Time consistency and policy
The growth effects of monetary policy
This article investigates the relationship between inflation and output, in the data and in standard models. The article reports that empirical cross-country studies generally find a nonlinear, negative relationship between inflation and output, a relationship that standard models cannot come close to reproducing. The article demonstrates that the models' problem may be due to their standard narrow assumption that all money is held by the public for making transactions. When the models are adjusted to also assume that banks are required to hold money, the models do a much better job. The ...
The \\"banks\\" we do need
Banks are prone to panic-induced runs due to their traditional structure of short-term, unconditional liabilities and long-term, illiquid assets. To avoid systemic crises caused by such panics, governments tend to bail out failing banks. Traditional banking systems thus impose external costs. Three major theoretical benefits are often used to justify a banking system that relies on short-term debt despite these costs: (1) maturity transformation, (2) efficient monitoring of bank managers and (3) facilitation of financial transactions. In a previous paper, we argued that the first two ...
On the Ethics of Redistribution
Analysts of optimal policy often advocate for redistributive policies within developed economies using a behind-the-veil-of-ignorance criterion. Such analyses almost invariably ignore the effects of these policies on the well-being of people in poor countries. We argue that this approach is fundamentally misguided because it violates the criterion itself.
Optimal fiscal and monetary policy: some recent results
This paper studies the quantitative properties of fiscal and monetary policy in business cycle models. In terms of fiscal policy, optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average. In terms of monetary policy, the Friedman rule is optimal?nominal interest rates are zero?and optimal monetary policy is activist in the sense that it responds to shocks to the economy.
Expectation traps and monetary policy
Why is it that inflation is persistently high in some periods and persistently low in other periods? We argue that lack of commitment in monetary policy may bear a large part of the blame. We show that, in a standard equilibrium model, absence of commitment leads to multiple equilibria, or expectation traps. In these traps, expectations of high or low inflation lead the public to take defensive actions which then make it optimal for the monetary authority to validate those expectations. We find support in cross-country evidence for key implications of the model.
On the Efficiency of Competitive Equilibria with Pandemics
The epidemiological literature suggests that virus transmission occurs only when individuals are in relatively close contact. We show that if society can control the extent to which economic agents are exposed to the virus and agents can commit to contracts, virus externalities are local, and competitive equilibria are efficient. The Second Welfare Theorem also holds. These results still apply when infection status is imperfectly observed and when agents are privately informed about their infection status. If society cannot control virus exposure, then virus externalities are global and ...