Guillaume Rocheteau |

Economic Advisor

Guillaume Rocheteau , Economic Advisor

Guillaume Rocheteau is an economic advisor in the Research Department of the Federal Reserve Bank of Cleveland. His major fields of interest are macroeconomics, monetary economics, and labor economics, and he has published in International Economic Review, Journal of Monetary Economics, Journal of Money, Credit, and Banking, and Journal of Macroeconomics.

Before joining the department in January 2004, he was a visiting professor at the University of Pantheon-Assas (Paris 2) in 2002-2003, a lecturer at the Australian National University from 2001-2002, and an assistant professor at the University of Lausanne in 1999-2001. He holds a master of economics from the University of Panthéon-Assas, a master of mathematics from the University of Pierre and Marie Curie, and a Ph.D. from the University of Paris.

  • Fed Publications
  • Other Publications
  • Work in Progress
Title Date Publication Author(s) Type

 

October, 2011 Federal Reserve Bank of Cleveland, Working Paper no. 11-24 ; Yiting Li; Pierre-Olivier Weill; Working Papers
Abstract: We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset’s resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.

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January, 2011 Federal Reserve Bank of Cleveland, working paper no. 11-03 ; Working Papers
Abstract: I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with a constrained-efficient allocation takes the form of a continuous correspondence that can fit the data over the period 1900-2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to different assumptions regarding the observability of money holdings, the introduction of match-specific heterogeneity, and endogeneous participation decisions.

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January, 2011 Federal Reserve Bank of Cleveland, working paper no. 11-04 ; Working Papers
Abstract: This paper adopts mechanism design to tackle the central issue in monetary theory, namely, the coexistence of money and higher-return assets. I describe an economy with pairwise meetings, where fiat money and risk-free capital compete as means of payment. Whenever fiat money has an essential role, any constrained-efficient allocation is such that capital commands a higher rate of return than fiat money.

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January, 2011 Federal Reserve Bank of Cleveland, working paper no. 11-05 ; Pierre-Olivier Weill; Working Papers
Abstract: On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading.

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October, 2010 Federal Reserve Bank of Cleveland, Working Paper no.1016 ; Randall Wright; Working Papers
Abstract: We study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset price trajectories that resemble bubbles growing and bursting. We also analyze endogenous private and public liquidity provision. Sometimes it is efficient to have enough liquid assets to satiate demand; other times it is not.

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May 2009 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 26 ; Joseph G Haubrich; Pierre-Olivier Weill; Randall Wright; Policy Discussion Papers
Abstract: This Policy Discussion Paper summarizes the papers that were presented at the Liquidity in Frictional Markets conference in November 2008. The papers, which looked at markets for assets as diverse as houses, bank loans, and electronic funds transfer, all explored that amorphous concept called “liquidity” and how its presence—or absence—affects the economy.

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January, 2009 Federal Reserve Bank of Cleveland, Working Paper no.0902 ; Working Papers
Abstract: I extend and discuss the model of asset liquidity by Lester, Postlewaite, and Wright (2007, 2008). I consider a model with decentralized trades in which claims on a real and divisible asset serve as means of payment. A recognizability problem is introduced by assuming that the claims on the asset can be counterfeited at a positive cost. This formalization nests the models by Lagos and Rocheteau (2008) and Geromichalos, Licari, and Suarez-Lledo (2007), in which there is no recognizability problem, and Lester, Postlewaite, and Wright (2007), in which counterfeits can be produced at no cost. Even though no counterfeiting occurs in equilibrium, the recognizability problem affects the composition of trades: Buyers consume less and spend a lower fraction of their asset holdings in matches where sellers are uninformed. Both the asset’s price and its liquidity (as measured by its transaction velocity) depend on the recognizability of the asset. The asset is more liquid and its return is lower if either the sellers’ ability to recognize counterfeits or the cost of producing counterfeits increases.

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January, 2009 Federal Reserve Bank of Cleveland, Working Paper no. 0901 ; Working Papers
Abstract: This paper offers a monetary theory of asset liquidity—one that emphasizes the role of assets in payment arrangements—and it explores the implications of the theory for the relationship between assets’ intrinsic characteristics and liquidity, and the effects of monetary policy on asset prices and welfare. The environment is a random-matching economy where fiat money coexists with a real asset, and no restrictions are imposed on payment arrangements. The liquidity of the real asset is endogenized by introducing an informational asymmetry in regard to its fundamental value. The model delivers the following insights. A monetary equilibrium exists irrespective of the per capita supply of the real asset, provided that inflation is not too high. The illiquidity premium paid to the real asset tends to increase as the asset becomes riskier and more abundant. Monetary policy affects the real asset’s return when its quantity is not too large and inflation is in some intermediate range. The model predicts a negative relationship between inflation and the real asset’s expected return.

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11.2008 Federal Reserve Bank of Cleveland, Working Paper no. 0809 ; Yiting Li; Working Papers
Abstract: We study counterfeiting of currency in a search–theoretic model of monetary exchange. In contrast to Nosal and Wallace (2007), we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility to counterfeit ?at money can affect its value, velocity, output and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trades in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society’s welfare, but the latter policy does not always decrease counterfeiting.

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May, 2008 Federal Reserve Bank of Cleveland, Working Paper no. 0804 ; Ricardo Lagos; Working Papers
Abstract: We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume, and trading delays—all the dimensions of market liquidity that search-based theories seek to explain.

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April, 2008 Federal Reserve Bank of Cleveland, Working Paper no. 0802 ; Working Papers
Abstract: I study random-matching economies where at money coexists with real assets, and no restrictions are imposed on payment arrangements. I emphasize informational asymmetries about asset fundamentals to explain the partial illiquidity of real assets and the usefulness of at money. The liquidity of the real asset, as measured by its transaction velocity, is shown to depend on the discrepancy of its dividend across states as well as policy. I analyze how monetary policy affects payment arrangements, asset prices, and welfare.

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January, 2008 Federal Reserve Bank of Cleveland, Working Paper no. 0801 ; Murat Tasci; Working Papers
Abstract: We review the positive and normative effects of a minimum wage in various versions of a search-theoretic model of the labor market.

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November 2007 Federal Reserve Bank of Cleveland, Economic Commentary ; Murat Tasci; Economic Commentary
Abstract: Can two countries, or two different states, with similar technologies, resources, and policies exhibit differences in labor market performance? In contrast to a commonly held view, the answer is yes under some conditions that we review in this Commentary. If these conditions are satisfied, the unemployment rate and the production of an economy can fluctuate even in the absence of shocks. Moreover, government intervention can be useful provided that it coordinates the economy on the preferred outcome.

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October, 2007 Federal Reserve Bank of Cleveland, Working Paper no. 0715 ; Bryan Engelhardt; Peter C Rupert; Working Papers
Abstract: This paper extends the Pissarides (2000) model of the labor market to include crime and punishment `a la Becker (1968). All workers, irrespective of their labor force status can commit crimes and the employment contract is determined optimally. The model is used to study, analytically and quantitatively, the effects of various labor market and crime policies. For instance, a more generous unemployment insurance system reduces the crime rate of the unemployed but its effect on the crime rate of the employed depends on job duration and jail sentences. When the model is calibrated to U.S. data, the overall effect on crime is positive but quantitatively small. Wage subsidies reduce unemployment and crime rates of employed and unemployed workers, and improve society's welfare. Hiring subsidies reduce unemployment but they can raise the crime rate of employed workers. Crime policies (police technology and jail sentences) affect crime rates signifi cantly but have only negligible effects on the labor market.

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August, 2007 Federal Reserve Bank of Cleveland, Working Paper no. 0708 ; Ricardo Lagos; Pierre-Olivier Weill; Working Papers
Abstract: We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors' aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity, persistence) under which dealers provide liquidity to investors following the crash. We also characterize the conditions under which dealers' incentives to provide liquidity are consistent with market efficiency.

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June, 2007 Federal Reserve Bank of Cleveland, Working Paper no. 0706 ; Ricardo Lagos; Working Papers
Abstract: We study how trading frictions in asset markets affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. To this end, we analyze the equilibrium and optimal allocations of a search-theoretic model of financial intermediation similar to Duffie, Gârleanu and Pedersen (2005). In contrast with the existing literature, the model we develop imposes no restrictions on asset holdings, so traders can accommodate frictions by varying their trading needs through changes in their asset positions. We find that this is a critical aspect of investor behavior in illiquid markets. A reduction in trading frictions leads to an increase in the dispersion of asset holdings and trade volume. Transaction costs and intermediaries' incentives to make markets are nonmonotonic in trade frictions. With the entry of dealers, these nonmonotonicities give rise to an externality in liquidity provision that can lead to multiple equilibria. Tight spreads are correlated with large volume and short trading delays across equilibria. From a normative standpoint we show that the asset allocation across investors and the number of dealers are socially inefficient.

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May 1, 2007 Federal Reserve Bank of Cleveland, Economic Commentary ; Murat Tasci; Economic Commentary
Abstract: New models of employment show that there are some cases in which a minimum wage can have positive effects on employment and social welfare. The effects depend ultimately on the prevailing market wage and the frictions in the market. Evidence to date does not support the view that raising the minimum wage will lead to positive employment effects.

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March 2007 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 18 ; Ed Nosal; Randall Wright; Policy Discussion Papers
Abstract: This Policy Discussion Paper summarizes the papers presented at the 2006 Summer Workshop on Money, Banking, and Payments. Every summer since 2002, some of the best researchers in the areas of theory, policy, and quantitative analysis relating to money, banking, and payments systems have met in Cleveland to discuss their latest work. The papers presented at the 2006 workshop cover a vast spectrum of issues and use a wide variety of methods. Still, there is an underlying theme, which is an effort to enhance our understanding of monetary economics, broadly defined, and to uncover new ways to think about important substantive issues. Hopefully, this helps not only theoretical monetary economists, but also economists such as central bankers with a more practical policy-oriented view.

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January, 2007 Federal Reserve Bank of Cleveland, Working Paper no. 0701 ; Ricardo Lagos; Working Papers
Abstract: This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. To this end, we generalize the search-theoretic model of financial intermediation of Darrell Duffie et al. (2005) to allow for entry of dealers and unrestricted asset holdings.

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October 15, 2006 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary
Abstract: Modern economists have built models of the labor market, which isolate the market's key drivers and describe the way these interact to produce particular levels of unemployment. One of the most popular models used by macroeconomists today is the search-matching model of equilibrium unemployment. We explain this model, and show how it can be applied to understand the way various policies, such as unemployment benefits, taxes, or technological changes, can affect the unemployment rate.

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July, 2006 Federal Reserve Bank of Cleveland, Working Paper no. 0608 ; Ricardo Lagos; Working Papers
Abstract: We construct a model in which capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

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July, 2006 Federal Reserve Bank of Cleveland, Working Paper no. 0607 ; Ricardo Lagos; Working Papers
Abstract: We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Gârleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealers, we show that a steady-state equilibrium exists and is unique, and provide a condition on preferences under which a reduction in trading frictions leads to an increase in the price of the asset. We also analyze the effects of trading frictions on bid-ask spreads, trade volume and the volatility of asset prices, and find that the asset allocation is constrained-inefficient unless investors have all the bargaining power in bilateral negotiations with dealers. We show that the dealers' entry decision introduces a feedback that can give rise to multiple equilibria, and that free-entry equilibria are generically inefficient.

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April 2006 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 15 ; Ed Nosal; Randall Wright; Policy Discussion Papers
Abstract: This PDP summarizes the papers presented at the 2005 Summer Workshop on Money, Banking, and Payments at the Cleveland Fed. Papers covered a wide variety of topics in monetary theory and policy, banking, and payments systems research. Topics ranged from optimal monetary policy, optimal bank contracts, the private supply of money, the coexistence of credit, money, and capital, the design of payment systems, and international currencies. Effort was made to calibrate models and bring them closer to the data. These contributions illustrate the progress made in the field of monetary theory.

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February 2006 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 14 ; Ed Nosal; Policy Discussion Papers
Abstract: In this paper we provide a survey of the payment literature in a unified framework. The environment is a variant of the Lagos and Wright (2005) model of monetary exchange, where some trades occur in bilateral meetings while others occur in more or less decentralized markets. We use this basic environment to introduce alternative sets of trading frictions that give rise to different payments instruments and/or payments institutions. We investigate credit economies, monetary economies, and economies in which money and credit coexist. We also study alternative assets, such as foreign exchange, capital (equity), and government liabilities, which can be used as payment instruments in conjunction with money. We introduce banks as deposit-taking institutions whose liabilities circulate in the economy. We also provide an extension in which the process of the settlement of debt for money is modeled and the potential social costs of settlement are characterized. Finally, we investigate government policy responses to the social costs introduced by various trading frictions.

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January 2006 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 12 ; Ben R Craig; Policy Discussion Papers
Abstract: This paper extends recent findings in the search-theoretic literature on monetary exchange regarding the welfare costs of inflation. We present first estimates of the welfare cost of inflation using the "welfare triangle" methodology of Bailey (1958) and Lucas (2000). We then derive a money demand function from the search-theoretic model of Lagos and Wright (2005) and we estimate it from U.S. data over the period 1900-2000. We show that the welfare cost of inflation predicted by the model accords with the welfare-triangle measure when pricing mechanisms are such that buyers appropriate the social marginal benefit of their real balances. For other mechanisms, welfare triangles underestimate the true welfare cost of inflation because of a rent-sharing externality. We also point out other inefficiencies associated with noncompetitive pricing, which matter for estimating the cost of inflation. We then illustrate how endogenous participation decisions can mitigate or exacerbate the cost of inflaion, and we provide calibrated examples in which a deviation from the Friedman rule is optimal. Finally, we discuss distributional effects of inflation.

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December, 2005 Federal Reserve Bank of Cleveland, Working Paper no. 0513 ; Peter C Rupert; Karl Shell; Randall Wright; Working Papers
Abstract: We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment.

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December, 2005 Federal Reserve Bank of Cleveland, Working Paper no. 0512 ; Richard Dutu; Ed Nosal; Working Papers
Abstract: This paper develops a model of currency circulation under asymmetric information. Agents are heterogeneous and trade in bilateral matches. Coins are intrinsically valuable and are available in two weights, light and heavy. We characterize the equilibrium under complete information and under imperfect information about the quality of coins. We deter- mine a set of conditions under which the two currencies circulate and are traded according to di¤erent terms of trade. We study how output, welfare, and the velocity of currency are a¤ected by the recognizability of coins. We show that society.s welfare increases as coins become more easily recognizable.

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October 1, 2005 Federal Reserve Bank of Cleveland, Economic Commentary ; Ed Nosal; Economic Commentary
Abstract: Gresham's law, which says that bad money tends to drive good money out of circulation, may account for many nations' episodes of money troubles, as far back as ancient Athens. This Commentary discusses the two main explanations for Gresham’s law and suggests some circumstances in which the law does not apply.

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May, 2005 Federal Reserve Bank of Cleveland, Working Paper no. 0504 ; Ben R Craig; Working Papers
Abstract: This paper investigates the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which price stability is optimal and a condition under which positive inflation is desirable. We relate these conditions to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for all our numerical examples. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.

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March, 2005 Federal Reserve Bank of Cleveland, Working Paper no. 0501 ; Christopher J Waller; Working Papers
Abstract: Search models of monetary exchange have typically relied on Nash (1950) bargaining or strategic games that yield an equivalent outcome to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions, whereas under strongly monotonic solutions such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman Rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition.

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March 1, 2005 Federal Reserve Bank of Cleveland, Economic Commentary ; Ben R Craig; Economic Commentary
Abstract: New models of monetary economies, developed in the last 15 years, suggest that traditional measures of the welfare cost of inflation may underestimate the true loss that inflation inflicts on society. According to these models, the cost of 10 percent inflation ranges from 1 to 5 percent of real income.

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January 2005 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 8 ; Ed Nosal; Randall Wright; Policy Discussion Papers
Abstract: We provide a summary and an overview of the papers presented at the Federal Reserve Bank of Cleveland's 2004 Workshop on Money, Banking, and Payments, held during the weeks of August 3-7 and August 23-27, 2004. The papers presented at the workshop are available at www.clevelandfed.org/research/confpast.cfm

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October 15, 2004 Federal Reserve Bank of Cleveland, Economic Commentary ; Sébastien Lotz; Economic Commentary
Abstract: The United States has introduced two one-dollar coins in the past 25 years, both of which have not circulated widely. Many other countries have replaced lower-denomination notes with coins and have achieved wide circulation and cost savings. Lessons from those countries suggest that achieving widespread use of a dollar coin is much harder if the note is allowed to remain in circulation.

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October, 2004 Federal Reserve Bank of Cleveland Working Paper no. 0408 ; Aleksander Berentsen; Shouyong Shi; Working Papers
Abstract: In this paper the authors study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. They show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency, and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. The authors analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, they extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities.

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August, 2004 Federal Reserve Bank of Cleveland, Working Paper no. 0407 ; Ricardo Lagos; Working Papers
Abstract: This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers' search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates.

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July, 2004 Federal Reserve Bank of Cleveland Working Paper no. 0405 ; Randall Wright; Working Papers
Abstract: We compare three market structures for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We also extend work on the microfoundations of money by allowing a general matching technology and entry. We study how equilibrium and the effects of policy depend on market structure. Under bargaining, trade and entry are both inefficient, and inflation implies first-order welfare losses. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation may actually improve welfare. Under posting, the Friedman rule yields the first best, and inflation implies second-order welfare losses.

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Title Date Publication Author(s) Type

 

Forthcoming Journal of Monetary Economics ; Boragan Aruoba; Christopher J Waller; Journal Article
Abstract: Search models of monetary exchange have typically relied on Nash (1950) bargaining, or strategic games that yield an equivalent outcome, to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a search model with divisible money, we show that the properties of the bargaining solutions do matter both qualitatively and quantitatively for questions of first-degree importance in monetary economics such as: (i) the efficiency of monetary equilibrium; (ii) the optimality of the Friedman rule and (iii) the welfare cost of inflation.

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Forthcoming American Economic Review (papers and proceedings, May 2007) ; Ricardo Lagos; Journal Article
Abstract: This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. To this end, we generalize the search-theoretic model of financial intermediation of Darrell Duffie et al. (2005) to allow for entry of dealers and unrestricted asset holdings.

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Forthcoming Journal of Money, Credit, and Banking ; Ben R Craig; Journal Article
Abstract: This paper uses a search model of monetary exchange to provide new insights for evaluating the welfare costs of inflation. We first show that the search model of money can rationalize the estimates of the welfare cost of inflation based on the "welfare triangle" methodology of Bailey (1956) and Lucas (2000) provided that buyers appropriate the social marginal benefit of their real balances. For other mechanisms, the measure given by the welfare triangle has to be scaled up by a factor that increases with sellers' market power. We introduce capital and endogenous participation decisions and study how the cost of inflation is affected. We provide calibrated examples in which a deviation from the Friedman rule is optimal.

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Forthcoming European Economic Review ; Ben R Craig; Journal Article
Abstract: We investigate the welfare effects of in?ation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which strictly positive inflation is desirable. We relate this condition to a standard e¢ ciency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for our numerical examples provided menu costs are small. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.

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forthcoming in Monetary Policy in Low Inflation Economies, Cambridge University Press ; Randall Wright; Article in Book
Abstract: We study the effects of inflation in models with various trading frictions. The framework is related to recent search-based monetary theory, in that trade takes place periodically in centralized and decentralized markets, but we consider three alternative mechanisms for price formation: bargaining, price taking, and posting. Both the value of money per transaction and market composition are endogenous, allowing us to characterize intensive and extensive margin effects. In the calibrated model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to be between the bargaining and posting models. In some cases, moderate inflation may increase output or welfare.

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forthcoming Economic Journal ; Aleksander Berentsen; Shouyong Shi; Journal Article
Abstract: In this paper, we study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. We show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods traded in each match and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. We analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, we extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize search externalities.

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forthcoming Journal of Economic Theory ; Peter C Rupert; Karl Shell; Randall Wright; Journal Article
Abstract: In general equilibrium with nonconvexities, there exist sunspot equilibria with good welfare properties, where sunspots ameliorate the nonconvexities. In these equilibria, we show agents act as if they have quasi-linear utility. We use this result to construct a new model of monetary exchange along the lines of the one by Lagos and Wright, where trade occurs in both centralized and decentralized markets, but we replace quasi-linearity with general preferences and indivisible labor. This suggests that modern monetary theory is ore robust than one might have thought, and cmonstitutes progress on the classic problem of integrating money and general equilibrium theory.

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Inflation, Output, and Welfare

 

2005 International Economic Review, vol. 46, pp. 495-522 ; Ricardo Lagos; Journal Article

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Money and Information

 

2004 Review of Economic Studies, 71, 915-944. ; Aleksander Berentsen; Journal Article
Abstract: This paper investigates the role of money in markets in which producers have private information about the quality of the goods they supply. When the fraction of high quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can decrease welfare relative to the barter equilibrium. The origin of this inefficiency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more costly information in the monetary equilibrium than in the barter equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs.

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Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium

 

2005 Econometrica, 73, 175-202 ; Randall Wright; Journal Article
Abstract: We compare three market structures for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We also extend work on the microfoundations of money by allowing a general matching technology and entry. We study how equilibrium and the effects of policy depend on market structure. Under bargaining, trade and entry are both inefficient, and inflation implies first-order welfare losses. Under price taking, the Friedman Rule solves the first inefficiency but not the second, and inflation may actually improve welfare. Under posting, the Friedman Rule yields the first best, and inflation implies second-order welfare losses.

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Forthcoming Journal of Economic Theory ; Ricardo Lagos; Journal Article
Abstract: We construct a model where capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman Rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

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Money and the Gains from Trade

 

2003 International Economic Review, 44, pp. 263-297 ; Aleksander Berentsen; Journal Article

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2003 Contributions to Macroeconomics, 3, No. 1, Article 11. ; Aleksander Berentsen; Journal Article

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On the Efficiency of Monetary Exchange: How Divisibility of Money Matters?

 

November 2002 Journal of Monetary Economics, 49/8, pp. 1621-1649 ; Aleksander Berentsen; Journal Article

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On the Launching of a New Currency

 

2002 Journal of Money, Credit, and Banking, 34, No. 3, Part 1 ; Sébastien Lotz; Journal Article

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Working Time Regulation in a Search Economy with Worker Moral Hazard

 

2002 Journal of Public Economics, 84/3, pp. 387-425. ; Journal Article

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Equilibrium Unemployment and Wage Formation with Matching Frictions and Worker Moral Hazard

 

2001 Labour Economics, 8, pp. 75-102 ; Journal Article

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Balanced-Budget Rules and Indeterminacy of the Equilibrium Unemployment Rate

 

1999 Oxford Economic Papers, 51, pp. 399-409 ; Journal Article

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Title Date Publication Author(s) Type

 

April, 2007 Unpublished manuscript ; Richard Dutu; Ed Nosal; Unpublished manuscript

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April, 2007 Unpublished manuscript ; Bryan Engelhardt; Peter C Rupert; Unpublished manuscript

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March 2005 Unpublished manuscript ; Christopher J Waller; Unpublished manuscript
Abstract: Search models of monetary exchange have typically relied on Nash (1950) bargaining, or strategic games that yield an equivalent outcome, to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions whereas under strongly monotonic solutions, such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition.

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