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on Dynamic General Equilibrium |
| By: | Eran Yashiv (Tel Aviv University); Renato Faccini (Queen Mary) |
| Abstract: | We study the interactions between hiring frictions and price frictions in business cycle models. We find that this interaction matters in a significant way for business cycle fluctuations and for labor market outcomes. Using a simple DSGE business-cycle model with Diamond-Mortensen-Pisssarides (DMP) elements, we derive two main results. First, introducing hiring frictions into a New Keynesian model offsets the effects of price frictions. As a result, some business cycle outcomes are actually close to the frictionless New Classical-type outcomes; namely, with moderate hiring frictions the response of employment to technology shocks is positive, and the effects of monetary policy shocks are small, if not neutral. Moreover, it generates endogenous wage rigidity. Second, introducing price frictions into a DMP setting generates amplification of employment and unemployment responses to technology shocks, as well as hump-shaped dynamics. Both results arise through the confluence of frictions. We offer an explanation of the mechanisms underlying them. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:464&r=dge |
| By: | Yongsung Chang (University of Rochester, Yonsei University); Yena Park (University of Rochester) |
| Abstract: | We derive a fully nonlinear optimal income tax schedule in the presence of a private insurance market. The optimal tax formula is expressed in terms of sufficient statistics?such as the Frisch elasticity of labor supply, social preferences, and hazard rates of the income distributions?as in the standard Mirrleesian taxation without private insurance (e.g., Saez (2001)). However, in the presence of a private market, the standard sufficient statistics are no longer sufficient. The optimal tax rate also depends on how private savings interact with public insurance? through substitution and crowding in/out. Based on our formula, we compute the optimal tax schedule using a quantitative general equilibrium model calibrated to reproduce the U.S. income distribution. |
| Keywords: | Optimal Taxation, Private Insurance, Crowding Out, Mirrelsian Tax |
| JEL: | H21 H23 D51 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2017rwp-105&r=dge |
| By: | Thomas Winberry (University of Chicago); Benjamin Moll (Princeton); Greg Kaplan (University of Chicago) |
| Abstract: | We study the aggregate consumption, interest rate and output dynamics of a heterogeneous agent economy that is parameterized to match key features of the cross-sectional distribution of labor income, wealth, and marginal propensities to consume measured from household-level micro data. Households face a process for idiosyncratic income risk with leptokurtic growth rates and can self-insure in two assets with different degrees of liquidity . The equilibrium features a three-dimensional distribution that moves stochastically over time, rendering computation difficult with existing methods. We develop computational tools to efficiently solve a broad class of heterogeneous agent model with aggregate shocks that include our model as a special case. The method uses linearization to solve for the dynamics of a reduced version of the model, which is obtained from a model-free dimensionality reduction method for the endogenous distributions. We will publish an open source set of Matlab codes to implement our method in an easy-to-use and model-free way. We find that our model, which is parameterized to household level facts, is consistent with the sensitivity of aggregate consumption to predictable changes in aggregate income, and with the relative smoothness of aggregate consumption - features that are difficult to generate in representative agent model. We illustrate the usefulness of our model and methods for studying the distributional implications of shocks more generally. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:483&r=dge |
| By: | Javier Fernandez-Blanco (Universitat Autonoma de Barcelona and Barcelona GSE) |
| Abstract: | We consider an economy with incomplete markets and intra-household risk sharing, where households are formed by a job-seeker and an employed spouse and differ by the productivity of the spouse. We study the constrained efficient private provision of insurance within the household through the labor supply of the spouse, and what unemployment risks should be publicly insured away. Unlike the spouse's total income, neither productivity nor labor supply is observed. We characterize the directed search equilibrium, and show that the spouse's labor supply is negatively affected by unemployment benets regardless of the search outcome of the worker in line with the empirical evidence. We also show that the optimal unemployment benefits are contingent on the household's total income as it affects the trade-off between consumption-smoothing and job search incentives. Moreover, we numerically explore the welfare gains of implementing a household-income-based unemployment insurance. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:478&r=dge |
| By: | Guangling Liu (University of Stellenbosch); Fernando Garcia-Barragan |
| Abstract: | This paper studies the effectiveness of capital controls with foreign currency denomination on business cycle fluctuations and the implications for welfare. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary, capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a significant impact on the dynamics of assets and liabilities that are denominated in foreign currency. The non-pecuniary capital controls help to stabilize the financial sector, thereby reducing the negative spillovers to the real economy. A more restrictive capital-control policy significantly weakens the welfare effect of the foreign monetary policy and exchange rate shocks. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:415&r=dge |
| By: | Hyunduk Suh (Inha University) |
| Abstract: | This paper examines an optimal simple rule for monetary policy and macroprudential policy in a New Keynesian DSGE model with a Bernanke et al. (1999) financial accelerator mechanism. Macroprudential policy is given by countercyclical bank capital regulation or loan-to-value (LTV) ratio regulation. Macroprudential policy can mitigate the inefficiencies arising from financial friction, by reducing the uncertainty related with the solvency risk. It is optimal to separate monetary policy from macroprudential concern and use only macroprudential policy for credit stabilization. Using monetary policy for credit stabilization is sub-optimal because of its tradeoff with inflation stability. |
| Keywords: | Macroprudential policy, monetary policy, countercyclical bank capital regulation, loan-to-value (LTV) ratio regulation, optimal simple rule |
| JEL: | E44 E52 E59 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2017-9&r=dge |
| By: | Giannoulakis, Stylianos |
| Abstract: | The purpose of this article is to carefully lay out the internal monetary and fiscal transmission mechanisms in the context of a New Keynesian model, with a particular focus on the role of capital - the most vital ingredient in the transition from the basic framework to the medium - scale DSGE models. The key concept of this paper is the form of the monetary policy: we assume a two-channel monetary policy, i.e. it is conducted through a rule for money supply and a Taylor-type rule for interest rates, in order to keep up with the ECB and Fed’s policies. We also adopt a simple fiscal policy rule for public consumption to examine the interactions between fiscal and monetary policy. Finally, in order to capture the crisis effects we introduce exogenous shocks to both monetary and fiscal policy rules. |
| Keywords: | Transmission Mechanisms; New Keynesian Model; Tobin’s Q; Two-Channel Monetary Policy |
| JEL: | E37 E52 E62 E63 |
| Date: | 2017–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80892&r=dge |
| By: | Lorenzo Caliendo; Luca David Opromolla; Fernando Parro; Alessandro Sforza |
| Abstract: | The economic effects from labor market integration are crucially affected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equilibrium model with trade in goods and labor mobility across countries to study and quantify the economic effects of trade and labor market integration. In our model trade is costly and features households of different skills and nationalities facing costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct migration flows by skill and nationality across 17 countries for the period 2002-2007. We then exploit the timing variation of the 2004 EU enlargement to estimate the elasticity of migration flows to labor mobility costs, and to identify the change in labor mobility costs associated to the actual change in policy. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the EU enlargement. We find that new member state countries are the largest winners from the EU enlargement, and in particular unskilled labor. We find smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse off after the enlargement. We study even further the interaction effects between trade and migration policies and the role of different mechanisms in shaping our results. Our results highlight the importance of trade for the quantification of the welfare and migration effects from labor market integration. |
| JEL: | F1 F13 F16 F22 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23695&r=dge |
| By: | Fève, Patrick; Pierrard, Olivier |
| Abstract: | In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms. |
| Keywords: | Shadow Banking; DSGE models; Macro-prudential Policy |
| JEL: | C32 E32 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31822&r=dge |
| By: | Cozzi, Guido (University of St. Gallen); Pataracchia, Beatrice (European Commission – JRC); Pfeiffer, Philipp (Technische Universitat Berlin); Marco, Ratto (European Commission – JRC) |
| Abstract: | The macroeconomic experience of the last decade stressed the importance of jointly studying the growth and business cycle fluctuations behavior of the economy. To analyze this issue, we embed a model of Schumpeterian growth into an estimated medium-scale DSGE model. Results from a Bayesian estimation suggest that investment risk premia are a key driver of the slump following the Great Recession. Endogenous innovation dynamics amplifies financial crises and helps explain the slow recovery. Moreover, financial conditions also account for a substantial share of R&D investment dynamics. |
| Keywords: | endogenous growth; R&D; Schumpeterian growth; Bayesian estimation |
| JEL: | E3 O3 O4 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201701&r=dge |
| By: | Adrien Auclert (Stanford Institute for Economic Policy Research) |
| Abstract: | This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different marginal propensities to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes. Sufficient statistics from Italian and U.S. data suggest that all three channels are likely to amplify the effects of monetary policy. A standard incomplete markets model can deliver the empirical magnitudes if assets have plausibly high durations but a counterfactual degree of inflation indexation. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ceq:wpaper:1706&r=dge |
| By: | Andrew Glover (University of Texas Austin); Dean Corbae (University of Wisconsin) |
| Abstract: | Credit agencies sell credit reports to employers for use in hiring. We build a model that rationalizes these products through adverse selection in credit and labor markets. Workers differ in their patience, with more patient workers repaying debts more frequently and accu- mulating more human capital. In equilibrium, a better credit history correlates with higher productivity. A poverty trap may arise: an unemployed agent with a low credit score has a low job finding rate, but cannot improve her credit score without a job. A policy that bans employer credit checks must balance their benefits (labor market effi- ciency and improved credit repayment incentives) against their costs (idiosyncratic poverty trap risk). |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:447&r=dge |
| By: | Valery Charnavoki (New Economic School) |
| Abstract: | This paper presents a general equilibrium model of a small open economy with monopolistically competitive retailers, inventories and durable goods. Following large devaluations, this model generates a collapse of imports, a fall of retail sales and inventories and a gradual increase in retail prices. Besides, the model allows to explain a short-lived spike in retail sales of durable goods, observed during the recent devaluation episode in Russia in December of 2014. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:402&r=dge |
| By: | Greg Kaplan; Kurt Mitman; Giovanni L. Violante |
| Abstract: | We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery. |
| JEL: | D10 D31 E21 E30 E40 E51 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23694&r=dge |
| By: | Koichi Futagami (Graduate School of Economics, Osaka University); Kunihiko Konishi (Research Fellow of the Japan Society for the Promotion of Science (JSPS)) |
| Abstract: | This study constructs an overlapping-generations model with endogenous fertility, mortality, and R&D activities. We demonstrate that the model explains the observed fertility dynamics of developed countries. When the level of per capita wage income is either low or high, an increase in such income raises the fertility rate. When the level of per capita wage income is in the middle, an increase in such income decreases the fertility rate. The model also predicts the observed relationship between population growth and innovative activity. At first, both the rates of population growth and technological progress increase, that is, there is a positive relationship. Thereafter, the rate of population growth decreases but the rate of technological progress increases, showing a negative relationship. |
| Keywords: | Fertility, Mortality, R&D |
| JEL: | D91 J13 O10 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1726&r=dge |
| By: | Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | Endogenous growth literature treats deliberate R&D effort as the main engine of long-run growth. It has been already recognized that R&D expenditures are procyclical. This paper builds a microfounded model that generates procyclical aggregate R&D investment as a result of optimizing behavior by heterogeneous monopolistically competitive firms. I find that business cycle fluctuations affect the aggregate endogenous growth rate of the economy so that transitory shocks leave lasting level effects on the economy’s Balanced Growth Path. This result stems from both procyclical R&D expenditures of the incumbents and procyclical firm entry rates. This mechanism generates economically significant hysteresis effects, increasing the welfare cost of business cycles by two orders of magnitude relative to the exogenous growth model. Coupled with potential to affect endogenous growth rates, ample space for welfare improving policy interventions arises. The paper evaluates the effects of selected subsidy schemes and finds some of them welfare improving. |
| Keywords: | business cycles, firm dynamics, innovation, growth, welfare analysis |
| JEL: | E32 E37 L11 O31 O32 O38 O40 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2017-19&r=dge |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Takeshi Yagihashi (Old Dominion University) |
| Abstract: | This paper uses both a nonstructural and a structural analysis to investigate the drivers of the business cycles in the US and 15 Trans-Pacific (TP) countries. Our nonstructural approach, based on a principal component methodology, helps us measure the share of the variation in macroeconomic variables that is explained by factors that are common to both the US and the TP region. We carry out a similar exercise after estimating a large scale, two country dynamic stochastic general equilibrium model that allows for common and correlated shocks across the two regions. The clear and common finding from our analyses is that common shocks explain a substantial amount of macroeconomic variation. Comparison with the NAFTA region, along this dimension, reveals that the US economy is more similar to the TP region than it is with Mexico and Canada. |
| Keywords: | Principal component analysis, DSGE, Bayesian estimation, Trans-Pacific, NAFTA |
| JEL: | E32 F15 F42 F44 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2017-03&r=dge |
| By: | David Andolfatto; Aleksander Berentsen; Fernando M. Martin |
| Abstract: | The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange – a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system. |
| Keywords: | Money, banking, financial markets, monetary policy |
| JEL: | E50 E60 D53 D02 G21 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:259&r=dge |
| By: | Svensson, Lars E O |
| Abstract: | The simple and transparent framework for cost-benefit analysis of leaning against the wind (LAW) in Svensson (2017a) and its main result are summarized. The analysis of the policy-rate effects on debt in Bauer and Granziera (2017) does not seem to contradict that the effects may be small and of either sign. The analysis of LAW in DSGE models is complicated and the results of Gerdrup et al. (2017) may not be robust. The Svensson (2017a) framework may allow comparison and evaluation of old and new approaches and their results. As an example, it is shown that these three papers result in very different marginal costs of LAW and that a realistic policy-rate effect on unemployment is crucial. |
| Keywords: | Financial crises; Financial Stability; macroprudential policy; monetary policy |
| JEL: | E52 E58 G01 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12226&r=dge |
| By: | Giancarlo Corsetti (University of Cambridge; Centre for Macroeconomics (CFM); Centre for Economic Policy Research); Eleonora Mavroeidi (Bank of England); Gregory Thwaites (Bank of England; Centre for Macroeconomics (CFM)); Martin Wolf (University of Bonn) |
| Abstract: | We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target in ation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation. |
| Keywords: | Monetary policy, Zero lower bound, deflation, depreciation, Beggar-thy-neighbour, Capital controls |
| JEL: | F41 E62 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1722&r=dge |
| By: | Thomas Drechsel; Silvana Tenreyro |
| Abstract: | Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible. |
| JEL: | E13 E32 F41 F43 O11 O16 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23716&r=dge |
| By: | Brissimis, Sophocles N.; Bechlioulis, Alexandros P. |
| Abstract: | The assumption of multiplicative non-separable (Cobb-Douglas) consumer preferences is a key assumption for analyzing the interdependence of consumption and leisure choices. In this paper we solve the consumer utility maximization problem under these preferences and derive a simultaneous system of two equations corresponding to a static and an inter-temporal equation of consumption and leisure choice. The system is estimated with GMM to obtain consistent estimates of the consumer's preference parameters, of which the relative weight of consumption in the utility function is found to be much higher than that commonly assumed in DSGE model calibration exercises. |
| Keywords: | Cobb-Douglas consumer preferences; consumption and leisure choices; GMM estimation; weight of consumption in utility |
| JEL: | C36 C61 D12 E44 |
| Date: | 2017–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80877&r=dge |
| By: | Thomas Drechsel (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Silvana Tenreyro (London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Performance (CEP)) |
| Abstract: | Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible. |
| Keywords: | Business cycles, Small open economy, Emerging markets, Commodity prices, Argentina's economy |
| JEL: | E13 E32 F43 O11 O16 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1723&r=dge |
| By: | Marla Ripoll (University of Pittsburgh); Juan Cordoba (Iowa State University) |
| Abstract: | Dynastic models common in macroeconomics use a single parameter to control the willingness of individuals to substitute consumption both intertemporally, or across periods, and intergenerationally, or across parents and their children. This paper defines the concept of elasticity of intergenerational substitution (EGS), and extends a standard dynastic model in order to disentangle the EGS from the EIS, or elasticity of intertemporal substitution. A calibrated version of the model lends strong support to the notion that the EGS is significantly larger than one, and probably around 2.5. In contrast, estimates of the EIS suggests that it is lower than one. What disciplines the identification is the need to match empirically plausible fertility rates for the U.S. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:428&r=dge |
| By: | Roberto Robatto (University of Wisconsin-Madison); Francesco Lippi (Einaudi Institute (EIEF)); Fernando Alvarez (University of Chicago) |
| Abstract: | We show that the area under the long-run demand curve for money measures the welfare cost of inflation for a very large class of inventory theoretical models of money demand. The class of inventory models considered has a general stochastic structure of the net cash expenditures as well as of the fixed/variable cost of withdrawing and depositing money. Thus, our framework includes a large number of models that have been studied in the literature as special cases. The most important feature that is responsible for our result is the fact that private agents fully internalize all the costs and benefits associated with managing their inventory of money. As a result, the social costs and benefits of holding money, which are related to the welfare cost of inflation, are equal to the private costs and benefits of holding money, which are in turn captured by the area under the money demand curve. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:490&r=dge |