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Creator: Bassetto, Marco Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 624 Abstract:
How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.
Palabra clave: Government strategy, Implementation, Commitment, and Competitive equilibrium Tema: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, F34 - International Lending and Debt Problems, and C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Creator: Gintis, Herbert Series: Monetary theory and financial intermediation Abstract:
This paper develops the Kiyotaki-Wright model of monetary general equilibrium in which trade is bilateral and enforced by requiring that transactions be quid pro quo, and studies which goods are chosen, and under what conditions, as media of exchange. We prove the existence of a rational expectations equilibrium in which agents' expectations concerning trading opportunities are realized in the present and all future periods. We also show that, exceptional cases aside, no rational expectations barter equilibrium exists; that an equilibrium generally supports multiple money goods; and that a fiat money (i.e., a good that is produced, has minimum storage costs, but is not consumed) cannot be traded in rational expectations equilibrium.
Tema: C62 - Mathematical methods and programming - Existence and stability conditions of equilibrium and D51 - General equilibrium and disequilibrium - Exchange and production economies
Creator: Altug, Sumru and Miller, Robert A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 341 Abstract:
This paper investigates the role of aggregate shocks on household consumption and labor supply. It posits, estimates and tests a model where the equilibrium behavior of agents sometimes leads them to locate on the boundary of their respective choices sets. The framework is rich enough to nest much previous empirical work on life cycle labor supply and consumption based asset pricing. It also yields a structural interpretation of wage regressions on unemployment. An important feature of our model is that markets are complete. Consequently, aggregate shocks only enter through two price sequences, namely real wages, and a sequence comprising weighted prices for future contingent consumption claims which are ultimately realized. We examine the properties of this latter sequence, whose elements may be represented as mappings from real wages and aggregate dividends.
Our empirical findings may be grouped into three. First, aggregate shocks play a significant role in determining the choices people make. Second, we reject for males some of the restrictions implicit in structural interpretations of wage unemployment regressions. Moreover when these restrictions are imposed, we find wages are countercyclical, but cannot reject the null hypothesis of no effect. Third, the null hypothesis that markets are complete is not invariably rejected. However, the orthogonality conditions associated with the asset pricing equation are rejected, even though our specification of preferences incorporates types of heterogeneity which violate the necessary conditions for aggregating to a representative agent formulation. Finally, we reject the cross-equation restrictions between the labor supply of spouses implied by equilibrium behavior.
Palabra clave: Complete markets, Tests of orthogonality conditions, Labor supply and consumption, Asset returns data, Nonseparability, Simple factor structure, and Panel data
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.
Palabra clave: Overlapping generations, International economic policy, Foreign exchange rate, and Laissez-faire regime Tema: F31 - Foreign Exchange and D53 - General Equilibrium and Disequilibrium: Financial Markets
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 204 Abstract:
In an overlapping generations model with borrowing and lending, uncertainty, and asymmetric information, fiat money may be essential to the existence of a competitive equilibrium. It may also serve to enhance the information of economic agents in a well-defined sense. In addition, the model presented provides suggestions about why the presence of valued fiat currency is essential to existence of equilibrium, even though in equilibrium perfect substitutes for money may exist.
Creator: Chari, V. V. and Jagannathan, Ravi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 320 Abstract:
This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive “story” that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long “lines” at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.
Creator: Chahrour, Ryan and Stevens, Lacramioara Luminita Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 522 Abstract:
We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation.
Palabra clave: Law of one price, Border effect, and Real exchange rate Tema: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), F41 - Open Economy Macroeconomics, and F30 - International Finance: General
Creator: Cooley, Thomas F., Hansen, Gary D. (Gary Duane), and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 535 Palabra clave: Equilibrium and Business cycle Tema: E13 - General Aggregative Models: Neoclassical and E32 - Business Fluctuations; Cycles
Creator: Mercenier, Jean and Schmitt, Nicolas Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 188 Abstract:
We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.
Palabra clave: Applied general equilibrium, Sunk costs, Market structure, and Trade liberalization Tema: D58 - Computable and Other Applied General Equilibrium Models, F17 - Trade: Forecasting and Simulation, F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation, and C68 - Computable General Equilibrium Models