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Journal Article
Acceptability, means of payment, and media of exchange
This essay explains the use of fiat money, or why intrinsically useless objects are accepted as payment in transactions. People accept a particular object as a means of payment because others do: social conventions matter more than the intrinsic characteristics of the object itself. Not everything can become a fiat money, though. If an object is especially costly to hold, for example, it will not be accepted as a means of payment. This explanation of fiat money is illustrated in a simple theoretical economic model. ; This essay was originally published in The New Palgrave Dictionary of Money ...
Journal Article
The labor market implications of unemployment insurance and short-term compensation
Two types of unemployment insurance systems are studied. In one, unemployed workers receive benefits while those on reduced hours do not, as in North America (at least until recently). In the other, short-time compensation is paid to workers on reduced hours, as in Europe. With incomplete experience-rating of unemployment insurance taxes, the first system leads to inefficient temporary layoffs. The latter system does not lead to layoffs but does lead to inefficient hours per worker. Some cross-country evidence is presented regarding these effects. The implication of the analysis is that ...
Journal Article
The labor market in real business cycle theory
The standard real business cycle model fails to adequately account for two facts found in the U.S. data: the fact that hours worked fluctuate considerably more than productivity and the fact that the correlation between hours worked and productivity is close to zero. In this paper, in a unified framework, the authors describe and analyze four extensions of the standard model, by introducing nonseparable leisure, indivisible labor, government spending, and household production.
Journal Article
Putting home economics into macroeconomics
The implications of adding household production to an otherwise standard real business cycle model are explored in this article. The model developed treats the business and household sectors symmetrically. In particular, both sectors use capital and labor to produce output. The article finds that the household production model can outperform the standard model in accounting for several aspects of U.S. business cycle fluctuations. ; This article is a summary of a chapter prepared for a forthcoming book, Frontiers of Business Cycle Research, edited by Thomas F. Cooley, to be published by ...
Journal Article
Introduction to \\"Models of Monetary Economies II: The Next Generation\\"
This article is a summary of the papers presented at the Models of Monetary Economies II conference, hosted in May 2004 by the Federal Reserve Bank of Minneapolis and the University of Minnesota. It focuses on several themes in the papers, including the microfoundations of monetary theory, optimal monetary policy, and the role of banking, and also overviews how the contributions fit together. Finally, the article comments on monetary theory in general - how it has evolved and where it may be headed.
Report
Why is automobile insurance in Philadelphia so damn expensive?
We document and attempt to explain the observation that automobile insurance premiums vary dramatically across local markets. We argue high premiums can be attributed to the large numbers of uninsured motorists in some cities, while at the same time, the uninsured motorists can be attributed to high premiums. We construct a simple noncooperative equilibrium model, where limited liability can generate inefficient equilibria with uninsured drivers and high, yet actuarially fair, premiums. For certain parameterizations, an optimal full insurance equilibrium and inefficient high price equilibria ...
Discussion Paper
Macroeconomic Policy and Household Economics
Multiperson households are less reliant on cash than single people because they are more likely than singles to rely on home-based production to meet their daily needs. This conclusion, supported by recent empirical research, suggests that fiscal and monetary policies that make market-based transactions more expensive will favor the formation of households. Individuals will seek to minimize costs due to such policies by forming partnerships, whether through marriage or less-formal arrangements. Fiscal policies, such as consumption and incomes taxes, and monetary policy that raises inflation ...
Discussion Paper
Are Prices Sticky and Does It Matter?
Many economists believe that prices are ?sticky??they adjust slowly. This stickiness, they suggest, means that changes in the money supply have an impact on the real economy, inducing changes in investment, employment, output and consumption, an effect that can be exploited by policymakers. {{p}} In this essay, we argue that price stickiness doesn?t necessarily generate an exploitable policy option. We describe a model in which money is neutral (that is, growth or reduction in money supply doesn?t impact real economic activity) even in a context of sluggish price adjustment.
Discussion Paper
Innovation and Growth with Frictions
The generation and implementation of new ideas are major factors in economic performance and growth. If some people are better at research and others at development, there emerges a role for an ?idea market,? where technology transfers reallocate knowledge to those best able to develop and apply it. Financial institutions can facilitate this reallocation by providing credit for these transfers. {{p}} However, the idea market is rife with frictions. These include so-called search-and-bargaining problems. Another obstacle is credit friction: If a debtor reneges, it is not always easy to ...
Working Paper
Money and capital: a quantitative analysis
We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from ...