Determinacy of Equilibrium under Various Phillips Curves

Determinacy of equilibrium under the original, the backward-looking, the forward-looking and the hybrid Phillips curves is examined. If the monetary authority keeps the nominal money stock to be constant, the equilibrium path is always determinate under the original Phillips curve and the forward-looking one. Under the backward-looking one and the hybrid one, however, the path can be non-existent. The case of a Taylor rule is also examined. Under any of the four curves the path is always determinate if the monetary policy is active but is never determinate if it is passive.

Protective Trade Policies 'Reduce' Employment: A Dynamic Optimization Approach

Using a competitive two-country two-commodity monetary model with optimizing agents in which persistent unemployment arises, this paper examines the effects of trade restrictions on consumption and employment in the two countries. When facing unemployment, a country tends to impose an import restriction so that domestic firms will increase production and raise employment. However, this policy improves the current account and hence its currency appreciates, causing its products to lose international competitiveness. Therefore, employment and consumption eventually decrease in the country while in the foreign country its currency depreciates and hence employment and consumption increase.

The Byrd Amendment as Facilitating a Tacit International Business Collusion

We analyze the effect of the Byrd Amendment, which amended the US Tariff Act of 1930 to allow revenue from antidumping duties to be distributed to domestic import-competing firms. In an international duopoly framework it is shown that it urges the home firm to restrict output so that the foreign firm increases output and that revenue from the duties increases. Consequently, not only the home firm but also the foreign firm can be better off while only consumers are worse off. Home total surplus increases if the foreign rival firm is much more efficient, but otherwise decreases.

Information Cycles and Depression in a Stochastic Money-in-Utility Model

This paper presents a simple model in which the learning behavior of agents generates fluctuations in money demand and possibly causes a prolonged depression. We consider a stochastic Money-in-Utility model, where agents receive utility from holding money only when a liquidity shock (e.g., a bank run) occurs. Households update the subjective probability of the shock based on the observation and change their money demand accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of low output. We show that the adverse effects of the shocks are largest when they occur in succession in an economy which has enjoyed a long period of stability.Bayesian Learning; Money Demand; Hamilton-Jacobi-Bellman Equations; Markov Modulated Poisson Processes; Partial Delay Differential Equations

Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations

This paper examines a mechanism of liquidity-preference fluctuations caused by people's learning behavior. % about the frequency of a liquidity shock. When observing a financial shock, they rationally update their belief so that the subjective probability of encountering it again is higher, immediately raise liquidity preference and reduce consumption. As a period without the shock lasts after that, they gradually decrease the subjective probability, lower liquidity preference and increase consumption. Particularly, when the shock is observed many times in succession, recovery is first slow because people do not easily change their pessimistic view, then gradually accelerates, and eventually slows down as they become fully optimistic.Bayesian Learning, Liquidity Preference, Precautionary Motive, Markov Switching

Capital Income Taxation and Specialization Patterns: Investment Tax vs. Saving Tax

Unless free international lending/borrowing is allowed, domestic saving equals domestic investment and hence saving and investment taxes have the identical effect, as is the case in a closed-economy context. However, if it is allowed, households can accumulate foreign assets besides domestic capital and hence saving and investment are separated, causing the two taxes to have different effects. Using a two-sector growth model, we show that the two taxes generate completely different effects on industrial structure. The investment tax always shrinks the capital-intensive sector whereas the saving tax may well expand it.saving tax, investment tax, two-sector growth model, industrial structure, financial asset trade

Capital Income Taxation and Specialization Patterns: Investment Tax vs. Saving Tax

Unless free international lending/borrowing is allowed, domestic saving equals domestic investment and hence saving and investment taxes have the identical effect, as is the case in a closed-economy context. However, if it is allowed, households can accumulate foreign assets besides domestic capital and hence saving and investment are separated, causing the two taxes to have different effects. Using a two-sector growth model, we show that the two taxes generate completely different effects on industrial structure. The investment tax always shrinks the capital-intensive sector whereas the saving tax may well expand it.

Learning, Inflation Cycles, and Depression

This paper constructs a model that describes inflation cycles and prolonged depression as generated by the learning behavior of households who face a random liquidity shock in which money is needed. Households update the subjective probability of the shock based on the observation and change their liquidity preference accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of depression in which unemployment exists and deflation occurs gradually. Depression is deep and prolonged when the economy has experienced a long period of boom before encountering a liquidity shock.Bayesian Learning in Continuous Time, Hamilton-Jacobi-Bellman Equations, Markov Modulated Poisson Processes, Partial Delay Differential Equations, Liquidity Preference.