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Creator: Velde, François R. and Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 588 Abstract:
Bimetallism has been the subject of considerable debate: Was it a viable monetary system? Was it a desirable system? In our model, the (exogenous and stochastic) amount of each metal can be split between monetary uses to satisfy a cash-in-advance constraint, and nonmonetary uses in which the stock of uncoined metal yields utility. The ratio of the monies in the cash-in-advance constraint is endogenous. Bimetallism is feasible: we find a continuum of steady states (in the certainty case) indexed by the constant exchange rate of the monies; we also prove existence for a range of fixed exchange rates in the stochastic version. Bimetallism does not appear desirable on a welfare basis: among steady states, we prove that welfare under monometallism is higher than under any bimetallic equilibrium. We compute welfare and the variance of the price level under a variety of regimes (bimetallism, monometallism with and without trade money) and find that bimetallism can significantly stabilize the price level, depending on the covariance between the shocks to the supplies of metals.
Creator: Prescott, Edward C. and Wessel, Ryan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 562 Abstract:
Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand deposits are legal tender. We find (i) money services in the production function necessitates revisions in the national accounts; (ii) monetary and fiscal policy cannot be completely separated; (iii) for a given policy, equilibrium is either unique or does not exist; and (iv) Friedman’s monetary satiation is not optimal. We make quantitative comparisons between interest rate targeting regimes and between inflation rate targeting regimes. The best inflation rate target was 2 percent.
Palabra clave: Interest rate targeting, Inflation rate targeting, Zero lower bound, Friedman monetary satiation, 100 percent reserve banking, and Money in production function Tema: E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E00 - Macroeconomics and Monetary Economics: General, E40 - Money and Interest Rates: General, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Prescott, Edward C. and Wessel, Ryan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 530 Abstract:
We explore monetary policy in a world without currency. In our world, money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine the balanced growth paths for a set of money interest rate target policy regimes. Besides this interest rate, the only policy variable that differs across regimes is either the labor income tax rate or the inflation rate. We find that Friedman monetary satiation without deflation is possible. We also examine a set of inflation rate targeting regimes. Here, the only other policy variable that differs across policy regimes is the tax rate. There is a sequence of markets with outcome in each market being a Debreu valuation equilibrium, which determines the vector of assets and liabilities households take into the subsequent period. Evaluating a policy regime is an advanced exercise in public finance. Monetary satiation is not optimal even though money is costless to produce. A preliminary version of this paper circulated under the title “Monetary Policy with 100 Percent Reserve Banking: An Exploration.”
Palabra clave: Interest rate targeting, Inflation rate targeting, Friedman monetary satiation, 100 percent reserve banking, and Money in production function Tema: E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E00 - Macroeconomics and Monetary Economics: General, E40 - Money and Interest Rates: General, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Aiyagari, S. Rao and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 516 Abstract:
An interpretation of government policy regarding what it accepts in transactions is embedded in a version of the Kiyotaki-Wright model of media of exchange. In an example with two goods and one fiat money, the policies consistent with fiat money being the unique medium of exchange are identified. These uniqueness policies have the government favoring fiat money in its transactions. Benefits and costs accompany any such policy. The benefit is that a worse nonmonetary equilibrium is eliminated; the cost is that a better monetary equilibrium is also eliminated.
Tema: E40 - Money and Interest Rates: General
Creator: Alonso, Irasema Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 510 Abstract:
We seem to observe different patterns of exchange at different times and in different places. The first goal of this paper is to develop a model of money as a medium of exchange which allows multiple transaction patterns. A dynamic version of Shubik’s trading post economy is used, and it is shown that this economy allows a role for fiat money, and that fiat money can coexist with barter in exchange. There are multiple decentralized equilibria, and one of these resembles the equilibrium of a cash-in-advance economy—indeed, the model can be viewed as a generalization of the cash-in-advance framework. The second goal of the paper is to show that the present model can help explain why inflation seems far more disruptive and costly than what is implied by empirical studies on the cash-in-advance model. The argument for this is based on misestimations due to the unobservability of the patterns of exchange, which are variable in this model.
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 494 Abstract:
This paper investigates the macroeconomic and welfare effects of a particular public finance decision. That decision was to use debt rather than current taxation to finance deposit insurance payments related to the savings and loan debacle. We find that this decision could have significantly raised real interest rates and affected welfare. The analysis is conducted in a dynamic, open-economy, monetary general equilibrium model in which parameters are set based on empirical observations.
Palabra clave: Savings and loan, Welfare, Real interest rates, Deposit insurance, Government debt, Public finance, Taxation, and S & L Tema: H63 - National Debt; Debt Management; Sovereign Debt and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 481 Abstract:
This paper investigates the effects of changes in a country's monetary policies on its economy and the welfare of its citizens and those of other countries. Each country is populated by two-period lived overlapping agents who reside in either a home service sector or a world-traded good sector. Policy effects are transmitted through changes in the real interest rate, relative prices, and price levels. Welfare effects are sometimes dominated by relative price movements and can thus be opposite of those found in one-good models. Simulation of dynamic paths also reveals that welfare effects for some types of agents reverse between those born in immediate post-shock periods and those born later.
Palabra clave: Exchange rates, Real interest rates, Monetary policy, Prices, and Relative prices Tema: E31 - Price Level; Inflation; Deflation, F31 - Foreign Exchange, and E52 - Monetary Policy
Creator: Atkeson, Andrew, Eisfeldt, Andrea L., and Weill, Pierre-Olivier Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 479 Abstract:
We develop a model of equilibrium entry, trade, and price formation in over-the-counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as “dealers,” trading mainly to provide intermediation services, while medium sized banks endogenously participate as “customers” mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.
Palabra clave: Asset pricing, Welfare, Trading limits, Bargaining, Entry, and Networks Tema: G28 - Financial Institutions and Services: Government Policy and Regulation, L14 - Transactional Relationships; Contracts and Reputation; Networks, G20 - Financial Institutions and Services: General, and G23 - Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors