Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 225 Abstract:
A model of a labor market is developed in which agents possess private information about their own productivities. This has the property that firms may use unemployment to create appropriate self-selection incentives. When this is the case, existence of an equilibrium may require that employment be stochastic. This is true even though all uncertainty is necessarily resolved prior to hiring. Even when existence is not at issue, it may be privately as well as socially desirable to randomize employment prospects. Finally, it is argued that this "adverse selection" approach is consistent with traditional "Keynesian" approaches to macroeconomics, but avoids some of the arbitrary features of several "Keynesian models."
Keyword: Random employment, Labor, Randomized employment, and Private information Subject (JEL): D83 - Information, knowledge, and uncertainty - Search ; Learning ; Information and knowledge ; Communication ; Belief and J64 - Mobility, unemployment, and vacancies - Unemployment : Models, duration, incidence, and job search
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 245 Abstract:
Recent developments in monetary economics stress the nature of monetary injections, emphasizing that these have implications for the relationship between money and prices. In constrast, traditional approaches posit stable money demand functions that are independent of how money is injected. The former approach implies that certain proportionality relations between money and prices need not obtain. This permits the two approaches to be empirically distinguished, but only if an appropriate "experiment" is conducted. The colonial period is one such experiment. Colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply.
Keyword: Value of money, Monetary injections, Sargent-Wallace theory of money, and Quantity theory of money Subject (JEL): E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers and N11 - Macroeconomics and monetary economics ; Growth and fluctuations - United States ; Canada : Pre-1913
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 219 Abstract:
This paper comments on "The Real Bills Doctrine vs. the Quantity-Theory: a Reconsideration" by T. Sargent and N. Wallace. It argues that there exists a class of models similar to theirs that is (a) favorable to the quantity theory view of price stability, (b) supports the imposition of 100 percent reserve requirements, and (c) explains a long history of legal credit restrictions. In particular, lending restrictions stabilize price levels and result in Pareto improvements.
Keyword: Loans, Banks, Quantity theory, Price level stability, Quantity-theory, and Lending Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation and G28 - Financial institutions and services - Government policy and regulation
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 221 Abstract:
This paper considers a view commonly associated with the "quantity theory of money": that banks should face 100 percent reserve requirements. It argues first that the objectives of the quantity theorists' proposals were more than merely price level stability, and that in fact, price level stability was at most a secondary objective of their proposals. Second, it argues that these theorists had a world with distortions in mind with respect to their proposals. These are present in a special setting examined that (a) supports the imposition of 100 percent reserve requirements (on the basis of an unconstrained Pareto criterion), and (b) supports the view that these restrictions stabilize the price level and make its movements more "predictable."
Keyword: Loans, Quantity-theory, Quantity theory, Price level stability, Banks, and Lending Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation and G28 - Financial institutions and services - Government policy and regulation
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 258 Abstract:
Recent developments in the theory of economies with private information permit a re-examination of the issues raised in the "real bills-quantity theory" debate. A model is developed here in which there are banks, in which fiat money is present, and in which agents possess private information. Two regulatory regimes are then considered. In the first, banks are essentially unregulated. In the second, banks face 100 percent reserve requirements. Issues related to existence and optimality of equilibrium are addressed, and problems with existence are given an interpretation in terms of the "stability" of the banking system. Existence (stability) problems which arise under laissez-faire banking can be rectified by a 100 percent reserve requirement. However, unless there is private information regarding access to investment opportunities, there are typically better ways to accomplish this. Finally, it is shown that even in the presence of 100 percent reserve requirements banks are not simply "money warehouses." Bank deposits and money bear different (real) return streams, even under 100 percent reserves.
Keyword: Financial intermediaries, Equilibrium, Real bills-quantity theory, Bank, Regulation, and Fiat money Subject (JEL): D82 - Information, knowledge, and uncertainty - Asymmetric and private information and G21 - Financial institutions and services - Banks ; Other depository institutions ; Micro finance institutions ; Mortgages
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 228 Abstract:
"Summary of Recommendations: . . . Repeal present control by the System over interest rates that member banks may pay on time deposits and present prohibition of interest payments by member banks on demand deposits." Milton Friedman (1960, p. 100) "I conclude that the over-all monetary effects of ceiling regulations are small and easy to neutralize by traditional monetary controls. The allocative and distributive effects are, however, unfortunate. The root of the policy was an exaggerated and largely unnecessary concern for the technical solvency of savings and loan associations." James Tobin (1970, p. 5) The regulation of deposit interest rates has received little support from economists. The same is true for the original rationale for such regulation: that bank competition for deposits generates inherent "instability" in the banking system. This paper develops an "adverse selection" model of banking in which this rationale is correct. Moreover, in this model instability in the banking system can arise despite the presence of a "lender of last resort," and despite the absence of any need for "deposit insurance." However, in the world described, the regulation of deposit interest rates is shown to be an appropriate response to "instability" in the banking system. Finally, it is argued that "adverse selection" models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts.
Keyword: Banking Act, Banking Act of 1933, Banking panics, Banking Act of 1935, Risk, Bank regulation, Instability, and Unregulated banks Subject (JEL): D82 - Information, knowledge, and uncertainty - Asymmetric and private information, E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems, G11 - General financial markets - Portfolio choice ; Investment decisions, and G21 - Financial institutions and services - Banks ; Other depository institutions ; Micro finance institutions ; Mortgages