Knowledge that Transforms

The stationary equilibrium of an overlapping generations economy in which agents trade a single asset is examined. If agents live for only two periods, the selling prices follow an identically and independently distributed process. If agents live for more than two periods, the selling prices follow a Markov process. An implication of the model is that price bubbles can occur in a stationary, rational expectations equilibrium.

We examine a decentralized monetary economy in which households can use a means of exchange (barter or gold) other than fiat money. The alternative means of exchange may drive out money even if monetary exchange Pareto dominates. Legal restrictions prohibiting other means of exchange may therefore be necessary. With stochastic preferences, households may use barter to supplement monetary purchases when they have an unexpectedly high demand. However, this may drive down the value of money (in all states) so low that households are again better off with fiat money alone. The paper provides both stochastic and nonstochastic examples in which eliminating markets for goods or assets that compete with fiat money improves welfare.

Presents a correction to an article on rational expectations in business cycles. (This abstract was borrowed from another version of this item.)

Digitised version produced by the EUI Library and made available online in 2020.

This paper examines the role of marital connections in models of intertemporal household behavior. Recent work by Bernheim and Bagwell implies that such connections might vastly expand the scope of neutrality results. The present work studies several formulations including not only marriage but also descriptions of how people choose spouses. Purposeful choices lead to assortative mating. All versions of the framework tend to lead away from cross-sectional neutrality results. The analysis suggests that one may be able to derive a solution for a parthenogenetic model and then interpret it as consistent with Nash equilibrium behavior in a world with marriage.

We develop a method to solve and simulate cash-in-advance models of money and asset prices. We calibrate the models to U.S. data spanning the period 1890-1987 and study some empirical regularities observed over this period. The phenomena of interest include the average level of stock returns and returns on nominal bonds, the covariation of realized real interest rates and real asset returns with inflation, and the ability of nominal interest rates to predict inflation and nominal stock returns.

We study the phenomenon of short-run increasing returns to labor (SRIRL) in a sample of 10 interwar U.S. manufacturing industries. Our main findings are that SRIRL was common in the interwar period and that the pattern of SRIRL across industries was similar to that observed in the postwar period. We argue that, since presumably the Depression was not caused by technical regress, these findings are inconsistent with the claim of real business cycle theorists that SRIRL is in general due to procyclical technical shocks. We propose tests for discriminating between two other leading explanations of SRIRL but find that our conclusions differ by industry.