Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View

A common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets. We propose an alternative view: even when private markets are efficient, costly bankruptcies will occur and benevolent governments without commitment will bail out firms to avoid bankruptcy costs. Bailouts then introduce inefficiencies where none had existed. Although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes, regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome, the sustainably efficient outcome. This outcome respects governments' incentives to intervene when they lack commitment

On the need for fiscal constraints in a monetary union

We show that the desirability of fiscal constraints in monetary unions depends critically on the extent of commitment of the monetary authority. If the monetary authority can commit to its policies, fiscal constraints can only impose costs. If the monetary authority cannot commit, there is a free-rider problem in fiscal policy, and fiscal constraints may be desirable

Time inconsistency and free-riding in a monetary union

In monetary unions, a time inconsistency problem in monetary policy leads to a novel type of free‐rider problem in the setting of non‐monetary policies. The free‐rider problem leads union members to pursue lax non‐monetary policies that induce the monetary authority to generate high inflation. Free‐riding can be mitigated by imposing constraints on non‐monetary policies. Without a time inconsistency problem, the union has no free‐rider problem; then constraints on non‐monetary policies are unnecessary and possibly harmful. This theory is here detailed and applied to several non‐monetary policies: labor market policy, fiscal policy, and bank regulation

Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem?

We construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations. These fluctuations include persistent movements in output along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so. We find that for a wide range of parameter values, the amount of endogenous stickiness is small. Thus, we find that in a standard quantitative model, staggered price‐setting, alone, does not generate business cycle fluctuations

Business cycle accounting

We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time‐varying wedges that resemble productivity, labor and investment taxes, and government consumption. Wedges that correspond to these variables—efficiency, labor, investment, and government consumption wedges—are measured and then fed back into the model so as to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the efficiency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge plays none. Analyses of the entire postwar period and alternative model specifications support these results. Models with frictions manifested primarily as investment wedges are thus not promising for the study of U.S. business cycles

Optimality of the Friedman rule in economies with distorting taxes

We find conditions for the Friedman rule to be optimal in three standard models of money. These conditions are homotheticity and separability assumptions on preferences similar to those in the public finance literature on optimal uniform commodity taxation. We show that there is no connection between our results and the result in the standard public finance literature that intermediate goods should not be taxed

How liquid are banks : some evidence from the United Kingdom

This paper uses quantitative balance sheet liquidity analysis, based upon modified versions of the BCBS 1 and Moody’s 2 models, to provide indicators which would alarm the UK banks’ short and long-term liquidity positions respectively. These information will also underpin other research related liquidity risk to banks’ lending and performance. Our framework accurately reflect UK banks’ liquidity positions under both normal and stress scenarios based on the consistent accounting information under IFRS. It has significant contribution on Basel III liquidity ratios calculation. The study also presents fundamental financial information to facilitate analysis of banks’ business models and funding strategies. Using data for the period 2005-2010, we provide evidence that there have been variable liquidity strains across the UK banks in our sample. The estimated results show that Barclays Bank was the only bank to maintain a healthy short-term liquidity position throughout the sample period; while HSBC remained liquid in the short term, in both normal and stress conditions, except in 2008 and 2010. RBS, meanwhile, maintained healthy long-term liquidity positions from 2008 after receiving government injections of capital. And Santander UK was also able to post healthy long-term liquidity positions, except in 2009. However, the other four banks, the Bank of Scotland, Lloyds TSB, Natwest, and Standard Chartered, proved illiquid, on both a short-term and long-term basis, throughout the six-year period, with Natwest being by far the worst performer

Galilean quantum gravity with cosmological constant and the extended q-Heisenberg algebra

We define a theory of Galilean gravity in 2+1 dimensions with cosmological constant as a Chern-Simons gauge theory of the doubly-extended Newton-Hooke group, extending our previous study of classical and quantum gravity in 2+1 dimensions in the Galilean limit. We exhibit an r-matrix which is compatible with our Chern-Simons action (in a sense to be defined) and show that the associated bi-algebra structure of the Newton-Hooke Lie algebra is that of the classical double of the extended Heisenberg algebra. We deduce that, in the quantisation of the theory according to the combinatorial quantisation programme, much of the quantum theory is determined by the quantum double of the extended q-deformed Heisenberg algebra.Comment: 22 page