Creator: Chari, V. V. and Jones, Larry E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 324 Abstract:
This paper examines the validity of one very special version of Coase's Theorem. The version we examine is that in any economy in which the property rights are fully allocated, competition will lead to efficient allocations. One repercussion of this result is that one way to "solve" the public goods problem would be to allocate property rights fully, transforming the economy to a private goods one and let markets do their work. This is particularly appealing due to its decentralized nature, but one must question the claim that the market will lead to efficient outcomes in this case. That is, the privatized economy created above is of a very special type which, as it turns out is highly susceptible to strategic behavior. We show that the "mechanism" suggested above is not likely to work well in economies with either pure public goods or "global" externalities. Basically, the free-rider problem manifests itself as one of monopoly power in this private goods setting. On the other hand, if the public goods or externalities are "local" in nature, there is reason to hope that this (and perhaps other) mechanism(s) will work well. The work is related to the recent literature on the foundations of Walrasian Equilibrium in that it points up a relationship between the appropriateness of Walrasian equilibrium as a solution concept, the incentives for strategic play, the aggregate level of complementarities in the economy and the problem of coordinating economic activity.
Keyword: Competition, Coordinating economic activity, Property rights, Walrasian Equilibrium, and Coase's Theorem Subject (JEL): H41 - Public Goods
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 406 Keyword: Inflation, Money, Monetary policy, Prices, Quantity theory of money, and Central banking Subject (JEL): E31 - Price Level; Inflation; Deflation and E52 - Monetary Policy
Creator: Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 355 Abstract:
Forecasts are routinely revised, and these revisions are often the subject of informal analysis and discussion. This paper argues 1) that forecast revisions are analyzed because they help forecasters and forecast users to evaluate forecasts and forecasting procedures, and 2) that these analyses can be sharpened by using the forecasting model to systematically express its forecast revision as the sum of components identified with specific data revisions and forecast errors. An algorithm for this purpose is explained and illustrated.
Keyword: Forecast revisions, Innovation, Forecasting, and Data revisions Subject (JEL): E17 - General Aggregative Models: Forecasting and Simulation: Models and Applications
Creator: Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 386 Abstract:
In a monetary model, it is shown that if there is a unique Pareto inefficient barter equilibrium, then a monetary equilibrium exists when traders are sufficiently patient.
Keyword: Money, Monetary equilbria, Inflation, Barter equilibria, and Consumers Subject (JEL): E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems and D51 - Exchange and Production Economies
Creator: Boyd, John H. and Graham, Stanley L. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 398 Abstract:
This study estimates the effects of allowing bank holding companies (BHCs) to enter several lines of financial business not now permitted. A simulation technique is used to estimate the risk and return of hypothetical financial corporations after merger between a BHC and a large firm in each of these industries: securities, real estate, life insurance, property and casualty insurance, and insurance agencies. The study concludes that a merger between a BHC and a life insurance company may decrease the probability of bankruptcy for the merged firm relative to the BHC alone. This result does not hold true, however, for BHC mergers with firms in the other industries. In particular, BHC mergers with securities or real estate firms are found to increase the probability of bankruptcy.
Keyword: Merger, Bank holding companies, Insurance, Real estate, Bankruptcy, Securities, Risk, and Bank holding company Subject (JEL): G28 - Financial Institutions and Services: Government Policy and Regulation, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Boyd, John H. and Graham, Stanley L. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 378 Keyword: Securities , Risk, Real estate, Nonbank activities, Bank holding companies, and Insurance Subject (JEL): C15 - Statistical Simulation Methods: General and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Christiano, Lawrence J., Eichenbaum, Martin S., and Marshall, David A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 335 Abstract:
This paper investigates whether there are simple versions of the permanent income hypothesis which are consistent with the aggregate U.S. consumption and output data. Our analysis is conducted within the confines of a simple dynamic general equilibrium model of aggregate real output, investment, hours of work and consumption. We study the quantitative importance of two perturbations to the version of our model which predicts that observed consumption follows a random walk: (i) changing the production technology specification which rationalizes the random walk result, and (ii) replacing the assumption that agents' decision intervals coincide with the data sampling interval with the assumption that agents make decisions on a continuous time basis. We find substantially less evidence against the continuous time models than against their discrete time counterparts. In fact neither of the two continuous time models can be rejected at conventional significance levels. The continuous time models outperform their discrete time counterparts primarily because they explicitly account for the fact that the data used to test the models are time averaged measures of the underlying unobserved point-in-time variables. The net result is that they are better able to accommodate the degree of serial correlation present in the first difference of observed per capita U.S. consumption.
Keyword: Consumption and Income Subject (JEL): E21 - Macroeconomics: Consumption; Saving; Wealth and C52 - Model Evaluation, Validation, and Selection
Creator: Greenwood, Jeremy, 1953- and Williamson, Stephen D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 363 Abstract:
A two country overlapping generations model is constructed, in which financial intermediation arises endogenously as an incentive compatible means of economizing on monitoring costs. Because of international credit markets. The model is used to generate the existence of transaction costs, money markets in the two countries are segmented and investors have differential access to predictions concerning the role of international intermediation in economic development, and to examine the nature of business cycle phenomena across alternative exchange rate regimes. Disturbances are propagated by a credit allocation mechanism, which also lends a novel flavor to the model's long run properties.
Keyword: Economic models, Business cycles, Financial policy , Exchange rate, and Generations Subject (JEL): E32 - Business Fluctuations; Cycles and F41 - Open Economy Macroeconomics