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Author:Andolfatto, David 

Journal Article
Unemployment and economic welfare
Statistics that measure labor market activity are often interpreted as measures of economic performance and social well being. This article demonstrates that such interpretations are not justified in the absence of information concerning the economic circumstances that determine individual labor market choices.
AUTHORS: Andolfatto, David; Gomme, Paul
DATE: 1998

Journal Article
A simple model of money and banking
This article presents a simple environment that has banks creating and lending out money. The authors define money to be any object that circulates widely as a means of payment and a bank to be an agency that simultaneously issues money and monitors investments. While their framework allows private nonbank liabilities to serve as the economy's medium of exchange, they demonstrate that the cost-minimizing structure has a bank creating liquid funds. In practice, the vast bulk of the money supply consists of private debt instruments that are issued by banks. Thus, their model goes some way in addressing the questions of why private money takes the form it does, and why private money is typically supplied by banks.
AUTHORS: Andolfatto, David; Nosal, Ed
DATE: 2001

Working Paper
Bank Runs without Sequential Service
Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief-driven runs. But the run-like phenomena witnessed during the financial crisis of 2007?08 occurred in the wholesale shadow banking sector where sequential service is largely absent, suggesting that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.
AUTHORS: Andolfatto, David; Nosal, Ed
DATE: 2018-08-20

Working Paper
Bank runs without sequential service
Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief driven runs. But the run-like phenomena witnessed during the financial crisis of 2007-08 occurred in the wholesale shadow banking sector where sequential service is largely absent. This suggests that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.
AUTHORS: Andolfatto, David; Nosal, Ed
DATE: 2018-07

Working Paper
Monetary Policy and Liquid Government Debt
We examine the conduct of monetary policy in a world where the supply of outside money is controlled by the fiscal authority-a scenario increasingly relevant for many developed economies today. Central bank control over the long-run inflation rate depends on whether fiscal policy is Ricardian or Non-Ricardian. The optimal monetary policy follows a generalized Friedman rule that eliminates the liquidity premium on scarce treasury debt. We derive conditions for determinacy under both fiscal regimes and show that they do not necessarily correspond to the Taylor principle. In addition, Non-Ricardian regimes may suffer from multiplicity of steady-states when the government runs persistent deficits.
AUTHORS: Andolfatto, David; Martin, Fernando M.
DATE: 2018-01-16

Working Paper
Bank Panics and Scale Economies
A bank panic is an expectation-driven redemption event that results in a self-fulfilling prophecy of losses on demand deposits. From the standpoint of theory in the tradition of Diamond and Dybvig (1983) and Green and Lin (2003), it is surprisingly di cult to generate bank panic equilibria if one allows for a plausible degree of contractual flexibility. A common assumption employed in the standard banking model is that returns are linear in the scale of investment. Instead, we assume the existence of a fixed investment cost, so that a higher risk-adjusted rate of return is available only if investment exceeds a minimum scale requirement. With this simple and empirically-plausible modification to the standard model, we find that bank panic equilibria emerge easily and naturally, even under highly flexible contractual arrangements. While bank panics can be eliminated through an appropriate policy, it is not always desirable to do so. We use our model to examine a number of issues, including the likely effectiveness of recent financial market regulations. Our model also lends some support for the claim that low-interest rate policy induces a ?reach-for-yield? phenomenon resulting in a more panic-prone financial system.
AUTHORS: Andolfatto, David; Nosal, Ed
DATE: 2017-03-29

Working Paper
Information disclosure and exchange media
When commitment is lacking, intertemporal trade is facilitated with the use of exchange media?interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to a news shock, but whose expected long-run return is stable. The nondisclosure of news enhances the asset?s property as an exchange medium, and generally improves social welfare. When a nondisclosure policy is infeasible, the framework admits a role for government debt, including fiat money. When lump-sum taxation is not permitted, fiat money may still improve welfare?but only if its circulation is supported by a cash-in-advance constraint.>
AUTHORS: Andolfatto, David; Martin, Fernando M.
DATE: 2012

Working Paper
Money, Banking and Financial Markets
The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange?a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable in government money, where the terms of bank deposit contracts are affected by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. Among other things, the model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.
AUTHORS: Andolfatto, David; Berentsen, Aleksander; Martin, Fernando M.
DATE: 2017-08-03

Working Paper
Optimal disclosure policy and undue diligence
While both public and private financial agencies supply asset markets with large amounts of information, they do not generally disclose all asset-related information to the general public. This observation leads us to ask what principles might govern the optimal disclosure policy for an asset manager or financial regulator. To investigate this question, we study the properties of a dynamic economy endowed with a risky asset, and with individuals that lack commitment. Information relating to future asset returns is available to society at zero cost. Legislation dictates whether this information is to be made public or not. Given the properties of our environment, nondisclosure is generally desirable. This result is overturned, however, when individuals are able to access hidden information?what we call undue diligence?at sufficiently low cost. Information disclosure is desirable, in other words, only to the extent that individuals can easily discover it for themselves.
AUTHORS: Andolfatto, David; Berentsen, Aleksander; Waller, Christopher J.
DATE: 2012

Discussion Paper
Monetary policy regimes and beliefs
Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public must form beliefs over current monetary policy based on historical realizations of money growth rates. Depending on the parameters governing the behaviour of monetary policy, beliefs (and therefore inflation forecasts) may evolve very slowly in the wake of actual regime changes, thereby exacerbating the costs of a disinflation policy. The quantitative importance of slowly adjusting beliefs is evaluated in the context of a computable general equilibrium model.
AUTHORS: Andolfatto, David; Gomme, Paul
DATE: 1997

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