The function of monetary policy to alter the informational content of money price signals is examined in a model where traders can observe an economy wide financial signal and a local commodity price. Under a passive policy, money demand disturbances, which are not directly observable, are shown to be confused with real productivity shocks and thereby preclude prices from fully reflecting all information. Even when the policy authority has no informational advantage, prospective money growth feedback rules can “improve” the structure of available information.

An equilibrium model of international trade, payments, and financial asset flows is developed with implications for the relationship between asset returns and changes in the relative prices of consumption goods of different countries. The model focuses on international trade as enlarging the opportunity for intertemporal exchange. The main source of uncertainty in the model is revisions of investors' expectations of the profitability of country-specific capital. The model is extended to include money to demonstrate how international monetary agreements may affect individual portfolio decisions.

[The theory of monetary policy is examined as it pertains to the functions of money as intermediating intergenerational trade as well as providing a useful service return. Finite economic lives are shown to alter the characterization of the optimal inflation rate from that suggested by models with infinitely long lived agents. In uncertain environments with sequential trade, policy is examined as altering the range of possible trades between agents of successive generations. In some cases, fully anticipated activist feedback policies may increase expected utility from that attainable with passive policies.]

The role of monetary policy as it affects available information is examined in an equilibrium model of the business cycle. Exogenous, uncertain changes in the expected return to capital assets relative to money holding are shown to induce revisions in investors' desired portfolios. Under a passive policy, asset market equilibrium requires a change in the value of money, which, if imperfectly perceived, detracts from the signaling aspect of observed prices. Active money growth feedback rules are examined as altering the prospective return to money holding. A policy may be designed to maintain the relative attractiveness between real capital and money even if the controlling authority has no informational advantage. Such a policy is shown to obviate the need for portfolio revisions to assure informational efficiency.

We explore a managerial model of investment behaviour in which an incentive problem arises because one input factor (managerial effort) is not publicly observed. We show that an optimal incentive contract leads to investment levels which are below first-best in low states and that this phenomenon can account for greater cyclical variability in aggregate production and investment. From the perspective of incentive scheme design, a special feature of the model is that screening takes place over two variables (investment and output) rather than one as is customary.

In a general equilibrium model with uncertain second period demand, incomplete markets, and costly labor mobility, the authors analyze the feasibility and optimality of alternative employment contracts. For the case where layoffs are prohibited, they demonstrate that both the fixed wage--constant employment contract, as well as the flexible wage--variable employment contract are equilibria in firm behavior, while the latter is preferable from society's point of view. In the case with layoffs, they show that the competitive mechanism leads to a less than optimal number of layoffs, and demonstrate that unemployment insurance with less than complete experience rating lowers the cost of layoffs to the firm and encourages labor mobility. In the context of the model, a properly designed unemployment insurance program yields a fully efficient allocation.

A model of aggregate economic activity is formulated which enmphasizes the effects of borrowing constraints in the presence of uninsurable risk. An important determinant of current income level is shown to be the cross-sectional distribution of wealth. As this distribution evolves endogenously, the model is capable of producing rich dynamics from a simple specification of exogenous shocks. The model shows that this phenomena can contribute to observed price volatility. IT IS COMMONLY THOUGHT that individuals have only limited opportunities to borrow against future labor income and cannot totally insure all types of risk. It has also been suggested that such departures from the presumptive norm of frictionless, complete information capital markets may have implications for aggregate economic activity. AlthLough there has been some work analyzing the implications of borrowing constraints for individual savings behavior (18, 2, 8), there has been no systematic analysis of how such borrowing constraints will affect the time series properties of output, prices, and interest rates. In this paper, we present a completely specified infinitely lived two agent equilibrium model which emphasizes the roles of borrowing constraint and uninsured risk for affecting aggregate outcomes. Specifically we assume that agents are prohibited from ever having negative nonhuman wealth. The model has the central feature that there is no aggregate uncertainty, but each agent's own productive opportunities are stochastic. If there were a full set of Arrow- Debreu contingent claim markets each agent could attain a certain consumption stream and the resulting allocation and (implicit) relative prices would be constant through time. However, we assume that such markets do not exist. Rather, we assume that at each point in time agents may trade only the single durable asset for the single perishable consumption good. This may be interpreted either as fiat mon ay with a fixed own nominal return of zero, or as claims to productive capital which emits a fixed exogenous flow of the consumption good. We assume also that output may be produced by labor. However, only one of the two agents is productive at any instant in time. The duration of time over which a single agent is productive is assumed to be random, and, for analytical simplicity, is assumed to be generated by a Poisson counting process. The resulting allocation has the property that the agent who is not productive exchanges some of his

This paper reexamines both monthly and quarterly U.S. postwar data to investigate if the observed comovements between money, real interestrates, prices and output are compatible with the money-real interest-output link suggested by existing monetary theories of output, which include both Keynesian and equilibrium models.The major empirical findings are these;1) In both monthly and quarterly data, we cannot reject the hypothesis that the ex ante real rate is exogenous, or Granger-causally prior in the context of a four-variable system which contains money, prices, nominal interest rates and industrial production.2) In quarterly data, there is significantly more information con-tained in either the levels of expected inflation or the innovationof this variable for predicting future output, given current and lagged output, than in any other variable examined (money, actualinflation, nominal interest rates, or ex ante real rates). The effect of an inflation innovation on future output is unambiguously negative. The first result casts strong doubt on the empirical importance of existing monetary theories of output, which imply that money should have a causal role on the ex ante real rates. The second result would appear incompatible with most demand driven models of output.In light of these results, we propose an alternative structural model which can account for the major dynamic interactions among the variables.This model has two central features: i) output is unaffected by money supply;and ii) the money supply process is motivated by short-run price stability.

What are the effects of open market operations? How do these differ from money falling from heaven? We propose a new explanation of how open market operations can change real and nominal interest rates which emphasizes three often mentioned but seldom explicitly articulated features of actual monetary economies: i) going to the bank is costly so that people will tend to bunch cash withdrawals, ii) people don't all go to the bank simultaneously and, because of these, iii) at any instant of time agents hold different amounts of cash. We show that these considerations imply that an open market purchase of a bond for fiat money will drive down nominal and real interest rates, lead to a delayed positive price response, and have damped persistent effects on both prices and nominal interest rates if agents have logarithmic utility of consumption. We assume output is exogenous, so that the model can shed only indirect light on the relationship between money and aggregate output. The model has emphasized how a change in the money supply affects the spending decision of those agents making withdrawals at the time of an open market operation. Considerations of intertemporal substitution imply that the real rate must decline to induce these agents to consume more. Because this new money is spent gradually, prices will rise slowly and reach their steady state level long after the interval of time between trips to the bank.