Bidding for money

We analyze monetary exchange in a model that allows for directed search and multilateral matches. We consider environments with divisible goods and indivisible money, and compare the results with those in models that use random matching and bilateral bargaining. Two different pricing mechanisms are used: ex ante price posting, and ex post bidding (auctions). Also, we consider settings both with and without lotteries. We find that the model generates very simple and intuitive equilibrium allocations that are similar to those with random matching and bargaining, but with different comparative static and welfare properties.     

The genericity of beliefs-determine-preferences models revisited

Barelli [P. Barelli, On the genericity of full surplus extraction in mechanism design, J. Econ. Theory 144 (2009) 1320-1332] defines beliefs-determine-preferences (BDP) models and argues that BDP models are nongeneric in a topological sense. In this note, we point out some difficulties in Barelli?s approach. Furthermore, we follow the idea of Heifetz and Neeman [A. Heifetz, Z. Neeman, On the generic (im)possibility of full surplus extraction, Econometrica 74 (2006) 213-233] to propose a more relevant notion of BDP^? model. We prove that BDP^? models are generic, which is opposite to Barelli?s conclusion.     

Overbidding in fixed rate tenders—an empirical assessment of alternative explanations

This paper investigates various theories explaining banks’ overbidding in the fixed rate tenders of the European Central Bank (ECB). Using auction data from both the Bundesbank and the ECB, we show that none of the theories can on its own explain the observed overbidding. This implies that the proposed new rules by the ECB, aimed at neutralizing interest rate expectations, would not eliminate overbidding if the rationing rule in the fixed rate tenders remains unchanged.     

On the genericity of full surplus extraction in mechanism design

Heifetz and Neeman [A. Heifetz, Z. Neeman, On the generic (im)possibility of full surplus extraction, Econometrica 74 (2006) 213-233], using convex combinations of models, showed that full surplus extraction (FSE) in mechanism design is generically impossible, contrary to the seminal work of Cremer and McLean [J. Cremer, R. McLean, Full extraction of the surplus in Bayesian and dominant strategy auctions, Econometrica 53 (1988) 345-361]. Since Cremer and McLean did not allow convex combinations of models, the two results are not comparable. We show that FSE is generically impossible when convex combinations of models are not allowed, provided that we do not hold fixed the cardinality of models.     

Asymmetric Information and the Transmission Mechanism of Monetary Policy

Abstract. This paper analyses the consequences of asymmetric information in credit markets for the monetary transmission mechanism. It shows that asymmetric information can not only reinforce but can also weaken or overcompensate the effects of the standard interest rate channel. Crucial is that informational problems lead to an external finance premium that can be positive or negative for marginal entrepreneurs. Tight money may lead to an increase in the absolute value of this premium, implying that there is a credit channel of monetary policy, but its working direction is ambiguous.     

Endogenous trading constraints with incomplete asset markets

This paper endogenizes the borrowing constraints on capital in a production economy with incomplete markets. We find that these limits get looser with income, a property that is consistent with US data on credit limits. The framework with endogenous limits is then used to study the effects of a revenue neutral tax reform that eliminates capital income taxes. Our results illustrate that it is very important to take into account the effects of tax policies on the limits. Throughout the transition, these effects can be big enough to change the overall conclusion about the desirability of a tax reform.     

Capital market imperfections in a monetary growth model

Summary. We consider a monetary growth model essentially identical to that of Diamond (1965) and Tirole (1985), except that we explicitly model credit markets, a credit market friction, and an allocative function for financial intermediaries. These changes yield substantially different results than those obtained in more standard models. In particular, if any monetary steady state equilibria exist, there are generally two of them; one of these has a low capital stock and output level, and it is necessarily a saddle. The other steady state has a high capital stock and output level; either it is necessarily a sink, or its stability properties depend on the rate of money creation. It follows that monetary equilibria can be indeterminate, and nonconvergence phenomena can be observed. Increases in the rate of money creation reduce the capital stock in the high-capital-stock steady state. If the high-capital-stock steady state is not a sink for all rates of money growth, then increases in the rate of money growth can induce a Hopf bifurcation. Hence dynamical equilibria can display damped oscillation as a steady state equilibrium is approached, and limit cycles can be observed as well. In addition, in the latter case, high enough rates of inflation induce the kinds of “crises” noted by Bruno and Easterly (1995): when inflation is too high there are no equilibrium paths approaching the high-activity steady state. Received: November 18, 1995; revised version: March 26, 1996     

A uniqueness proof for monetary steady state

The framework in Lagos and Wright (2005) [20] combining decentralized and centralized markets is used extensively in monetary economics. Much is known about that model, but there is a loose end: only under special assumptions about bargaining power or decentralized market preferences has it been shown that the monetary steady state is unique. For general decentralized market utility and bargaining, I prove uniqueness for generic parameters with fiat money, and for all parameters with commodity money. As a corollary, I get monotone comparative statics.     

Societal benefits of illiquid bonds

In this paper, I provide a possible explanation of why nominally risk-free bonds are essential in monetary economies. I argue that the role of nominal bonds is to enable agents to engage in intertemporal exchanges of money. I show that bonds can only serve this role if they are illiquid (costly to exchange for goods). Finally, I argue that in economies in which nominal bonds are essential, it is optimal for monetary policy to respond to changes in the distribution of liquidity needs.     

On the coexistence of money and higher-return assets and its social role

This paper adopts mechanism design to investigate the coexistence of fiat money and higher-return assets. We consider an economy with pairwise meetings where fiat money and risk-free capital compete as means of payment, as in [28]. The trading mechanism in pairwise meetings is chosen among all individually rational, renegotiation-proof mechanisms to maximize society?s welfare. We show that in any stationary monetary equilibrium capital commands a higher rate of return than fiat money.     

Heterogeneity in price setting behavior,spatial disparities and sectoral diversity: Evidence from a panel of Italian firms

In this paper, we analyze firms' pricing behavior using a full informative micro dataset that accounts for a large part of Italian firms. In our view, “the black boxes” to examine are the relations between price setting, market structure and spatial disparities. The paper aims to extend the empirical literature in several directions. A first goal of the research is to investigate the link between heterogeneity in price changes and spatial dependence. Besides, we compare the price dynamics among sectors, namely manufacturing vs. service. It is irrefutable that prices stickiness is linked to good market rigidities. Consequently, these issues have extremely important policy implications; for instance, the Monetary Authority considers the macro price indexes in order to determine the right policy to stabilize the economy and to improve social welfare. However, the Central Bank does not distinguish the likely aggregation bias source from the cross sector–region–country heterogeneities.     

The welfare cost of banking regulation

The Basel Accords promote the adoption of capital adequacy requirements to increase the banking sector's stability. Unfortunately, this type of regulation can hamper economic growth by shifting banks' portfolios from more productive, risky investment projects toward less productive but safer projects. This paper introduces banking regulation in an overlapping-generations model and studies how it affects economic growth, banking sector stability, and welfare. In this model, a banking crisis is initiated by an aggregated shock (in the risky sector) in a banking system with implicit bailout, and banking regulation is modeled as a constraint on the maximal share of banks' portfolios that can be allocated to risky assets. This model allows us to evaluate quantitatively the key trade-off, inherent in this type of regulation, between ensuring banking stability and fostering economic growth. The model implies an optimal level of regulation that prevents crises but at the same time is detrimental to growth. We find that the overall effect of optimal regulation on social welfare is positive when productivity shocks are sufficiently high (for example, in the subprime banking crisis episode) and economic agents are sufficiently risk-averse. Finally, we find that there is a trade-off between regulating the economy upfront (i.e. before the shock) and facing the challenge of making a huge bailout after the crisis.     

Sunspots and predictable asset returns

This paper uses a stylised asset-pricing model to show that sunspots may cause asset returns to be predictable, a widely documented feature of many speculative markets. This result parallels and extends previous works showing that sunspots render asset prices excessively volatile.