A theory of low inflation in a non Ricardian economy with credit constraints

This paper explores the relationship between the severity of credit constraints and long run inflation in a simple non Ricardian setting. It is shown that a low positive inflation can loosen credit constraints and that this effect yields a theory of the optimal long run inflation target with no assumption concerning nominal rigidities or expectation errors. Credit constraints introduce an un-priced negative effect of the real interest rate on investment. Because of this effect, the standard characterization of economic efficiency with the Golden Rule fails to apply. When fiscal policy is optimally designed, the first best allocation can be achieved thanks to a positive inflation rate and a proportional tax on consumption.credit constraints ; long run inflation ; non Ricardian setting

The case for a financial approach to money demand

The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels, even controlling for life-cycle effects. This is a puzzle for theories which directly link money demand to consumption, such as cash-in-advance (CIA), money-in-the-utility function (MIUF) or shopping-time models. This paper shows that the joint distribution of money and nancial assets can be explained by an incomplete-market model when frictions are introduced into financial markets. Money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets.money demand ; money distribution ; heterogenous agents

The real effect of inflation in liquidity constrained models

This article identifies a new channel through which inflation affects the real economy. In a simple monetary model where agents face heterogenous income flows, it is proven that credit constraints create heterogeneity in money demand. Because of this heterogeneity, long run inflation affects the real interest rate and real variables, even when there are no redistributive effects, no distorting fiscal policy, no substitution between leisure and working time, and when prices are flexible. For realistic utility functions, inflation is found to raise the capital stock, but to decrease welfare.inflation ; credit constraints ; heterogenous agents

Public spending shocks in a liquidity-constrained economy

This paper analyses the effect of transitory increases in government spending when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous, infinitely-lived households face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self-insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effect that are produced by the shockborrowing constraints ; public debt ; fiscal policy shocks

Risk Shifting, Asset Bubbles, and Self-fulfilling Crises.

Financial crisis are often associated with an endogenous credit reversal fol- lowed by a fall in asset prices and failures of financial institutions. To account for this sequence of events, this paper constructs a model where the excess risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, Economic Journal, 2000), and where the supply of credit to these investors is endogenous. First, we show that changes in the composition and riskiness of investors' portfolio as total lending varies may cause the ex ante return on loans to increase with the amount of total lending, thereby creating the potential for multiple (Pareto-ranked) equilibria associated with different levels of lending, asset prices, and output. We then embed this mechanism into a 3-period model where the low-lending equilibrium is selected with positive probability at the intermediate date. This event is associated with a inefficient liquidity dry-up, a market crash, and widespread failures of borrowers.Financial crises; Credit market imperfections; self-fulfilling expectations;

Bubbles and self-fulfilling crises

Financial crises are often associated with an endogenous credit reversal followed by a fall in asset prices and serious disruptions in the financial sector. To account for this sequence of events, this paper constructs a model where the excessive risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, "Bubbles and Crises", Economic Journal, 2000), and where the supply of credit to these investors is endogenous. We show that the interplay between the risk shifting problem and the endogeneity of credit may give rise multiple equilibria associated with different levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an inefficient liquidity dry-up at the intermediate date, a market crash, and widespread failures of borrowers. The possibility of multiple equilibria and self-fulfilling crises is showed to be related to the severity of the risk shifting problem in the economy.credit market imperfections ; self-fulfilling expectations ; financial crises

Monetary policy with heterogenous agents and credit constraints

This paper analyzes the long-run effect of monetary policy when credit constraints are taken into account. This analysis is carried on in a heterogeneous agents framework in which infinitely lived agents can partially self-insure against income risks by using both financial assets and real balences. First we show theoretically that financial borrowing constraints give rise to an heterogeneity in money demand, leading to a real effect of inflation. Secondly, we show that inflation has a quantitative positive impact on output and consumption in economies which closely match the wealth distribution of the United States. Thirdly, we find that the average welfare cost of inflation is much smaller compared to a complete market economy, and that inflation induces important redistributive effects across households.monetary policy ; credit constraints ; incomplete markets ; welfare

Monetary Policy with Heterogeneous Agents and Credit Constraints

This paper exhibits and quantifies a new theoretical channel of the non-neutrality of inflation transiting through capital market imperfections. Unconstrained households change their financial position in front of a change in the inflation rate, whereas constrained households can not. Thus credit constraints induce heterogeneity in the response of money demand following a change in the inflation rate. Because of this heterogeneity, the standard result on the neutrality of inflation does not hold. To investigate this channel, we model capital market imperfections in a production economy following the approach of Aiyagari (1994). Heterogeneous agents can accumulate financial assets to partially insure against idiosyncratic income risks, but they face a borrowing constraint. We embed in this framework money in the utility function. Thus agents can self-insure with both money and financial titles, and the substitution between these two instruments depends on their relative returns. Firstly we provide theoretical evidence that inflation affects aggregate real variables in this framework with credit constraints. Secondly, we quantify the long-run effect of inflation on aggregate variables by calibrating the model on the United States. We find that credit constraints give rise to quantitatively important departure from the traditional superneutrality result. In the benchmark general equilibrium economy an increase in inflation from 2 percent to 3 percent leads to a rise of 0.39 percent in aggregate capital. Moreover, the average welfare costs of inflation are much lower in incomplete market economy compared to the traditional complete market set-up à la Lucas (2000). A rise by one point in inflation would induce a 30 percent higher decrease in welfare in the complete market economy compared to our framework with credit constraints. Thirdly, inflation has a key redistributive impact. Wealth-poor households benefit from inflation, contrary to the wealthiest households. This result is mainly driven by a price effect: Most the income of the wealth-poor comes from labor whose return rises as aggregate capital increases.monetary policy, Credit constraints, Welfare

Bubbles and Self-fulfilling Crises

Financial crises are often associated with an endogenous credit reversal followed by a fall in asset prices and serious disruptions in the financial sector. To account for this sequence of events, this paper constructs a model where the excessive risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, 'Bubbles and Crises', Economic Journal, 2000), and where the supply of credit to these investors is endogenous. We show that the interplay between the risk shifting problem and the endogeneity of credit may give rise multiple equilibria associated with di¤erent levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an ine¢ cient liquidity dry-up at the intermediate date, a market crash, and widespread failures of borrowers. The possibility of multiple equilibria and self-fulfilling crises is showed to be related to the severity of the risk shifting problem in the economyCredit market imperfections, self-fulfilling expectations, financial crises.

Division du travail et progrès technique

Cet article présente une modélisation de la croissance fondée sur le lien entre division du travail et progrès technique. La division du travail donne lieu à des opportunités d’introduction de nouvelles machines qui viennent aider ou remplacer les travailleurs. Des tâches devenues obsolètes disparaissent, et de nouvelles tâches sont créées pour produire les nouvelles machines. Ce modèle permet d’étudier la dynamique conjointe des deux facteurs de production, travail et capital. On montre que la diversité des tâches croît moins vite lorsque le progrès technique s’accélère. On montre, par ailleurs, que cette modélisation de l’innovation produit un modèle de croissance sans effets de taille.We present a model of growth based on the link between technical change and division of labour. Division of labour generates opportunities of introduction of new capital goods, which can help or even replace workers. The tasks which become useless disapear and new tasks are created to produce the new capital goods. This model analyzes the joint dynamic of labour and of capital goods. We show that the diversity of labour decelerates when technical change accelerates. We show that this model yields a new kind of growth model without scale effects