Creator: Miller, Preston J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 193 Abstract:
The welfare-maximizing income tax structure, rate of money creation, and amounts of intergenerational transfers are jointly determined for given rates of government consumption. When government consumption is zero, it is found for the parameter values examined that the income tax structure is progressive, the rate of money change is negative, and positive transfers are made to the old. As government consumption increases, the tax structure’s progressivity declines and turns increasingly regressive, the rate of money change rises, and transfers decrease. It is found that the bulk of the increase in government consumption is optimally financed by a cut in transfers.
Creator: Litterman, Robert B. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 200 Abstract:
Using optimal control theory and a vector autoregressive representation of the relationship between money and interest rates one can derive a feedback control procedure which defines the best possible tradeoff between interest rate volatility and money supply fluctuations and which could be used to reduce both from their current levels.
Keyword: Control theory, Inflation, Federal Reserve Bank, Optimal control theory, and Time series analysis Subject (JEL): E51 - Money Supply; Credit; Money Multipliers, E40 - Money and Interest Rates: General, and E58 - Central Banks and Their Policies
Creator: Sargent, Thomas J. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 211 Abstract:
In a general equilibrium setting, we study versions of the proposal to pay interest on reserves at the market rate. We argue that the proposal makes the demand for total reserves indeterminate whether interest is paid on total reserves or on required reserves only. One consequence is that tax financing of the proposal gives rise to a continuum of equilibria, equilibria which differ in real returns and consumption allocations. Another consequence is that an attempt to finance the proposal through earnings on the central bank’s portfolio either gives rise to an equilibrium with a zero nominal interest rate or fails to give rise to an equilibrium.
Keyword: Reserves, General equilibrium models, and Interest rates Subject (JEL): E43 - Interest Rates: Determination, Term Structure, and Effects and D58 - Computable and Other Applied General Equilibrium Models
Creator: Atkeson, Andrew and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 212 Abstract:
In this paper we develop a model in which a country faces a balance of payments crisis if constraints on its international borrowing bind. We use the model to describe the dynamics of the trade balance, capital account, and balance of payments of a country that borrows to finance consumption following sweeping macroeconomic and structural reforms and then hits constraints on its international borrowing. We compare the predictions of this theoretical example with events in Mexico from 1987 through 1995.
Keyword: Balance of payments, Speculative attacks, International borrowing, and Exchange rate crises Subject (JEL): F34 - International Lending and Debt Problems and F31 - Foreign Exchange
Creator: Miller, Preston J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 220 Description:
Working paper 220 was presented at The Economic Consequences of Government Deficits: an Economic Policy Conference, cosponsored by the Center for the Study of American Business and the Institute of Banking and Financial Markets at Washington University, St. Louis, Missouri, October 29-30, 1982.
Keyword: Tax policy, Federal debt, Deficit, Inflation, and Budget policy Subject (JEL): H62 - National Deficit; Surplus, E52 - Monetary Policy, H63 - National Debt; Debt Management; Sovereign Debt, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) 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: Price level stability, Lending, Quantity theory, Loans, and Banks Subject (JEL): G28 - Financial Institutions and Services: Government Policy and Regulation and E31 - Price Level; Inflation; Deflation
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 234 Abstract:
Current approaches to monetary theory and policy owe much to the "quantity theory of money." However, recent theoretical developments suggest that the manner in which money is introduced is more important, even for price level movements, than the quantity of money. Colonial American experience provides a laboratory for discriminating between these views. It is shown here that the nature of backing, rather than the quantity of money, determined its value. Large secular inflations were ended by changing the nature of backing despite the continuance of large note issues (and despite the absence of a metallic standard). Extremely large note issues and note withdrawals are shown not to have produced inflation (currency depreciation) or deflation (currency appreciation).
Keyword: Fiat money, Quantity theory, Currency, and Colonial America Subject (JEL): N11 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: Pre-1913, E52 - Monetary Policy, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Sargent, Thomas J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 238 Keyword: Budget, Dynamic games, Minnesota Vikings, Fiscal policy, Reaganomics, Debt, Deficit, and Monetary policy Subject (JEL): C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games and E65 - Studies of Particular Policy Episodes
Creator: Sargent, Thomas J. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 241 Keyword: Seignorage, Real balances, Rational expectations, and Hyperinflations Subject (JEL): H27 - Taxation, Subsidies, and Revenues: Other Sources of Revenue and E31 - Price Level; Inflation; Deflation
Creator: Doan, Thomas, Litterman, Robert B., and Sims, Christopher A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 243 Abstract:
This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied to ten macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variables responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates. We provide unconditional forecasts as of 1982:12 and 1963:3* We also describe how a model such as this can be used to make conditional projections and to analyse policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982:12. While no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, which may help in evaluating causal hypotheses, without containing any such hypotheses themselves.
Keyword: Forecasting, Macroeconomics, and Bayesian methods Subject (JEL): E27 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications and C11 - Bayesian Analysis: General