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Creator: Aiyagari, S. Rao, Braun, R. Anton, and Eckstein, Zvi Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 241 Abstract:
This paper is motivated by empirical observations on the comovements of currency velocity, inflation, and the relative size of the credit services sector. We document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money. Our model makes two new contributions. First, we show that direct evidence on the appropriately defined credit service sector for the United States is consistent with the welfare cost measured using an estimated money demand schedule. Second, we provide welfare cost of inflation estimates that have some new features.
Tema: E31 - Price Level; Inflation; Deflation and E51 - Money Supply; Credit; Money Multipliers
Creator: Aiyagari, S. Rao and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 203 Abstract:
We find that the welfare gains to being at the optimum quantity of debt rather than the current U.S. level are small, and, therefore, concerns regarding the high level of debt in the U.S. economy may be misplaced. This finding is based on a model 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 is found in standard models, and it captures different cost-benefit trade-offs. On the benefit side, government debt enhances the liquidity of households by providing an additional means of smoothing consumption and by effectively loosening borrowing constraints. On the cost side, the implied taxes have adverse wealth distribution and incentive effects. In addition, government debt crowds out capital via higher interest rates and lowers per capita consumption.
Creator: Aiyagari, S. Rao and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 203_1 Abstract:
In this appendix, we describe the numerical methods used to compute an equilibrium in the economy with an inelastic labor supply and in the economy with an elastic labor supply (i.e., our benchmark economy). Although the economy with inelastically supplied labor is a special case of the benchmark economy, the equilibrium in the inelastic labor supply case is much easier to compute and is therefore treated separately. In each case, we start with the consumer's problem, assuming the consumer takes prices as given. We then show how the equilibrium prices are determined. To verify that the methods work well with our problem, we apply them to some related test problems that have known solutions.
Creator: Aiyagari, S. Rao, Braun, R. Anton, and Eckstein, Zvi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 551 Abstract:
This paper is motivated by a variety of empirical observations on the comovements of currency velocity, inflation, and the relative size of the “credit services” sector. By the credit services sector we mean the part of banking and credit sector which provides alternative means of transactions to using currency as well as other services which help people economize on currency. We incorporate the credit services sector into a monetary growth model. Our model makes two specific and new contributions. The first is to show that direct quantitative evidence on the welfare cost of low inflation using measures of the relative size of an appropriately defined credit services sector for the U.S.—essentially the cost incurred by banks and credit unions in providing demand deposit and credit card services—is consistent with the welfare cost measured using an estimated money demand curve following the classic analysis of Bailey (1956) and the more recent analysis of Lucas (1993). Both of these measures amount to about 0.5 percent of GNP. The second contribution is in providing welfare cost of inflation estimates over a range of inflation rates which have some new features. We find that the total welfare cost of inflation remains bounded at about 5 percent of consumption.
Tema: E51 - Money Supply; Credit; Money Multipliers and E31 - Price Level; Inflation; Deflation
Creator: Aiyagari, S. Rao and Braun, R. Anton Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 565 Abstract:
We consider the nature of optimal cyclical monetary policy in three different stochastic models with various shocks. The first is a pure liquidity effect model, the second is a cost of changing prices model, and the third is an optimal seinorage model. In each case we solve for the optimal monetary policy and describe how money growth and interest rates respond to shocks under the optimal policy. The shocks we consider are money demand shocks, productivity shocks, and government consumption shocks. All of the models have the feature that the Friedman rule of setting the nominal interest rate to zero is not optimal. Optimal policies are always time inconsistent even though lump sum taxation is allowed. At least in some instances we find that optimal policy dictates responses of money growth and interest rates which run counter to conventional wisdom.
Creator: Aiyagari, S. Rao, Wallace, Neil, and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract:
A random matching model with money is used to study the nominal yield on small denomination, bearer, safe, discount securities issued by the government. There is always one steady state with matured securities circulating at par and, for some parameters, another with them circulating at a discount. In the former, a necessary and sufficient condition for a positive nominal yield on not-yet-matured securities is exogenous discriminatory treatment of them by the government. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even without such discriminatory treatment.
Palabra clave: Money, Interest rates, and Monetary policy Tema: E43 - Interest Rates: Determination, Term Structure, and Effects, E41 - Demand for Money, E40 - Money and Interest Rates: General, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Aiyagari, S. Rao Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 196 Abstract:
I argue that Farmer and Guo's one-sector real business cycle model with indeterminacy and sunspots fails empirically and that its failure is inherent in the logic of the model taken together with some simple labor market facts.
Palabra clave: Business cycles, Indeterminacy, Labor Market, and Sunspots Tema: E32 - Business Fluctuations; Cycles and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: Aiyagari, S. Rao and Peled, Dan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 197 Abstract:
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 simulations produce positively skewed distributions of total income across agents.
Palabra clave: Proportional taxes, Sequential majority voting, and Utilitarian government Tema: E62 - Fiscal Policy, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, and C68 - Computable General Equilibrium Models
Creator: Aiyagari, S. Rao and Eckstein, Zvi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 525 Abstract:
This paper is motivated by observations concerning the size of the banking sector and the growth rate of the economy before and after successful stabilizations of high inflations. The facts suggest that the relative size of the banking sector increases during a period of accelerating inflation and decreases immediately following a successful monetary stabilization. Furthermore, the GDP growth rate is lower during the high inflation period than after stabilization. The goal of this paper is to develop a monetary growth model which is qualitatively consistent with these observations. The model we use is a variant of the Lucas and Stokey (1987) model of cash and credit goods. The main innovation in our model is that while cash goods and credit goods are perfect substitutes in consumption we posit different technologies for their production. We show that the model’s predictions on the impact of a permanent stabilization are consistent with the main real and monetary observations on high inflation countries.