregate food expenditures, time use, and key macroeconomic variables. Our results indicate that changes in the relative cost of food prepared away from home play an important role in our understanding of the increased weight of the American population during the last 40 years.Obesity

Currency substitution in Latin America - lessons from the 1990s

The authors study how agents in Latin America allocate their balances between dollar-denominated and domestic currency-denominated accounts. They empirically determine the causes of currency substitution, its significance in recent banking crises, and the link between currency substitution, and volatility in macroeconomic aggregates. Their findings: The ratio of dollar deposits to broad money is strongly influenced by expectations of depreciation. They show that depositors in Latin America face some uncertainty and frictions when making their portfolio decisions. They explore the macroeconomic consequences of a dollarized economy. In particular, they find that, in the presence of currency substitution, past banking crises are good predictors of future crises. In other words, having a highly dollarized economy, increases the response of the banking system when there is a bad shock, which halts the outflow of capital. Once an economy is in crisis, however, having more dollar-denominated deposits in the banking system, increases the probability of a longer crisis in the future, because it increases exchange rate exposure in an already weak banking system. Finally, they show that the volatility of macroeconomic variables linked to the financial system, increases whenever the economy becomes more dollarized, which in turn makes the choice of monetary targets more difficult.Macroeconomic Management,Fiscal&Monetary Policy,Economic Theory&Research,Banks&Banking Reform,Settlement of Investment Disputes

Seasonality and monetary policy

∗We would like to thank an anonymous referee for extremely helpful comments and Joseph Beaulieu and Jeffrey Miron for making their data available to us. We would also like to thank the participants of seminars at the Federal Reserve Banks of St. Louis and San Francisco, the European Central Bank, th

Search-Theoretic Money, Capital and International Exchange Rate Fluctuations

In this paper we develop a two-country global monetary economy where a monetary equilibrium exists because of fundamentaldecentralized trade frictions ? a Lagos-Wright search and matching friction. In the decentralized markets (DM), the terms of trade can be determined either by bargaining or by competitive price taking (baseline model). We show that the baseline model is capable of generating quite realistic real and nominal exchange rate volatility observed in the data, without relying on more ad-hoc sticky price assumptions commonly used in the international macroeconomics literature. The key mechanism lies in the role of search and matching frictions and a primitive technological assumption ? that capital is also a complementary input to production in the DM. This creates an internal propagation mechanism by modifying asset-pricing relations and relative price dynamics in the model.Search-theoretic Money, Open Economy, Real Exchange Rate Puzzle

Quantifying the shadow economy: measurement with theory

We construct a dynamic, general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping – cash. Trade using cash to avoid taxes is the theoretical measure of the shadow economy from our model. We then calibrate our model using money, interest rate and GDP data to back out the size of the shadow economy for a sample of 30 countries and compare our estimates to traditional ad hoc estimates. Our results generate reasonably larger estimates for the size of the shadow economy than exist in previous literature.>Informal sector (Economics) ; Taxation ; Credit