Research Database

This article reviews recent work that generalizes a random matching model of money to permit there to be a mix of transactions: some accomplished through the use of tangible media of exchange and the rest through some form of credit. The generalizations are accomplished by specifying assumptions about common knowledge of individual histories that are intermediate between no common knowledge and complete common knowledge. One of the specifications permits a simple representation of the sense in which more common knowledge is beneficial. The other permits a comparison between using outside money and using inside money as a medium of exchange.

A pairwise random matching game is considered to identify the social environments that give rise to the social custom and fashion cycles. The game, played by Conformists and Nonconformists, can generate a variety of socially stable behavior patterns. In the path-dependence case, Conformists set the social custom and Nonconformists revolt against it; what action becomes the custom is determined by “history.” In the limit cycle case, Nonconformists become fashion leaders and switch their actions periodically, while Conformists follow with delay. The outcome depends on the relative share of Conformists to Nonconformists as well as their matching patterns.

This paper examines a two-country, monetary general-equilibrium model that includes a financial sector, capital mobility, and shocks to technologies and money-growth rates. Capital mobility allows agents in both countries to participate in rewards from relatively favorable shocks realized in either country. Currency exchange facilitates currency-intermediated international trade of consumption and capital goods. Qualitative and quantitative implications of the model for evolutions of variables are investigated. The quantitative analysis is performed by numerically solving and simulating the model. We focus on international monetary shock transmissions, and effects of monetary innovations on interest rates and nominal and real exchange rates.

This paper, originally published in 1988, argues that there is nothing special about government-issued money, that without restrictions of some kind, privately issued money would be a perfect substitute for it. The paper describes the type of intermediation this argument implies for a laissez-faire economy. One important implication is that there would be only one risk-adjusted rate of return; either all assets would pay a low return to match that on money, or money would pay interest. Another important implication is that open market operations would be irrelevant. The paper argues that the reason we don't frequently observe economies with such characteristics is that governments generally impose restrictions which prevent the private issue of money. However, the paper does examine some historical periods when restrictions seemingly were not imposed. And it concludes with some reservations about the oversimplifying suggestion.

This study shows that in a standard one-sector neoclassical growth model, in which money is introduced with a cash-in-advance constraint, zero nominal interest rates are optimal. Milton Friedman argued in 1969 that zero nominal rates are necessary for efficient resource allocation. This study shows that they are not only necessary but sufficient. The study also characterizes the monetary policies that will implement zero rates. The set of such policies is quite large. The only restriction these policies must satisfy is that asymptotically money shrinks at a rate no greater than the rate of discount.

We provide an investigation of duration dependence in prewar business expansions, contractions, and whole cycles for France, Germany, and Great Britain. Our results, obtained using both nonparametric and parametric procedures, generally indicate the presence of positive duration dependence in expansions and whole cycles but not in contractions. Our results corroborate those of our earlier studies of the United States.

We consider four models of consumption that differ with respect to efficient risk-sharing and altruism. They range from complete markets with altruism to family risk-sharing. We use a matched sample of parents and independent children available from the Panel Study of Income Dynamics to discriminate between the four models. Our testing procedure is designed to deal with the set of observed independent children being endogenously selected. The combined hypothesis of complete markets and altruism can be decisively rejected, while we fail to reject altruism and hence family risk-sharing for a subset of families.

This memo describes a revision to the mixed-frequency vector autoregression (MF-VAR) model originally constructed by Schorfheide and Song (2012) and subsequently revised by Beauchemin (2013). In this most recent version, the 14-variable model is expanded to include nonfarm payroll employment. The forecast performance of the augmented model is compared with that of its predecessor.

In this paper I develop a practical extension of the Method of Simulated Moments (MSM) estimator for limited dependent variable models to the panel data case. The method is based on a factorization of the MSM first order condition into transition probabilities, along with the development of a new highly accurate method for simulating these transition probabilities. A series of Monte-Carlo tests show that this MSM estimator performs quite well relative to quadrature-based ML estimators, even when large numbers of quadrature points are employed. The estimator also performs well relative to simulated ML, even when a highly accurate method is used to simulate the choice probabilities. In terms of computational speed, complex panel data models involving random effects and ARMA errors may be estimated via MSM in times similar to those necessary for estimation of simple random effects models via ML-quadrature.

This paper critically reevaluates recent claims that the postwar U.S. price level exhibits countercyclicality. While overall countercyclicality is confirmed, temporal disaggregation suggests a shift from pro- to countercyclicality in the early 1970s. Furthermore, the countercyclicality is markedly more pronounced for negative than for positive output innovations. The evidence thus casts doubt on single-source business cycle explanations.

This paper builds a simple but complete model of a political system to analyze the effects of intergenerational conflicts on capital and labor income tax rates, transfers, and government spending. I show how the different nature of tax liabilities for the young and the old can explain why the old receive large gross lump-sum transfers through social security, while the young receive little or none. I also show that there is a natural link between the size of the government as a provider of public goods and the magnitude of transfers that the same government will implement.

A general class of Markov switching regime time series models is presented that allows one to estimate the nontrivial interdependencies between different types of cycles which make the economy grow at an unsteady rate. The paper further explores results obtained in Ghysels (1991b) suggesting that the economy transits from recessions to expansions with an uneven propensity throughout the year. It is also built on the work of Hamilton (1989) who proposed a stochastic switching-regime model for GNP and has important connections with hidden periodic structures discussed by Tiao and Grupe (1980) or Hansen and Sargent (1990), for instance. The time series models we present may have periodic transition probabilities and the drifts may be seasonal. In the latter case, the model exhibits seasonal dummy variation that may change with the stage of the business cycle. While the model is intrinsically nonlinear and stochastic, it produces a linear representation with seasonal effects that appear to be deterministic. The paper provides an elaborate discussion of the regularity conditions for a well-defined covariance structure including explicit formula for characterizing first and second moments. Finally, we present empirical evidence using U.S. GNP data series which tends to support a periodic structure for switching probabilities. The most significant result is the following: it is found that the seasonal in GNP growth significantly affects switching probabilities for regime switches in the nonseasonal growth of GNP. We also analyze the out-of-sample forecast performance of the different models and find that the models exploiting seasonality in transition probabilities perform best.

Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. The main purpose of this paper is to illustrate the exchange of knowledge as well as its consequences on agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas and create new knowledge in order to improve production efficacy. When individuals’ types of knowledge are too diverse, a match is less likely to generate significant innovations. We demonstrate the extent of agglomeration has significant implications for the patterns of information flows in economies. Further, by simultaneously determining the patterns of knowledge exchange and the spatial agglomeration of an economy we identify additional channels for interaction between agglomerative activity and knowledge exchange. Finally, contrary to previous work in spatial agglomeration, our model suggests that agglomerative environments may be either under-specialized and under-populated or over-specialized and over-populated relative to the social optimum.

This paper studies the accuracy of two versions of the procedure proposed by Kydland and Prescott (1980, 1982) for approximating the optional decision rules in problems in which the objective fails to be quadratic and the constraints linear. The analysis is carried out in the context of a particular example: a version of the Brock-Mirman (1972) model of optimal economic growth. Although the model is not linear quadratic, its solution can nevertheless be computed with arbitrary accuracy using a variant of the value function iteration procedures described in Bertsekas (1976). I find that the Kydland-Prescott approximate decision rules are very similar to those implied by value function iteration.