Money Creation in a Random Matching Model

I study money creation in versions of the Trejos-Wright (1995) and Shi (1995) models with indivisible money and individual holdings bounded at two units. I work with the same class of policies as in Deviatov and Wallace (2001), who study money creation in that model. However, I consider an alternative notion of implementability–the ex ante pairwise core. I compute a set of numerical examples to determine whether money creation is beneficial. I find beneficial e?ects of money creation if individuals are su?ciently risk averse (obtain su?ciently high utility gains from trade) and impatient.inflation; Friedman rule; optimal monetary policy

Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation

Empirical analysis of exchange rates has produced puzzles that conventional models of exchange rates cannot explain. Here we deal with four puzzles regarding both real and nominal exchange rates, which are robust and inconsistent with standard theory. These puzzles are that both real and nominal exchange rates: i) are disconnected from fundamentals, ii) are much more volatile than fundamentals, iii) show little di?erence in behavior, and iv) fail to satisfy conservation of volatility. We develop a two-country, two-currency version of the random matching model to study exchange rates. We show that search and legal restrictions can produce exchange-rate dynamics consistent with these four puzzles.exchange-rate puzzles, exchange-rate volatility, bargaining, search

Estimating a Cagan-type demand function for gold: 1561-1913

Long times series on production of gold and the value of gold, taken from Jastram’s book The Golden Constant, are used to estimate a Cagan-type demand function that relates the real total value of gold to its expected rate of return. The model assumes that gold production and a latent scale variable (income or consumption) are jointly exogenous and that the data are measured with error. The data reject the model: the estimates imply that the real value of gold varies a great deal relative to the expected return and depends negatively, rather than positively, on the expected return.gold, Cagan demand function, estimation

Reputation and the Soft-Budget Constraint

We study the role of reputation in dealing with the soft-budget constraint. We examine whether the reputation of a borrower can lead to repayment in an environment where enforcement is weak. We also introduce lenders’ reputation and examine how this impacts on the allocation of borrowers. We find that reputation can harden budget constraint and improve welfare, although it can never fully eliminate softness. We also show that lenders who acquire a reputation for being tough can earn higher profits than lenders with reputations for being soft.

Money Creation in a Random Matching Model

I study money creation in versions of the Trejos-Wright (1995) and Shi (1995) models with indivisible money and individual holdings bounded at two units. I work with the same class of policies as in Deviatov and Wallace (2001), who study money creation in that model. However, I consider an alternative notion of implementability - the ex ante pairwise core. I compute a set of numerical examples to determine whether money creation is beneficial. I find beneficial effects of money creation if individuals are sufficiently risk averse (obtain sufficiently high utility gains from trade) and impatient.

Interest on Cash with Endogenous Fiscal Policy

Monetary policy and the welfare cost of inflation cannot be studied without some specification of allowable fiscal instruments. Here, feasible policies are implied by the frictions imposed to get roles for money and credit. The model has extreme versions of an above-ground economy and a benign underground economy. The former consists of people who are perfectly monitored and who, therefore, can be taxed; while the latter consists of people who are anonymous and, who, therefore, cannot be taxed. For various examples, ex ante (representative-agent) optima are computed. For most examples for the outside-money version of the model, it is not optimal to use taxes to raise the return on money held by anonymous people.interest on cash, matching, monitoring, mechanism design, inside money, outside money