Working Papers:

Money and Capital


(With S. Borağan Aruoba and Randall Wright)


We extend micro-founded models of money with both centralized and decentralized markets to include capital. Although we consider several versions, in the baseline model, capital produced in the centralized market is an input in the decentralized market. We calibrate the model, and find the following. With bargaining in the decentralized market, inflation has virtually no impact on investment, but still affects consumption and welfare: going from 10% inflation to the Friedman rule is worth around 3.5% of consumption. With price taking the same policy works quite differently: now capital increases 12%, and although the steady state gain is also 3.5%, the transition cost cuts it to 1.9%. Although we also find big distortions from fiscal policy, even if we must make up the revenue with proportional taxes, eliminating inflation may still be desirable. Finally, we quantify the impact of holdup problems in bargaining models.


Optimal Stabilization Policy with Endogenous Entry


(With Aleksander Berentsen)


We construct a dynamic stochastic general equilibrium model where money is essential for trade to study optimal monetary stabilization policy. A novel aspect of our model is that firm entry is endogenous. We compare the optimal stabilization policy when all prices are flexible and when some are sticky. Due to an externality affecting firm entry, the central bank deviates from the Friedman rule. In contrast

to other sticky price models, under the optimal policy, the zero lower bound on nominal interest rates never binds. Calibration exercises suggest that the nominal interest rate should have been i) much more volatile if productivity shocks were the only aggregate disturbance and ii) substantially smoother if preference shocks were the main aggregate shock.


Price-level Targeting and Stabilization Policy


(With Aleksander Berentsen)


We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smoothes consumption across states.


Outside Bonds versus Inside Bonds


(With Aleksander Berentsen)


When agents are liquidity constrained, two options exist ó borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds.


Random Matching and Money in the Neoclassical Growth Model: Some Analytical Results


I use the monetary version of the neoclassical growth model developed by Aruoba, Waller and Wright (2008) to study the properties of the model when there is exogenous growth. I first consider the plannerís problem, then the equilibrium outcome in a monetary economy. I do so by first having price taking determining the terms of trade and then with proportional bargaining. I obtain closed form solutions for the balanced growth path of all variables in all cases. I then derive closed form solutions for the transition paths under the assumption of full depreciation and, in the monetary economy, a non-stationary interest rate policy.


Dynamic Taxation, Private Information and Money


The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In `middle age', agents receive preference shocks and trade amongst themselves in an anonymous search market. Since preference shocks are private information, in a record-keeping economy without money, the planner's allocation trades off efficient risk sharing against production efficiency in the search market and average consumption when old. For a government to replicate this outcome in a monetary economy without record-keeping, distortionary taxation of money balances is needed if other taxes are constrained to be lump-sum and/or linear in nature.


Technical Appendix for Camera, Craig and Waller "Currency Competition in a Fundamental Model of Money" Journal of International Economics December 2004.