MONEY TAXES, MARKET SEGMENTATION, AND SUNSPOT EQUILIBRIA

2001 ◽  
Vol 5 (3) ◽  
pp. 327-352
Author(s):  
Todd Keister
Keyword(s):  
Market Segmentation ◽  
Competitive Equilibrium ◽  
Price Level ◽  
Asset Market ◽  
Fiat Money ◽  
Lump Sum ◽  
General Price Level ◽  
Redistribution Policy ◽  
Sunspot Equilibria ◽  
The Government

This paper investigates how volatile the general price level can be in an equilibrium where all uncertainty is extrinsic. The government operates a lump-sum redistribution policy using fiat money. An approach to modeling asset market segmentation is introduced in which this tax policy determines how volatile the price level can be, which in turn determines the volatility of consumption. The paper characterizes (i) the set of general price levels consistent with the existence of competitive equilibrium and (ii) the resulting set of equilibrium allocations. The results demonstrate how redistribution policies that are fixed in nominal terms can have a destabilizing effect on an economy, and show how to evaluate the amount of volatility that a particular policy may induce.

IMPLEMENTING THE BEST STEADY STATE WITH SAVINGS IN UNBACKED RISKY ASSETS

2012 ◽  
Vol 17 (4) ◽  
pp. 779-801 ◽  
Author(s):  
Julio Dávila
Keyword(s):  
Steady State ◽  
Overlapping Generations ◽  
Competitive Equilibrium ◽  
American Economic Review ◽  
Fiscal Policies ◽  
Risky Assets ◽  
Fiat Money ◽  
Lump Sum ◽  
Monetary Savings ◽  
Capital Subsidies

This paper shows, in an overlapping-generations economy à la Diamond [American Economic Review 55, 1126–1150 (1965)], that when savings in an unbacked asset (e.g., fiat money) bear some risk of becoming suddenly worthless, the market does not implement the best steady state attainable with that asset. Nonetheless, in the absence of absolutely riskless fiat money and excluding resorting to redistributive fiscal policies that would make it possible to attain the first-best steady state, this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. The policy is, at the steady state, balanced every period and nonredistributive.

scholarly journals The Case for a New Fiscal Constitution

1992 ◽  
Vol 6 (2) ◽  
pp. 13-24 ◽  
Author(s):  
William A Niskanen
Keyword(s):  
Price Level ◽  
Federal Budget ◽  
Fiscal Rules ◽  
Budget Deficits ◽  
Voting Rules ◽  
The Public ◽  
General Price Level ◽  
Federal Debt ◽  
Fiscal Constitution ◽  
The Government

For the first 140 years of U.S. history, the federal budget was effectively constrained by two fiscal rules: the formal limits within the Constitution on the enumerated spending powers and an informal rule that the government could borrow only during recessions and wars. At the end of the 1920s, federal expenditures were 2.6 percent of GNP. The federal debt was constrained to about equal to 16 percent of GNP. The general price level was roughly stable over this long period. Over the past six decades, however, federal expenditures have increased to nearly 25 percent of GNP. Larger and more frequent budget deficits have increased the federal debt held by the public to an amount equal to about 50 percent of GNP. And the general price level is now about nine times the level at the beginning of this period. This dramatic change in fiscal and monetary conditions occurred without one amendment to the Constitution to authorize a change in the fiscal rules. Our effective fiscal constitution has been transformed into one in which Congress and the President may authorize any type or amount of expenditures and taxes, subject only to the voting rules for routine legislation. How did this happen? Should economists be concerned about this change in the fiscal constitution? What, if anything, should be done about it?

MONEY, CREDIT, AND LIMITED PARTICIPATION

2011 ◽  
Vol 15 (5) ◽  
pp. 616-655 ◽  
Author(s):  
Hyung Sun Choi
Keyword(s):  
Growth Rate ◽  
Monetary Policy ◽  
Market Segmentation ◽  
Indirect Effect ◽  
Asset Market ◽  
Money Growth ◽  
Limited Participation ◽  
Distributional Effects ◽  
Friedman Rule ◽  
The Government

An asset market segmentation model is constructed to study the distributional effects of monetary policy when economic individuals can choose means of payment among alternatives. In equilibrium, monetary policy has two distributional effects: a direct effect and an indirect effect through the choice of means of payment. When the government injects money, some purchase a greater variety of goods with cash whereas others purchase a greater variety of goods with credit. Credit can dampen fluctuations in consumption arising from monetary policy. The optimal money growth rate can be positive or negative. The Friedman rule is not optimal in general.

THE WELFARE COST OF EXCESS VOLATILITY IN INCOMPLETE MARKETS WITH SUNSPOTS

2017 ◽  
Vol 23 (3) ◽  
pp. 1062-1073 ◽  
Author(s):  
Minwook Kang
Keyword(s):  
Incomplete Markets ◽  
Price Level ◽  
Welfare Cost ◽  
Local Analysis ◽  
Equilibrium Allocation ◽  
Excess Volatility ◽  
Pareto Criterion ◽  
Sunspot Equilibria ◽  
Level I ◽  
Different Levels

In an incomplete markets economy with sunspots, the Pareto-criterion cannot rank sunspot equilibria of different levels of excess price-level volatility. Therefore, I propose a measure of excess volatility cost in terms of a period-0 endowment good. Ex-ante endowment subsidies are provided, in theory, to each consumer, so that the resulting equilibrium allocation of the higher volatility is Pareto-equivalent to the original benchmark equilibrium with a lower volatility level. The aggregate volatility cost is computed as the sum of all consumers' subsidies. Focusing on local analysis that considers small variations around a given volatility level, I show that the aggregate cost strictly increases in volatility even though each individual cost does not necessarily have this property.

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