Inflation and the monetary financing of deficits are analyzed in a model in which the deficit is ... more Inflation and the monetary financing of deficits are analyzed in a model in which the deficit is constrained to be less than a given fraction of a measure of aggregate market activity. Depending on parameter values, the model can have multiple steady states. Under adaptive learning with heterogeneous learning rules, there is convergence to a subset of these steady states. In some cases, a high-inflation constrained steady state will emerge. However, with a sufficiently tight fiscal constraint, the low-inflation steady state is globally stable. We provide experimental evidence in support of our theoretical results.
I study the stability properties of a stochastic equilibrium growth model with a finite number of... more I study the stability properties of a stochastic equilibrium growth model with a finite number of infinitely lived consumers. The exogenous stochastic environment is represented by a stationary stochastic process that influences preferences, technology, and primary resources. Consumers maximize the expected sum of discounted utilities. Production is intertemporal and primary resources are assumed to be necessary for the production of capital goods. By adapting standard assumptions in general equilibrium theory and turnpike theory, I show that if consumers have homogeneous discount factors close enough to one, the allocation of an interior equilibrium converges to the allocation of a stationary equilibrium with transfer payments. This result is used to prove the existence of a stationary equilibrium.
We study how limited enforcement of contracts and barriers to business start-up affect the invest... more We study how limited enforcement of contracts and barriers to business start-up affect the investment in knowledge capital and the adoption of new technologies. We show that barriers to business startup (limited competition) is the most important obstacle to growth. Limited enforceability of contracts is detrimental to growth only if there are barriers to business start-up. Our results are consistent with crosscountry evidence. * Ramon Marimon acknowledges the support and hospitality of the "Ente Luigi Einaudi" in Rome, as well as the support of the Fundación BBVA and of the Ministerio de Educación y Ciencia
We develop a monetary model with flexible supply of labor, cash in advance constraints and govern... more We develop a monetary model with flexible supply of labor, cash in advance constraints and government spending financed by seignorage. This model has two regimes. One regime is conventional with two steady states. The other regime has a unique steady state which can be determinate or indeterminate. In the latter case there exist sunspot equilibria which are stable under adaptive learning, taking the form of noisy finite state Markov processes at resonant frequencies. For a range of parameter values, a sufficient reduction in government purchases will eliminate these equilibria.
We study a dynamic equilibrium model in which agents have adaptive expectations and monetary auth... more We study a dynamic equilibrium model in which agents have adaptive expectations and monetary authorities pursue an inflation target. We show how alternative monetary stabilization policies become more effective when fiscal constraints on deficits are implemented, although they are not binding at the equilibrium target. In particular, we show that the inflation target equilibrium can be locally, or even globally, stable for a large class of adaptive learning schemes. We also compare alternative stabilization policies in terms of their stability properties. Commonly postulated conditional Taylor-type rules tend to be dominated by other rules, such as an unconditional Friedman type.
We characterize the optimal sequential choice of monetary policy in economies with either nominal... more We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive-or negative-debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.
All these objectives are inextricably linked: the large market, technological cooperation, streng... more All these objectives are inextricably linked: the large market, technological cooperation, strengthening the European monetary system, economic and social cohesion and the social aspects of collective action." (Jacques Delors, 9 th Jean Monnet Lecture at the European University Institute, November 1986.) "The internal effects of a mutable policy are […] calamitous. It poisons the blessing of liberty itself. It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man that knows what the law is today can guess what it will be tomorrow. Law is defined as a rule of action; but how can be a rule, which is little known and less fixed?"
and the 1997 SED Meetings in Oxford for helpful comments and suggestions. All errors are ours. Th... more and the 1997 SED Meetings in Oxford for helpful comments and suggestions. All errors are ours. This paper is based on research conducted while Teles was visiting the Universidad Di Tella, the European Forum at the European University Institute and the Federal Reserve Bank of Minneapolis. Teles thanks hospitality at these Institutions as well as the financial support of JNICT. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Monetary Theory as a Basis for Monetary Policy, 2001
There are three issues in which everyday macroeconomic life and economic theory seem to be quite ... more There are three issues in which everyday macroeconomic life and economic theory seem to be quite apart. The first is the zeal with which governments in Europe and elsewhere pursue fiscal discipline as almost a precondition for price stability. One would think that governments were trying to implement a well-established theorem in monetary theory, but while the need to co-ordinate fiscal and monetary policies is a well-understood principle,1 such a theorem has been missing.
The authors develop an equilibrium search-matching model with risk-neutral agents and two-sided e... more The authors develop an equilibrium search-matching model with risk-neutral agents and two-sided ex-ante heterogeneity. Unemployment insurance has the standard effect of reducing employment, but also helps workers to get a suitable job. The predictions of our simple model are consistent with the contrasting performance of the labor market in Europe and US in terms of unemployment, productivity growth and wage
The authors obtain a recursive formulation for a general class of contracting problems involving ... more The authors obtain a recursive formulation for a general class of contracting problems involving incentive constraints. These constraints make the corresponding maximization (sup)problems non recursive. Our approach consists of studying a recursive Lagrangian.
Inflation and the monetary financing of deficits are analyzed in a model in which the deficit is ... more Inflation and the monetary financing of deficits are analyzed in a model in which the deficit is constrained to be less than a given fraction of a measure of aggregate market activity. Depending on parameter values, the model can have multiple steady states. Under adaptive learning with heterogeneous learning rules, there is convergence to a subset of these steady states. In some cases, a high-inflation constrained steady state will emerge. However, with a sufficiently tight fiscal constraint, the low-inflation steady state is globally stable. We provide experimental evidence in support of our theoretical results.
I study the stability properties of a stochastic equilibrium growth model with a finite number of... more I study the stability properties of a stochastic equilibrium growth model with a finite number of infinitely lived consumers. The exogenous stochastic environment is represented by a stationary stochastic process that influences preferences, technology, and primary resources. Consumers maximize the expected sum of discounted utilities. Production is intertemporal and primary resources are assumed to be necessary for the production of capital goods. By adapting standard assumptions in general equilibrium theory and turnpike theory, I show that if consumers have homogeneous discount factors close enough to one, the allocation of an interior equilibrium converges to the allocation of a stationary equilibrium with transfer payments. This result is used to prove the existence of a stationary equilibrium.
We study how limited enforcement of contracts and barriers to business start-up affect the invest... more We study how limited enforcement of contracts and barriers to business start-up affect the investment in knowledge capital and the adoption of new technologies. We show that barriers to business startup (limited competition) is the most important obstacle to growth. Limited enforceability of contracts is detrimental to growth only if there are barriers to business start-up. Our results are consistent with crosscountry evidence. * Ramon Marimon acknowledges the support and hospitality of the "Ente Luigi Einaudi" in Rome, as well as the support of the Fundación BBVA and of the Ministerio de Educación y Ciencia
We develop a monetary model with flexible supply of labor, cash in advance constraints and govern... more We develop a monetary model with flexible supply of labor, cash in advance constraints and government spending financed by seignorage. This model has two regimes. One regime is conventional with two steady states. The other regime has a unique steady state which can be determinate or indeterminate. In the latter case there exist sunspot equilibria which are stable under adaptive learning, taking the form of noisy finite state Markov processes at resonant frequencies. For a range of parameter values, a sufficient reduction in government purchases will eliminate these equilibria.
We study a dynamic equilibrium model in which agents have adaptive expectations and monetary auth... more We study a dynamic equilibrium model in which agents have adaptive expectations and monetary authorities pursue an inflation target. We show how alternative monetary stabilization policies become more effective when fiscal constraints on deficits are implemented, although they are not binding at the equilibrium target. In particular, we show that the inflation target equilibrium can be locally, or even globally, stable for a large class of adaptive learning schemes. We also compare alternative stabilization policies in terms of their stability properties. Commonly postulated conditional Taylor-type rules tend to be dominated by other rules, such as an unconditional Friedman type.
We characterize the optimal sequential choice of monetary policy in economies with either nominal... more We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive-or negative-debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.
All these objectives are inextricably linked: the large market, technological cooperation, streng... more All these objectives are inextricably linked: the large market, technological cooperation, strengthening the European monetary system, economic and social cohesion and the social aspects of collective action." (Jacques Delors, 9 th Jean Monnet Lecture at the European University Institute, November 1986.) "The internal effects of a mutable policy are […] calamitous. It poisons the blessing of liberty itself. It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man that knows what the law is today can guess what it will be tomorrow. Law is defined as a rule of action; but how can be a rule, which is little known and less fixed?"
and the 1997 SED Meetings in Oxford for helpful comments and suggestions. All errors are ours. Th... more and the 1997 SED Meetings in Oxford for helpful comments and suggestions. All errors are ours. This paper is based on research conducted while Teles was visiting the Universidad Di Tella, the European Forum at the European University Institute and the Federal Reserve Bank of Minneapolis. Teles thanks hospitality at these Institutions as well as the financial support of JNICT. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Monetary Theory as a Basis for Monetary Policy, 2001
There are three issues in which everyday macroeconomic life and economic theory seem to be quite ... more There are three issues in which everyday macroeconomic life and economic theory seem to be quite apart. The first is the zeal with which governments in Europe and elsewhere pursue fiscal discipline as almost a precondition for price stability. One would think that governments were trying to implement a well-established theorem in monetary theory, but while the need to co-ordinate fiscal and monetary policies is a well-understood principle,1 such a theorem has been missing.
The authors develop an equilibrium search-matching model with risk-neutral agents and two-sided e... more The authors develop an equilibrium search-matching model with risk-neutral agents and two-sided ex-ante heterogeneity. Unemployment insurance has the standard effect of reducing employment, but also helps workers to get a suitable job. The predictions of our simple model are consistent with the contrasting performance of the labor market in Europe and US in terms of unemployment, productivity growth and wage
The authors obtain a recursive formulation for a general class of contracting problems involving ... more The authors obtain a recursive formulation for a general class of contracting problems involving incentive constraints. These constraints make the corresponding maximization (sup)problems non recursive. Our approach consists of studying a recursive Lagrangian.
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