A Note on Income Heterogeneity, Dietary Choice and Medical Services: Implications for Health Outcomes

We present a theoretical framework where agents take into account the fact that their dietary choice affects their health status and hence their life expectancy. The literature that explains the relationship between income heterogeneity, health status and life expectancy has focused on the medical service channel whereby the wealthier spend more on medical services. In this note we propose an alternative mechanism -- the dietary choice channel. This channel takes into account how the quality of food directly impacts an individual's health and life expectancy. service channel whereby the wealthier spend more on medical services. In this note we propose an alternative mechanism – the dietary choice channel. This channel takes into account how the quality of food directly impacts an individual's health and life expectancy.Diet, Health Production Function, Income Heterogeneity

A Repayment Model of House Prices Oil Price Dynamics in a Real Business Cycle Model

We show the importance of endogenous oil prices and production in the real business cycle framework. Endogenising these variables improves the model's predictions of business cycle statistics, oil related and non-oil related, relative to a situation where either is exogenous. This result is robust to the standard extensions (variable capacity utilisation and monopolistic competition) used in the literature. In particular, we first show that with either exogenous oil prices or production the standard real business cycle model and variants cannot match the oil-related and business cycle facts. In contrast, when both of these variables are endogenous, we can substantially improve the corresponding co-movements and slightly improve standard business cycle properties for consumption and investment.Oil price, two regions, variable capacity utilization

Optimal monetary policy in a model of money and credit

The authors investigate the extent to which monetary policy can enhance the functioning of the private credit system. Specifically, they characterize the optimal return on money in the presence of credit arrangements. There is a dual role for credit: It allows buyers to trade without fiat money and also permits them to borrow against future income. However, not all traders have access to credit. As a result, there is a social role for fiat money because it allows agents to self-insure against the risk of not being able to use credit in some transactions. The authors consider a (nonlinear) monetary mechanism that is designed to enhance the credit system. An active monetary policy is sufficient for relaxing credit constraints. Finally, they characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate, which is required to induce cooperation in the credit system.Monetary policy ; Money ; Credit

Optimal monetary policy in a model of money and credit

The authors study optimal monetary policy in a model in which fiat money and private debt coexist as a means of payment. The credit system is endogenous and allows buyers to relax their cash constraints. However, it is costly for agents to publicly report their trades, which is necessary for the enforcement of private liabilities. If it is too costly for the government to obtain information regarding private transactions, then it relies on the public information generated by the private credit system. If not all private transactions are publicly reported, the government has imperfect public information to implement monetary policy. In this case, the authors show that there is no incentive-feasible policy that can implement the socially efficient allocation. Finally, they characterize the optimal policy for an economy with a low record-keeping cost and a large number of public transactions, which results in a positive long-run inflation rate.Monetary policy ; Disclosure of information

Pricing, Advertising, and Market Structure with Frictions

This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers' search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness-matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.Directed searching, Advertising, Pricing,Market structure

Optimal Monetary and Fiscal Policies in a Search-Theoretic Model of Money and Unemployment

In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios’ rule does not hold.Search and matching; Fiscal polices; Money; Unemployment; Efficiency

Optimal Monetary and Fiscal Policies In a Search-theoretic Model of Money and Unemployment

In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios’ rule does not hold.Search and matching, Fiscal polices,Money, Unemployment, Efficiency

Testing for Explosive Behaviour in Relative Inflation Measures: Implications for Monetary Policy

In this paper we test for large deviations in headline measures of the price level relative to core measures using the recently proposed test of Phillips et al. (2011a). We find evidence of explosive behaviour in the headline price index of personal consumption expenditures (PCE) relative to the core PCE (less food and energy prices) on three occasions from 1982-2010. Two of these episodes correspond to energy supply shocks (OPEC price collapse of 1986 and Hurricane Katrina). The third one is during March 2008 through September 2008 which seems to be driven by both food and energy prices as these indices exhibit explosive behaviour. We also find evidence suggesting that inflation expectations behave differently under normal and explosive periods. In particular, unemployment and interest rates also help predict inflation expectations during explosive episodes relative to normal times. Furthermore, explosive episodes in the relative measure between headline and core inflation is found to be more important than the relative volatile periods implied by a Markov-switching model when studying inflation expectations. The findings of this paper suggest that explosive behaviour of headline versus core PCE should be taken into account when conducting monetary policy as it is a key determinant in consumers’ inflation expectations.Explosive behaviour, core inflation, relative measure, inflation expectations

Pricing, Advertising, and Market Structure with Frictions

This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers’ search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.Directed searching; Advertising; Pricing; Market structure

Fiscal Requirements for Price Stability in Economies with Private Provision of Liquidity and Unemployment

We study the impact of fiscal policies on inflation, unemployment and interest rate spreads dynamics in an environment where firms provide liquidity. Firms link labor and asset markets by hiring workers and issuing claims to their future profits. Matching frictions in the labor market drastically alters the effect of fiscal policy as the tax base increases with the number of jobs filled. As a result, labor market conditions directly affect the return on private assets and inflation dynamics. Moreover, since frictions in decentralized financial markets exist, public and private assets are also used as collateral. These features in the labor and financial markets drastically change the nature of monetary equilibria. In particular, monetary steady states are generically not unique and endogenous fluctuations are observed. Furthermore, characteristics of the labor market affect the demand for private and public assets, making the interaction between monetary and fiscal policies more intricate. Finally, traditional stabilization policies based on frictionless financial and labor markets are not robust to this frictional environment