Equilibrium Bank Runs

We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the so-called "optimal contract," the post-deposit game can have a run equilibrium. Given a "propensity" to run, triggered by sunspots, the optimal contract for the full pre-deposit game can be consistent with runs that occur with positive probability. Thus, the Diamond-Dybvig framework can explain bank runs, as emerging in equilibrium under the optimal deposit contract.

The Economic Effects of Restrictions on Government Budget Deficits: Imperfect Privte Credit Markets

We consider a pure-exchange overlapping-generations model We consider a pure-exchange overlapping-generations model with many consumers per generation and many goods per period. As in Ghiglino and Shell (2000), there is a government that collects taxes, distributes transfers and faces budget deficit restrictions. We introduce, for realism and symmetry with the government, imperfection in the private credit markets. We find that with constraints on individual credit and anonymous (i.e., non-personalized) lump-sum taxes, strong (or 'global') irrelevance of the government budget deficit is not possible, and weak irrelevance can hold only in very special situations. With credit constraints and anonymous consumption taxes, weak irrelevance holds provided the number of tax instruments is sufficiently large and at least one consumer's credit constraint is not binding.

Capital Gains

Capital gains play an important, positive role in the inter-temporal allocation of resources, but they can also be a source of economic instability. We analyze a simple overlapping-generations economy with two capital goods and irreversible investment. For each vector of initial capital/labor ratios, there is one and only one trajectory on which expectations are realized at every date. If there is any deviation from this trajectory, then there is a bubble which must burst in finite time.

Comparing Sunspot Equilibrium and Lottery Equilibrium Allocations: The Finite Case

Sunspot equilibrium and lottery equilibrium are two stochastic solution concepts for nonstochastic economies. Recent work by Garratt, Keister, Qin, and Shell (in press) and Kehoe, Levine, and Prescott (in press) on nonconvex exchange economies has shown that when the randomizing device is continuous, applying the two concepts to the same fundamental economy yields the same set of equilibrium allocations. In the present paper, we examine economies based on a discrete randomizing device. We extend the lottery model so that it can constrain the randomization possibilities available to agents in the same way that the sunspots model can. Every equilibrium allocation of our generalized lottery model has a corresponding sunspot equilibrium allocation. For almost all discrete randomizing devices, the converse is also true. There are exceptions, however: for some randomizing devices, there exist sunspot equilibrium allocations with no lottery equilibrium counterpart.

Market uncertainty: correlated and sunspot equilibria in imperfectly competitive economies

An imperfectly competitive economy is very prone to market uncertainty, including uncertainty about the liquidity (or "thickness") of markets. We show, in particular, that there exist stochastic equilibrium outcomes in nonstochastic market games if (and only if) the endowments are not Pareto optimal. We also provide a link between extrinsic uncertainty arising in games (e.g. correlated equilibria) and extrinsic uncertainty in market economies (e.g. sunspot equilibria). A correlated equilibria to the market game is either a sunspot equilibrium or a non-sunspot equilibrium to the related securities games, but the converse is not true in general. 1

General Equilibrium with NonConvexities, Sunspots and Money

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasi-linearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemploymentMoney, Indivisibilities, Sunspots.

General Equilibrium with Nonconvexities, Sunspots, and Money

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment.

General equilibrium with nonconvexities, sunspots, and money

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment.Equilibrium (Economics) ; Money