Theory and practice of monetary policy

Summary. We consider an optimally managed renewable resource with stochastic non-concave growth function. We characterize the conditions under which the optimal policy leads to global extinction, global conservation and the existence of a safe standard of conservation. Our conditions are specified in terms of the economic and ecological primitives of the model: the biological growth function, the welfare function, the distribution of shocks and the discount rate. Our results indicate that, unlike deterministic models, extinction and conservation in stochastic models are not determined by a simple comparison of the growth rate and the discount rate; the welfare function plays an important role.Received: 20 October 2004, Revised: 28 February 2005, JEL Classification Numbers: D90, O11, O41, Q32.Santanu Roy: Correspondence toResearch on this paper was completed when the second author visited Cornell University in July, 2003. We thank the Center for Analytic Economics and the Department of Economics at Cornell University for making this research visit possible. The current version has gained considerably from the comments made by an anonymous referee.     

Idiosyncratic risk and financial policy

In economies subject to uninsurable idiosyncratic risks, competitive equilibrium allocations are constrained inefficient: reallocations of assets support Pareto superior allocations. This is the case even if the asset market for the allocation of aggregate risks is complete.     

Monetary equilibria over an infinite horizon

Summary. Money provides liquidity services through a cash-in-advance constraint. The exchange of commodities and assets extends over an infinite horizon under uncertainty and a sequentially complete asset market. Monetary policy sets the path of rates of interest and accommodates the demand for balances through open market operations or loans. A public authority, which, most pertinently, inherits a strictly positive public debt, raises revenue from taxes and seignorage, and it distributes possible budget surpluses to individuals through transfers. Competitive equilibria exist, under mild solvency conditions. But, for a fixed path of rates of interest, there is a non-trivial multiplicity of equilibrium paths of prices of commodities. Determinacy requires that, subject to no-arbitrage and in addition to rates of interest, the prices of state-contingent revenues be somehow determined.Received: 16 April 2003, Revised: 16 January 2004, JEL Classification Numbers: D50, E40, E50.We are grateful to Pietro Reichlin, Rabah Amir, Tomoyuki Nakajima, Armando Dominioni and Leo Ferraris for helpful discussions and their reading of preliminary drafts. The usual disclaimer applies. An earlier version was circulated as [4].     

On the disaggregation of excess demand functions when prices and aggregate income vary independently

Under the assumption that prices and aggregate income can vary independently and that the income distribution scheme is known and homogeneous of degree 1 in prices and aggregate income, I raise the question of the restrictions on aggregate excess demand behavior implied by the postulate of rationality of individual agents. If the number of agents is at least as high as the number of commodities, aggregate excess demand need not satisfy, at a point, any restrictions other than homogeneity of degree 0 and Walras' law. Furthermore, if the number of agents, m, is less than the number of commodities, l, aggregate excess demand can be locally arbitrary when projected on an m-dimensional subspace of the commodity space.     

Liberal parentalism

What normative constraints should bind parents (or policy makers) if they intervene in the choices of children (or constituencies) whose preferences evolve over time? For a sophisticated child who anticipates correctly his preference change, we prove that generically there exist parental interventions that are Pareto improving over the backward induction path that the child will follow on his own. If, in contrast, the child misperceives his future preferences, Pareto improving interventions might not exist, and even nudges might be painfully sobering. The parent may then choose to minimize the maximal disappointment along time that her benevolent intervention would cause.     

Myopia and monetary equilibria

In an infinitely lived, representative individual economy, important properties of competitive equilibria, such as determinacy and the non-existence of monetary equilibria, are not robust to the introduction of myopia. An individual is myopic if, at each date, he plans consumption only for that date and few periods that immediately follow; that is, his planning horizon, n, is finite. Equilibria with myopia can display real indeterminacy and allow for monetary as well as non-monetary steady states; thus, they share some of the features of equilibria in economies of overlapping generation. The equilibrium price dynamics (but not the consumption dynamics) of an exchange economy with extreme myopia, n = 1, are identical to the dynamics of an overlapping generation economy with two-period lives.     

Asset Markets and Investment Decisions*

In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date‐events by shareholders, which is not directly observable; rather, it is based on the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. However, even in the absence of nominal assets, competitive equilibrium allocations are generically indeterminate. The set of competitive equilibria is indexed by the price level at each state of the world, which has implications for the effectiveness of monetary policy.     

Pareto improving price regulation when the asset market is incomplete

Summary. Incomplete asset markets cause competitive equilibria to be constrained suboptimal and provides scope for Pareto improving interventions. In this paper, we examine how intervention in prices in asset or spot commodity markets serves this purpose. We show that, if fix-price equilibria behave sufficiently regularly near Walrasian equilibria, Pareto improving price regulation is generically possible. An advantage of price regulation, contrasted with interventions in individuals asset portfolios, is that it operates anonymously, on market variables.Received: 12 August 2002, Revised: 10 July 2003, JEL Classification Numbers: D45, D52, D60.Earlier and longer versions were circulated as Discussion Paper No. 9841 (June, 1998), CORE, Université Catholique de Louvain, and Working Paper No. 01-31 (2001), Department of Economics, Brown University.The research of Herings was made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences and a grant of the Netherlands Organization for Scientific Research (NWO); while this paper was being written, he enjoyed the generous hospitality of the Cowles Foundation.John Geanakoplos and Hamid Sabourian asked questions that clarified a number of points in earlier drafts of the paper. An anonymous referee made comments that were insightful and helpful.     

The Identification of Preferences from Equilibrium Prices under Uncertainty

The competitive equilibrium correspondence, which associates equilibrium prices of commodities and assets with allocations of endowments, identifies the preferences and beliefs of individuals under uncertainty; this is the case even if the asset market is incomplete. Journal of Economic Literature Classification Numbers: D52, D80.