Creator: Williamson, Stephen D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 382 Abstract:
A model with private information is constructed that supports conventional arguments for a government monopoly in supplying circulating media of exchange. The model also yields predictions, including rate-of-return dominance of circulating media of exchange, that are consistent with observations from free banking regimes and fiat money regimes. In a laissez faire banking equilibrium, fiat money is not valued, and the resulting allocation is not Pareto optimal. However, if private agents are restricted from issuing circulating notes, there exists an equilibrium with valued fiat money that Pareto dominates the laissez faire equilibrium and is constrained Pareto optimal.
Keyword: Fiat money, Free banking, Monetary exchange, Private information, Currency, Monetary economics, Laissez faire banking, Assymetric information, and Money Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design 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: 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: Fiat money, Financial intermediaries, Regulation, Equilibrium, Real bills-quantity theory, and Bank Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) 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 panics, Risk, Instability, Bank regulation, Unregulated banks, Banking Act of 1935, and Banking Act of 1933 Subject (JEL): G11 - Portfolio Choice; Investment Decisions, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, D82 - Asymmetric and Private Information; Mechanism Design, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Sargent, Thomas J. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 214 Keyword: Private issue inside money, Bimetallism, Symmetallism, Seignorage, Quantity theory of money, and Commodities Subject (JEL): E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems and E52 - Monetary Policy
Creator: Bryant, John B. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 189 Keyword: Rate of return dominance, Private currency, Government debt, and Prohibition Subject (JEL): E40 - Money and Interest Rates: General and E52 - Monetary Policy
Creator: Kareken, John H. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 153 Abstract:
In this paper we consider a particular international economic policy regime: the laissez-faire regime, the distinguishing features of which are unrestricted portfolio choice and floating exchange rates. And as we show, that regime, although favored by many economists, is not economically feasible. It does not have a determinate equilibrium. That is an implication of an over-lapping-generations model. But as we argue in the paper, that is no reason for doubting the indeterminacy of the laissez-faire regime equilibrium.
Keyword: Overlapping generations, International economic policy, Foreign exchange rate, and Laissez-faire regime Subject (JEL): F31 - Foreign Exchange and D53 - General Equilibrium and Disequilibrium: Financial Markets
Creator: Kahn, James A. (James Allan) and Lim, Jong-Soo. Series: Conference on economics and politics Abstract:
This paper analyzes the political economy of growth as an issue of intergenerational distribution. The first part of the paper develops a model of endogenous growth via human capital accumulation in an overlapping generations setting. Equilibrium growth is inefficient due to the presence of an intergenerational externality. We characterize the set of Pareto efficient paths for physical and human capital accumulation, and find that there is a continuum of efficient growth rate-interest rate combinations. The preferred combination for an infinitely-lived planner will depend on the social discount rate. Competitive equilibrium with subsidized or mandated human capital accumulation may give rise to a Pareto efficient steady state, though for some parameters efficiency requires some intergenerational redistribution. We then argue that a social planner or government with an infinite horizon is incongruous in an OG model when the agents all have finite horizons. Hence the second part of the paper addresses the question of how a government whose decisionmakers reflect the finite horizons of their constituents would choose policies that affect physical and human capital accumulation. Specifically we assume that each government maximizes a weighted sum of utilities of those currently alive. Each period the government selects a policy that takes into account the effect (through state variables) on subsequent policy decisions (and hence on the welfare of the current young generation). Numerical methods involving polynomial approximations are used to compute equilibria under specific parametric assumptions. Equilibrium growth rates turn out to be substantially below efficient rates.
Keyword: Growth, Political economy, Education, Political instability, and Markov equilibrium Subject (JEL): D91 - Intertemporal choice and growth - Intertemporal consumer choice ; Life cycle models and saving, O41 - One, Two, and Multisector Growth Models, and D72 - Analysis of collective decision-making - Models of political processes : Rent-seeking, elections, legislatures, and voting behavior
Creator: Bullard, James. and Russell, Steven. Series: Finance, fluctuations, and development Abstract:
We examine the conditions under which steady states with low real interest rates—real rates substantially below the output growth rate—exist in an overlapping generations model with production, capital accumulation, a labor-leisure trade-off, technological progress, and agents who live for many periods. The number of periods in an agent's life (n) is left open for much of the analysis and determines the temporal interpretation of a time period. The qualitative properties of the model are largely invariant to different values of n. We find that two low real interest rate steady states exist for empirically plausible values of the parameters of the model. Outside liabilities such as fiat currency or unbacked government debt are valued in one of these steady states.
Keyword: General equilibrium models, Interest rates, and Debts, Public Subject (JEL): D51 - General equilibrium and disequilibrium - Exchange and production economies and E40 - Money and interest rates - General