A Course in Monetary Economics: Sequential Trade, Money, and Uncertainty

417 Pages·2004·3.878 MB·English

A Course in Monetary Economics
SequentialTrade,Money,andUncertainty
ToMyParents
ZahavaandShevachEden
A COURSE IN
MONETARY ECONOMICS
SEQUENTIAL TRADE, MONEY, AND UNCERTAINTY
Benjamin Eden
©2005byBenjaminEden
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Firstpublished2005byBlackwellPublishingLtd
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Eden,Benjamin.
Acourseinmonetaryeconomics:sequentialtrade,money,anduncertainty/BenjaminEden.
p.cm.
ISBN0-631-21565-4(cloth:alk.paper)
ISBN0-631-21566-2(pbk.:alk.paper)
1.Money–Mathematicalmodels.
2.Uncertainty–Mathematicalmodels.
I.Title
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2003020730
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Brief Contents
Preface xiii
PartI: IntroductiontoMonetaryEconomics 1
1 Overview 5
2 MoneyintheUtilityFunction 26
3 TheWelfareCostofInflationinaGrowingEconomy 57
4 Government 72
5 MoreExplicitModelsofMoney 86
6 OptimalFiscalandMonetaryPolicy 100
7 MoneyandtheBusinessCycle:DoesMoneyMatter? 123
8 StickyPricesinaDemand-satisfyingModel 147
9 StickyPriceswithOptimalQuantityChoices 155
10 FlexiblePrices 170
PartII: AnIntroductiontotheEconomicsofUncertainty 179
11 Preliminaries 182
12 DoesInsuranceRequireRiskAversion? 197
13 AssetPricesandtheLucas“TreeModel” 202
PartIII: AnIntroductiontoUncertainandSequentialTrade(UST) 207
14 RealModels 210
15 AMonetaryModel 250
vi BRIEFCONTENTS
16 LimitedParticipation,StickyPrices,andUST:AComparison 261
17 InventoriesandtheBusinessCycle 280
18 MoneyandCreditintheBusinessCycle 302
19 EvidencefromMicroData 313
20 TheFriedmanRuleinaUSTModel 327
21 SequentialInternationalTrade 333
22 EndogenousInformationandExternalities 356
23 SearchandContracts 369
References 385
Index 395
Contents
Preface xiii
PartI: IntroductiontoMonetaryEconomics 1
1 Overview 5
1.1 Money,Inflation,andOutput:SomeEmpiricalEvidence 5
1.2 ThePolicyDebate 8
1.3 ModelingIssues 13
1.4 BackgroundMaterial 14
1.4.1 TheFisheriandiagram 15
1.4.2 Efficiencyanddistortivetaxes 18
1.4.3 Assetpricing 21
2 MoneyintheUtilityFunction 26
2.1 MotivatingtheMoneyintheUtilityFunctionApproach:
TheSingle-period,Single-agentProblem 26
2.2 TheMulti-period,Single-agentProblem 28
2.3 EquilibriumwithConstantMoneySupply 33
2.4 TheSocialandPrivateCostforAccumulatingRealBalances 34
2.5 AdministrativeWaysofGettingtotheOptimum 36
2.6 OnceandforAllChangesinM 36
2.7 ChangeintheRateofMoneySupplyChange:TechnicalAspects 37
2.8 ChangeintheRateofMoneySupplyChange:Economics 38
2.9 Steady-stateEquilibrium(SSE) 41
2.10 TransitionfromOneSteadyStatetoAnother 41
2.11 RegimeChanges 43
2.12 IntroducingPhysicalCapitalandBonds 45
viii CONTENTS
2.13 TheGoldenRuleandtheModifiedGoldenRule 47
Appendix2A Adynamicprogrammingexample 53
3 TheWelfareCostofInflationinaGrowingEconomy 57
3.1 Steady-stateEquilibriuminaGrowingEconomy 57
3.2 GeneralizingtheModelinChapter2totheCaseofGrowth 58
3.3 MoneySubstitutes 64
Appendix3A Adynamicprogrammingformulation 69
4 Government 72
4.1 TheRevenuesfromPrintingMoney 72
4.1.1 Steady-staterevenues 72
4.1.2 Outofthesteady-staterevenues 73
4.1.3 Thepresentvalueofrevenues 75
Appendix4A Non-steady-stateequilibria 76
4.2 TheGovernment’s“BudgetConstraint” 78
4.2.1 Monetaryandfiscalpolicy:Whomovesfirst? 81
4.2.2 Thefiscalapproachtothepricelevel 81
4.3 PolicyintheAbsenceofPerfectCommitment:
APositiveTheoryofInflation 82
5 MoreExplicitModelsofMoney 86
5.1 ACash-in-advanceModel 86
5.1.1 Atwo-goodsmodel 87
5.1.2 Ananalogousrealeconomy 89
5.1.3 Moneysuper-neutralityinaone-goodmodel 92
5.2 AnOverlappingGenerationsModel 94
5.3 ABaumol–TobinTypeModel 96
Appendix5A 98
6 OptimalFiscalandMonetaryPolicy 100
6.1 TheSecond-bestAllocation 100
6.2 TheSecondBestandtheFriedmanRule 103
6.3 SmoothingTaxDistortions 109
6.4 AShoppingTimeModel 112
7 MoneyandtheBusinessCycle:
DoesMoneyMatter? 123
7.1 VARandImpulseResponseFunctions:AnExample 125
7.2 UsingVARImpulseResponseAnalysistoAssess
theMoney–OutputRelationship 127
CONTENTS ix
7.3 SpecificationSearch 135
7.4 VarianceDecomposition 142
8 StickyPricesinaDemand-satisfyingModel 147
9 StickyPriceswithOptimalQuantityChoices 155
9.1 TheProductiontoOrderCase 156
9.2 TheProductiontoMarketCase 161
10 FlexiblePrices 170
10.1 Lucas’ConfusionHypothesis 170
10.2 LimitedParticipation 174
PartII: AnIntroductiontotheEconomicsofUncertainty 179
11 Preliminaries 182
11.1 TradeinContingentCommodities 185
11.2 EfficientRiskAllocation 190
12 DoesInsuranceRequireRiskAversion? 197
12.1 TheInsurance-buyingGambler 200
12.2 SociallyHarmfulInformation 201
13 AssetPricesandtheLucas“TreeModel” 202
PartIII: AnIntroductiontoUncertainandSequentialTrade(UST) 207
14 RealModels 210
14.1 AnExample 210
14.1.1 Downwardslopingdemand 215
14.1.2 Welfareanalysis 218
14.1.3 Demandandsupplyanalysis 221
14.2 Monopoly 224
14.2.1 Procyclicalproductivity 226
14.2.2 Estimatingthemarkup 227
14.3 RelationshiptotheArrow–DebreuModel 228
14.4 HeterogeneityandSupplyUncertainty 231
14.4.1 Themodel 233
x CONTENTS
14.5 Inventories 237
14.5.1 Temporary(partial)equilibrium 238
14.5.2 Solvingforatemporaryequilibrium 240
14.5.3 Fullequilibrium 243
14.5.4 Efficiency 243
Appendix14A Thefirm’sproblem 247
Appendix14B Theplanner’sproblem 248
15 AMonetaryModel 250
15.1 AnExample 251
15.2 WorkingwiththeMoneySupplyastheUnitofAccount 253
15.3 AnticipatedandUnanticipatedMoney 255
15.4 LaborChoice,AverageCapacityUtilizationandWelfare 256
15.5 AGeneralizationtoManyPotentialMarkets 256
15.6 AsymmetricEquilibria:APerfectlyFlexiblePriceDistributionis
ConsistentwithIndividualPricesThatAppeartoBe“Rigid” 258
15.7 SummaryoftheImplicationsoftheModel 259
16 LimitedParticipation,StickyPrices,andUST:AComparison 261
16.1 LimitedParticipation 261
16.2 StickyPrices 265
16.3 UST 268
16.4 ARealBusinessCycleModelwithWedges:SomeEquivalence
Results 274
16.5 AdditionalTestsBasedonUnitLaborCostandLaborShare 276
17 InventoriesandtheBusinessCycle 280
17.1 IntroducingCostlessStorage 282
17.2 AddingSupplyShocks 288
17.3 TestingtheModelwithDetrendedVariables 292
17.4 UsinganImpulseResponseAnalysiswithNon-detrendedVariables
toTestforPersistence 297
Appendix17A TheHodrick–Prescott(H–P)filter 300
18 MoneyandCreditintheBusinessCycle 302
18.1 AUSTModelwithCredit 302
18.2 InventoriesAreaSufficientStatisticforPastDemandShocks 305
18.3 EstimatingtheResponsestoaMoneyShock 306