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Author:Teles, Pedro 

Working Paper
Monetary policy with state contingent interest rates
What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate instruments under uncertainty are state- contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance.
AUTHORS: Correia, Isabel; Teles, Pedro; Bernardino Adão
DATE: 2004

Working Paper
Monetary policy with single instrument feedback rules
We consider a standard cash in advance monetary model with flexible prices or prices set in advance and show that there are interest rate or money supply rules such that equilibria are unique. The existence of these single instrument rules depends on whether the economy has an infinite horizon or an arbitrarily large but finite horizon.
AUTHORS: Correia, Isabel; Teles, Pedro; Bernardino Adão
DATE: 2004

Discussion Paper
Electronic money: the end of inflation?
We study economies where government currency and electronic money, drawn from interest bearing deposits in private financial intermediary institutions, are full substitutes. We analyze the impact of competition on policy outcomes under different assumptions regarding: the objectives of the central bank, the ability of the monetary authorities to commit to future policies, and the legal restrictions in the form of reserve requirements on financial intermediaries. Electronic money competition can discipline a revenue maximizing government and result in lower equilibrium inflation rates, even when there is imperfect commitment. The efficient Friedman rule policy, of zero nominal interest rates, is only implemented if the government maximizes households preferences, in which case, electronic money competition may either have no role, or weaken the incentive effects of the reputational mechanism. We also show how an independent choice of the reserve requirements can be an effective policy rule to enhance the disciplinary role of electronic money competition.
AUTHORS: Nicolini, Juan Pablo; Marimon, Ramon; Teles, Pedro
DATE: 1997

Discussion Paper
The optimal inflation tax
We determine the second best rule for the inflation tax in monetary general equilibrium models where money is dominated in rate of return. The results in the literature are ambiguous and inconsistent across different monetary environments. We compare the derived optimal inflation tax solutions across the different environments and find that Friedman's policy recommendation of a zero nominal interest rate is the right one.
AUTHORS: Correia, Isabel; Teles, Pedro
DATE: 1997

Journal Article
The optimal price of money
The optimal inflation tax is computed in monetary models where money is costly to supply. The models are simple general equilibrium models with money in the utility function or a transactions technology. The inflation tax is a means of raising taxes to finance exogenous government expenditures. The alternative means of revenue are also distortionary. The main point of this article is to show that the robustness of the optimality of the Friedman rule, of a zero nominal interest rate, resides in the assumption that money is produced at zero cost.
AUTHORS: Teles, Pedro
DATE: 2003-04

Journal Article
A stable money demand: Looking for the right monetary aggregate
A money demand relationship with M1 as the monetary aggregate holds very well until the mid-1980s but not well after that. This could be because the demand for money is not a stable relationship. The authors' conclusion is that the measure of money is not a stable measure. Technological innovation and changes in regulatory practices in the past two decades have made other monetary aggregates as liquid as M1. Once an appropriately adjusted measure of money is taken into consideration, the stability of money demand is recovered.
AUTHORS: Teles, Pedro; Zhou, Ruilin
DATE: 2005-01

Working Paper
Gaps and triangles
In this paper, we derive principles of optimal cyclical monetary policy in an economy without capital, with a cash-in-advance restriction on household transactions, and with monopolistic firms that set prices one period in advance. The only distortionary policy instruments are the nominal interest rate and the money supply. In this environment, it is feasible to undo both the cash in advance and the price setting restrictions, but not the monopolistic competition distortion. We show that it is optimal to follow the Friedman rule, and thus offset the cash-in-advance restriction.
AUTHORS: Correia, Isabel; Teles, Pedro; Bernardino Adão
DATE: 2001

Working Paper
Nominal debt as a burden on monetary policy
We study the effects of nominal debt on the optimal sequential choice of monetary and debt policy. When the stock of debt is nominal, the incentive to generate unanticipated inflation increases the cost of the outstanding debt even if no unanticipated inflation episodes occur in equilibrium. Without full commitment, the optimal sequential policy is to deplete the outstanding stock of debt progressively until these extra costs disappear. Nominal debt is therefore a burden on monetary policy, not only because it must be serviced, but also because it creates a time inconsistency problem that distorts interest rates. The introduction of alternative forms of taxation may lessen this burden, if there is enough commitment to fiscal policy.
AUTHORS: Giovannetti, Giorgia; Marimon, Ramon; Teles, Pedro; Diaz-Gimenez, Javier
DATE: 2004

Working Paper
Inside-outside money competition
We study how competition from privately supplied currency substitutes affects monetary equilibria. Whenever currency is inefficiently provided, inside money competition plays a disciplinary role by providing an upper bound on equilibrium inflation rates. Furthermore, if "inside monies" can be produced at a sufficiently low cost, outside money is driven out of circulation. Whenever a 'benevolent' government can commit to its fiscal policy, sequential monetary policy is efficient and inside money competition plays no role.
AUTHORS: Marimon, Ramon; Nicolini, Juan Pablo; Teles, Pedro
DATE: 2003

Working Paper
The optimal mix of taxes on money, consumption and income
We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.
AUTHORS: Teles, Pedro; Fiorella De Fiore
DATE: 2002

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