MONEY AS A MECHANISM IN A BEWLEY ECONOMY*

We investigate the efficiency property of a monetary economy with spot trade. We prove a conjecture that is essentially due to Bewley (Models of Monetary Economics (1980); Econometrica 51 (1983), 1485–504). The gist is that monetary spot trading is nearly efficient ex ante in an environment where very patient agents can accumulate large enough money stocks to be completely self‐insured. We also study examples where a nonmonetary mechanism is preferred ex ante to any monetary mechanism in a stationary environment, and where an inflationary monetary mechanism is preferred ex ante to a laissez‐faire or deflationary monetary mechanism in an environment with impatient agents.     

STABILIZATION POLICY AT THE ZERO LOWER BOUND

We construct a monetary economy with aggregate liquidity shocks and heterogeneous idiosyncratic preference shocks. In this environment, not all agents are satiated at the zero lower bound (ZLB) even when the Friedman rule is the best interest‐rate policy the central bank can implement. As a consequence, central bank stabilization policy, which takes the form of repo arrangements in response to aggregate demand shocks, temporarily relaxes the liquidity constraint of impatient agents at the ZLB. Due to a pecuniary externality, this policy may have beneficial general equilibrium effects for patient agents even if they are unconstrained in their money balances.     

Regionalism and Multilateral Trade Liberalization with Asymmetric Countries

The paper examines the impact of regionalism on the process of multilateral trade liberalization when countries are asymmetric. The author uses a three‐country, three‐good, competing exporters model, with countries being symmetric in everything but their discount factors. The equilibrium regional agreement is found to be a customs union between a patient and an impatient country and that the impact of regionalism depends on the discount factors. The impact of regionalism on multilateral trade liberalization depends critically on which countries engage in regionalism.     

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for intertemporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of intertemporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.     

Risk sharing and retrading in incomplete markets

At a competitive equilibrium of an incomplete-markets economy agents’ marginal valuations for the tradable assets are equalized ex-ante. We characterize the finest partition of the state space conditional on which this equality holds for any economy. This leads naturally to a necessary and sufficient condition on information that would induce agents to retrade, if such information was to become publicly available after the initial round of trade.     

Prudent expectations equilibrium in economies with uncertain delivery

In an economy with private information, we introduce the notion of objects of choice as lists of bundles out of which the market selects one for delivery. This leads to an extension of the model of Arrow–Debreu that is used to study trade ex ante with private state verification. Under the assumption that agents are prudent, equilibrium is characterized by the fact that agents consume bundles with the same utility in states that they do not distinguish. This is a weaker condition than the restriction of equal consumption imposed by Radner (Econometrica 36(1), 31–58, 1968), therefore, some no trade situations are avoided and the efficiency of trade increases.     

Injecting rational bubbles

This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales constraints in which there is an allocation-equivalent equilibrium in which asset prices have a bubble. The second theorem extends to the result to the case in short-sales constraints are endogenously determined in the sense of Alvarez and Jermann [Efficiency, equilibrium, and asset pricing with risk of default, Econometrica 68 (2000) 775-797].     

On Ramseyʼs conjecture

Studying a one-sector economy populated by finitely many heterogeneous households that are subject to no-borrowing constraints, we confirm a conjecture by Frank P. Ramsey according to which, in the long run, society would be divided into the set of patient households who own the entire capital stock and impatient ones without any physical wealth. More specifically, we prove (i) that there exists a unique steady state equilibrium that is globally asymptotically stable and (ii) that along every equilibrium the most patient household owns the entire capital of the economy after some finite time. Furthermore, we prove that despite the presence of the no-borrowing constraints all equilibria are efficient. Our results are derived for the continuous-time formulation of the model that was originally used by Ramsey, and they stand in stark contrast to results that – over the last three decades – have been found in the discrete-time version of the model.     

A THEORY OF MONEY AND MARKETPLACES*

This article considers an infinitely repeated economy with divisible fiat money. The economy has many marketplaces that agents choose to visit. In each marketplace, agents are randomly matched to trade goods. There exist a variety of stationary equilibria. In some equilibrium, each good is traded at a single price, whereas in another, every good is traded at two different prices. There is a continuum of such equilibria, which differ from each other in price and welfare levels. However, it is shown that only the efficient single‐price equilibrium is evolutionarily stable.     

The optimal degree of cooperation in the repeated Prisoners' Dilemma with side payments

In the infinitely repeated Prisoners' Dilemma with side payments, we characterize the Pareto frontier of the set of subgame perfect equilibrium payoffs for all possible combinations of discount factors. Play paths implementing Pareto dominant equilibrium payoffs are uniquely determined in all but the first period. Full cooperation does not necessarily implement these payoffs even when it maximizes total stage game payoffs. Rather, when the difference in players' discount factors is sufficiently large, Pareto dominant equilibrium payoffs are implemented by partial cooperation supported by repeated payments from the impatient to the patient player. When both players are sufficiently patient, such payoffs, while implemented via full cooperation, are supported by repeated payments from the impatient to the patient player. We characterize conditions under which public randomization has no impact on the Pareto dominant equilibrium payoffs and conditions under which such payoffs are robust to renegotiation.     

Heterogeneity,impatience, and dynamic private provision of a discrete public good

We analyze dynamic private provision of a discrete public good by heterogeneous agents, who differ in terms of their levels of impatience, in a differential game framework. In contrast to the strategic complementarity result for homogeneous individuals, we show that an asymmetric completion Markov perfect equilibrium exists, where the individual contributions and the strategic behaviors depend crucially on an impatience differential: the difference in rates of time preference across groups of individuals. When this differential is insignificant, contributions of both types of individuals are strategic complements. On the other hand, when this impatience differential exceeds a threshold, the contributions of impatient individuals become strategic substitutes, whereas the contributions of patient individuals remain strategic complements. We show that group size has an interesting role to play in the strategic behavior: increasing the number of patient individuals aggravates the incentives to free‐ride by the impatient agents. We also derive a condition under which all the socially beneficial projects get completed in the equilibrium.     

SIZE,OPENNESS, AND MACROECONOMIC INTERDEPENDENCE

One common, simplifying assumption in open economy macroliterature is that the rest of the world can be thought of as a representative economy. This article formally investigates conditions under which this assumption can be justified using a multicountry general equilibrium model as a laboratory. We derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Thereby, we show that the two‐country framework is a valid approximation only for economies that have diversified trade linkages and only when there is no globally dominant economy among the foreign economies.     

Regulating collateral-requirements when markets are incomplete

In this paper we examine the effects of default and collateral on risk sharing. We assume that there is a large set of assets which all promise a risk less payoff but which distinguish themselves by their collateral requirements. In equilibrium agents default, the assets have different payoffs, and there are as many linearly independent assets available for trade as there are states of the world. We derive necessary and sufficient conditions for equilibria to be Pareto-efficient in the presence of uncertainty. We explore some examples for which the collateral equilibrium allocation is identical to the Arrow–Debreu allocation, either when agents have a high preference for the durable good, or when the endowment distribution of the durable good is relatively homogeneous. We examine a series of examples to understand which collateral-levels prevail in equilibrium and under which conditions there is scope for regulating margin-requirements, that is, restricting the sets of tradable assets through government intervention. In these examples equilibrium is always sub-optimal but regulation never leads to a Pareto-improvement. While the competitive equilibria are constrained efficient, there do exist regulations which make large groups of agents in the economy better off. These regulations typically restrict all trades to take place in the low-collateral loans and benefit the poor and the rich agents in the economy through their effects on the equilibrium interest rate and the equilibrium prices of the durable goods.     

Dynamic Patterns of Trade Imbalances with Recursive Preference

Based on the recursive preference approach, the dynamic and global properties of the two‐country open economy are examined with one good and inputs of labor and capital, with capital being freely traded internationally. First, by showing that the world's consumption increases (decreases) with an increase (decrease) in the world's capital, the global stability of the economy is obtained. Secondly, the nonmonotonicity of consumption between impatient country 1 and patient country 2 is established. Thirdly, with the Cobb–Douglas‐type production function and country 1's technological superiority, the dynamic trade patterns and the asset–debt position are derived.     

Privatization and the Political Economy of Strategic Trade Policy

This article considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an economy where portfolio allocations are chosen by risk-averse agents who rationally forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trade policy through the incentives for lobbying by private agents. Portfolios and trade policy are thus jointly determined in political-economic equilibrium. Privatization of state-owned industry exerts an important influence over the trade policies chosen by domestic and foreign governments by expanding the scope for individual diversification.     

Evolution of Walrasian equilibrium in an exchange economy

We study the stochastic stability of a dynamic trading process in an exchange economy. We use a simplified version of a trading model à la Shapley and Shubik (J Polit Econ 85:937–968, 1977). Two types of agents equipped with Leontief preferences trade goods in markets by offering endowments, and actual trades occur at market clearing prices. Better behavior tends to spread through the same type of agents by imitation, and agents also make mistakes occasionally. We provide a sufficient condition for the perturbed dynamic process to have a unique stochastically stable state that is a Walrasian equilibrium allocation. In this sense, we give a rationale for Walrasian behavior.     

Oligopoly equilibria in exchange economies: a limit theorem

In a pure exchange economy, agents have the possibility of behaving strategically by putting only a part of their initial endowments on the market. An oligopoly equilibrium is defined to be a Nash equilibrium of the game in which agents choose simultaneously quantities to be put on the market. It is proved that under standard hypotheses, the oligopoly equilibrium leads to the competitive equilibrium when the economy is replicated an infinite number of times. Received: May 26, 1999; revised version: April 3, 2000     

Endogenous trading bloc formation in a North-South global economy

Abstract .  The majority of the trading blocs to date are between similar countries, rather than between developed and developing countries. This paper provides a rationale for why trading blocs among similar countries may arise as an equilibrium phenomenon. It develops a model of an asymmetric world economy in which there are at least four countries. The countries are differentiated with respect to their market size and they choose their trading partners. In the coalition-proof Nash equilibrium, either there is global free trade or free trade areas are formed among similar countries.     

To Trade Or Not To Trade: Economies With A Variable Number Of Tradeables*

We present a general equilibrium model that encompasses the endogenous selection and shadow‐pricing of a set of tradeable commodities, with home‐based and social production activities. In the model, a market system is a set of costly social institutions which embody the trade and production technologies available in the economy. Our equilibrium concept describes the pricing of market institutions, thus pricing the tradeability of a commodity. We obtain the existence and the decentralization of Pareto‐efficient allocations. We discuss an example regarding the transition of a guild‐based economy into a market‐based economy.     

Existence of equilibrium in the Helpman–Krugman model of international trade with imperfect competition

Helpman and Krugman (Market structure and foreign trade. Increasing returns, imperfect competition, and the international economy. MIT Press, Cambridge, 1985) provide a synthesis of the traditional factor proportions theory of international trade and the theory of international trade due to the exploitation of scale economies in imperfectly competitive markets. They derive illuminating results about trade patterns and gains from trade, among other things, leaving unanswered the question of existence of equilibrium, however. The central significance of their characterization of properties of free trade equilibria with inter-industry and intra-industry trade calls for an analysis of existence of equilibrium. This is the object of the present paper. We prove the existence of equilibrium for the integrated multi-sector multi-factor Helpman–Krugman economy without national borders. Well-known conditions ensure that the world economy under free trade reproduces this equilibrium and thus establishes existence of a free trade equilibrium. Since an equilibrium of the integrated economy is not necessarily unique, the same holds true for a free trade equilibrium.