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Working Paper
Keynesian inefficiency and optimal policy: a new monetarist approach
A simple model of monetary/labor search is constructed to study Keynesian indeterminacy and optimal policy. In the model, economic agents have trouble splitting the surplus from exchange appropriately, and we consider monetary and fiscal policies that correct this Keynesian inefficiency. A Taylor rule does not imply determinacy, nor does it support an efficient outcome, in general. Optimal policies yield an efficient and determinate allocation of resources, but equilibrium policy actions, wages, and prices are indeterminate at the optimum.
Journal Article
Interest Rate Control Is More Complicated Than You Thought
Setting the fed funds rate is just one step. The Fed also has to deal with the discount rate and the interest rate paid on reserves. Throw in a floor system (with a subfloor!) and overnight reverse repos, and you?ve got a process that is anything but simple.
Report
Restrictions on financial intermediaries and implications for aggregate fluctuations: Canada and the United States, 1870-1913
We consider a production economy with a finite number of heterogeneous, infinitely lived consumers. We show that, if the economy is smooth enough, equilibria are locally unique for almost all endowments. We do so by converting the infinite-dimensional fixed point problem stated in terms of prices and commodities into a finite-dimensional Negishi problem involving individual weights in a social value function. By adding artificial fixed factors to utility and production functions, we can write the equilibrium conditions equating spending and income for each consumer entirely in terms of ...
Working Paper
Credit markets, limited commitment, and government debt
A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers? incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not.
Journal Article
Neo-Fisherism: A Radical Idea, or the Most Obvious Solution to the Low-Inflation Problem?
Central banks around the world are struggling with inflation rates that are below their targets. According to conventional central banking wisdom, interest rate cuts should increase inflation, but that?s not working. Maybe?by Irving Fisher?s logic?increasing nominal interest rates increases inflation.
Working Paper
Low Real Interest Rates, Collateral Misrepresentation, and Monetary Policy
A model is constructed in which households and banks have incentives to fake the quality of collateral. These incentive problems matter when collateral is scarce in the aggregate when real interest rates are low. Conventional monetary easing can exacerbate these problems, in that the misrepresentation of collateral becomes more protable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fiscal ...
Working Paper
Money and dynamic credit arrangements with private information
The authors construct a model with private information in which consumers write dynamic contracts with financial intermediaries.
Journal Article
Monetary Policy Normalization in the United States
Because of the Federal Reserve?s unconventional approaches to monetary policy during the Great Recession and recovery, the Fed now finds itself in an unconventional situation. Short-term nominal interest rates have been close to zero for more than six years, and the Fed?s balance sheet is currently more than four times as large as in 2007. This article explains how and why the Fed got into this situation and the challenges this creates in returning Fed policy to ?normal??a state in which the Fed?s nominal interest rate target is above zero and its balance sheet is reduced in size.
Report
International financial intermediation and aggregate fluctuations under alternative exchange rate regimes
This paper presents a two-country overlapping generations model in which financial intermediation arises endogenously as an incentive-compatible means of economizing on monitoring costs. Because of the existence of transactions costs, money markets in the two countries are segmented and investors have differential access to international credit markets. The model is used to generate predictions about the role of international intermediation in economic development and to examine the nature of business cycle phenomena across alternative exchange rate regimes. Disturbances are propagated by a ...
Journal Article
Bank failures, financial restrictions, and aggregate fluctuations: Canada and the United States, 1870-1913
During 1870_1913, Canada had a well-diversified branch banking system while banks in the U.S. unit-banking system were less diversified. Canadian banks could issue large-denomination notes with no restrictions on their backing, while all U.S. currency was essentially an obligation of the U.S. government. Also, experience in the two countries with regard to bank failures and panics was quite different. A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as ...