Showing results 1 to 10 of approximately 35.(refine search)
Banking panics, information, and rational expectations equilibrium
This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive ?story? that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long ?lines? at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.
Deficits, interest rates, and the tax distribution
Social insurance and taxation under sequential majority voting and utilitarian regimes
It is often argued that with a positively skewed income distribution (median less than mean) majority voting would result in higher tax rates than maximizing average welfare and, hence, lower aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications, despite the fact that model ...
Uninsured idiosyncratic risk and aggregate saving
We find that precautionary saving accounts for only a modest (less than 3 percentage point) increase in the aggregate saving rate, at least for moderate and empirically plausible parameter values. This finding is based on a quantitative analysis of a reasonably parameterized version of the standard growth model modified to include a large number of agents who receive uninsured idiosyncratic labor endowment shocks. In contrast to representative agent models, asset trading is quite important to individuals. The model can also account qualitatively for the positive skewness of wealth and income ...
Government transaction policy, the medium of exchange, and welfare
An interpretation of government policy regarding what it accepts in transactions is embedded in a version of the Kiyotaki-Wright model of media of exchange. In an example with two goods and one fiat money, the policies consistent with fiat money being the unique medium of exchange are identified. These uniqueness policies have the government favoring fiat money in its transactions. Benefits and costs accompany any such policy. The benefit is that a worse nonmonetary equilibrium is eliminated; the cost is that a better monetary equilibrium is also eliminated.
Response to a defense of zero inflation
This essay distills the differences between zero inflation proponents and critics to three main questions: Can the central bank make a credible commitment to maintaining a stable price level? Should monetary policy be used to reduce the tax on capital income? And would reducing uncertainty about inflation produce significant social benefits? Proponents of zero inflation answer all three questions yes, while critics answer no. The essay reviews both answers for each question and suggests that the disagreements are at least partly due to inadequacies in economic models. The essay repeats the ...
The optimal quantity of debt
We describe a model for calculating the optimal quantity of debt and then apply it to the U.S. economy. The model consists of a large number of infinitely-lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints. This model incorporates a different role for government debt than the standard representative agent growth model and captures different trade-offs between the benefits and costs of varying its level. Government debt enhances the liquidity of households by providing additional assets for smoothing consumption (in addition to claims ...
Equilibrium existence in an overlapping generations model with altruistic preferences
We prove the existence of a competitive equilibrium in an overlapping generations model in which each generation has a preference ordering over its own and its descendents? consumptions. The model is one of pure exchange with many goods in each period and two period lived generations. The bequest from one generation to the next is required to be non-negative and is endogenous. In equilibrium, some sequences of agents of successive generations may be continually ?linked? by positive bequests and act as infinitely lived agents. Other sequences of agents may not be so linked and therefore behave ...
Efficient investment in children
If children are society?s most precious resource, as many would argue, how should we invest in them? To gain insight into this question, the authors develop a dynamic, general-equilibrium model in which children differ by ability. Parents invest time and money in their offspring, depending on their altruism, to help them grow into more productive adults. The authors characterize the efficient allocation, then compare it with the outcome that arises when financial markets are incomplete. They also examine the situation where childcare markets are lacking and analyze the consequences of impure ...