JOSEPH HASLAG University of Missouri-Columbia

Transcription

1 Modeimg Monetary Economies Fourth Edition BRUCE CHAMP SCOTT FREEMAN JOSEPH HASLAG University of Missouri-Columbia gif CAMBRIDGE $0? UNIVERSITY PRESS

2 Contents Preface page xv Parti Money 1 Trade without Money: The Role of Record Keeping 3 1 Roadmap 3 2 Beginnings 4 3 The Environment 5 4 Preferences Future Generations The Initial Old The Never-Ending Economy 12 5 The Economic Problem Feasible Allocations The Golden Rule Allocation 15 6 Decentralized Solutions A Record-Keeping Equilibrium Finding the Conversion Rate The Game and the Enforcement 22 7 Is the Record-Keeping Equilibrium the Golden Rule? 24 8 Summary 25 9 Exercises 25 2 A Simple Model of Money 27 1 Roadmap 27 2 The Environment 28 3 The Economic Problem Feasible Allocations 29 4 Decentralized Solutions 30 vii

3 viii Contents 4.1 Equilibrium without Money Equilibrium with Money 31 5 Finding the Demand for Fiat Money A Person's Budget Finding Fiat Money's Rate of Return The Quantity Theory of Money The Neutrality of the Fiat Money Stock The Role of Fiat Money 38 6 Is This Monetary Equilibrium the Golden Rule? 39 7 A Monetary Equilibrium with a Growing Economy The Feasible Set with a Growing Population The Budget Set with a Growing Population 43 8 Summary 44 9 Exercises Appendix: Using Calculus An Example Appendix Exercise 49 3 Barter and Commodity Money 50 1 Roadmap 50 2 Barter and Commodity Money 51 3 A Model of Barter Direct Barter Monetary Exchange 54 4 What Should Be Used as Money? Exchange Costs 58 5 A Model of Commodity Money The Consumption of Gold The Inefficiency of Commodity Money 62 6 Summary 64 7 Exercises 64 4 Inflation 67 1 Roadmap 67 2 Inflation 67 3 A Growing Supply of Fiat Money The Budget Set with Monetary Growth The Inefficiency of Inflation The Golden Rule Monetary Policy in a Growing Economy A Government Policy to Fix the Price Level 77 4 Financing Government Purchases Is Inflation an Efficient Tax? A Nondistorting Tax 82 5 The Limits to Seigniorage 85

4 Contents ix 6 Summary 89 7 Exercises 90 8 Appendix: Equilibrium Consumption Is at the Edge of the Feasible Set 92 5 International Monetary Systems 94 1 Roadmap 94 2 A Model of International Exchange 95 3 Foreign Currency Controls Fixed Exchange Rates The Costs of Foreign Currency Controls The Indeterminacy of the Exchange Rate Exchange Rate Fluctuations International Currency Traders Fixing the Exchange Rate Cooperative Stabilization Unilateral Defense of the Exchange Rate Speculative Attacks on Currencies Inflationary Incentives The Optimal International Monetary System Summary Exercises Price Surprises Roadmap The Data The Phillips Curve Cross-Country Comparisons Expectations and the Neutrality of Money The Lucas Model Nonrandom Inflation Random Monetary Policy The Lucas Critique of Econometric Policy Evaluation Optimal Policy Summary Exercises Appendix: A Proofby Contradiction 137 Part II Banking 7 Capital Roadmap Capital Rate-of-Retum Equality 144

5 X Contents 4 Can Fiat Money Coexist with Another Asset? The Tobin Effect When Fiat Money and Other Assets Are Not Substitutes Nominal Interest Rates Anticipated Inflation and the Nominal Interest Rate Anticipated Inflation and the Real Interest Rate Risk Summary Exercises Appendix A: A Model of Private Debt Private Debt The Lender Problem The Borrower Problem Private Debt and Capital Appendix Exercises Appendix B: The Golden Rule Capital Stock Appendix Exercise Liquidity and Financial Intermediation Roadmap Money as a Liquid Asset A Model of Illiquidity The Business of Banking A Simple Arbitrage Plan The Effect of Arbitrage on Equilibrium Banks as Monitors Unintermediated Investment Intermediated Investment Summary Exercises Central Banking and the Money Supply Roadmap Legal Restrictions on Financial Intermediation Reserve Requirements Banks with Reserve Requirements Prices Seigniorage Capital and Output Deposits Weifare Central Bank Definitions of Money The Total Money Supply in Our Model 183

6 Contents xi 5 Central Bank Lending Limited Central Bank Lending Unlimited Central Bank Lending Central Bank Lending Policies in the United States and Canada Central Bank Lending since the 2007 Financial Crisis Summary Exercises Money Stock Fluctuations Roadmap The Correlation between Money and Output A Model of Currency and Deposits A Model of Inside and Outside Money Linking Output and the Money Multiplier Correlation or Causality? A Once-and-for-All Change in the Fiat Money Stock A Monetary Stabilization Policy? Another Look at Monetary Aggregates Anticipated Inflation and Output Revisited Summary Exercises Appendix: The Money Supply with Reserves and Currency Appendix Exercises Fully Backed Central Bank Money Roadmap Paying Interest on Money Another Look at the Quantity Theory Money and Prices: Deflation Currency Boards Summary Exercises Appendix: Price Level Indeterminacy The Payments System Roadmap Clearinghouses A Model of the Clearing of Debt Trading Institutions for the Clearing of Debt Providing Liquidity Equilibrium with an Inelastic Money Supply An Elastic Fiat Money Supply 238

7 xii Contents 5.3 An Elastic Supply of Inside Money Fully Backed Bank Notes A Potential for an Inflationary Overissue of Bank Notes The Short-Term Interest Rate Policy Options Liquidity and the 2007 Financial Crisis Unconventional Monetary Policy Summary Exercises Appendix: A Secondary Market Bank Risk Roadmap Demand Deposit Banking A Model of Demand Deposit Banking Bank Runs Preventing Panics Interbank Lending Identifying Unnecessary Withdrawals Suspensions of Withdrawals Government Deposit Insurance Bank Failures The Moral Hazard of Deposit Insurance The Importance of Capital Requirements Capital Requirements for Insured Banks Closing Insolvent Banks Summary Exercises Liquidity Risk and Bank Panics Roadmap Money with Limited Communication A Model with Random Relocation The Person's Portfolio Decision Portfolio Allocation with a Bank With Only Second-Period Consumption Optimal Consumption Bundles Optimal Monetary Policy Bank Risk Regulation and Bank Panics Inelastic Currency Supply Elastic Currency Supply 290

8 Contents xiii 5 Money, Banking, and the Zero Lower Bound Summary Exercises 294 Part III Government Debt 15 Deficite and the National Debt Roadmap High-Denomination Government Debt A Model of Separated Asset Markets Introducing Government Bonds Continual Debt Issue Rolling Over the Debt The Bürden of the National Debt The Government Budget Constraint The Government's Intertemporal Choice Open Market Operations Political Strategy and the National Debt Summary Exercises Savings and Investment Roadmap The Savings Decision Wealth Present Value Wealth and Consumption Income and Saving The Effects of Taxes on Consumption and Savings Wealth-Neutral Tax Changes Wealth Effects Social Security Fully Funded Government Pensions Pay-as-You-Go Pensions Summary Exercises The Effect of the National Debt on Capital and Savings Roadmap The National Debt and the Crowding Out of Capital Deficits and Interest Rates Neutral Government Debt Fiat Money and the Crowding Out of Capital Offsetting Wealth Transfers 345

9 xiv Contents 5 Infinitely Lived Agents A Model of Infinitely Lived People Wealth, Capital, and Interest-Bearing Government Debt Wealth, Capital, and Real Money Balances Parents, Bequests, and Infinite Lives A Simple Model of Parents Parents Leaving No Bequest Summary Exercises The Temptation of Inflation Roadmap Defaulting on the Debt The Inconsistency of Default Commitment Reputation The Rate of Return on Risky Debt Inflation and the Nominal National Debt Unanticipated Inflation and the Real National Debt Anticipated Inflation and the Real National Debt Rational Expectations The Lucas Critique Revisited Self-Fulfilling Inflationary Expectations Hyperinflation Commitment in Monetary Policy The Temptation of Seigniorage Inflation and Private Debt Summary Exercises Appendix: An Activist Monetary Policy 374 References 377 Author Index 383 Subject Index 385