RESEARCH
PUBLISHED and FORTHCOMING PAPERS
Inflation, Output, and Welfare in the Laboratory New!
with Janet Hua Jiang and Daniela Puzzello
European Economic Review (2023), 152, 104351.
We integrate theory and experimental evidence to study the effects of inflationary monetary policies on allocations and welfare. Our framework is based on the Lagos and Wright (2005) model of monetary exchange that provides a role for money as a medium of exchange. We compare a laissez-faire policy with a constant money supply and three inflationary policies with fixed money growth. In scheme one (Government Spending), the government adjusts expenditures financed through seigniorage; in scheme two (Lump Sum Transfers), the government injects new money through lump-sum transfers; and in scheme three (Proportional Transfers), the government makes transfers proportional to individual money holdings. Under all inflationary policies, theory predicts inflation is constant at the money growth rate in steady state. While the first two policies yield the same stationary equilibrium with lower welfare relative to laissez faire, the third policy is neutral. Consistent with theory, output and welfare in the experiments are significantly lower with Government Spending relative to laissez faire while there are no significant effects with Proportional Transfers. Our findings have implications on monetary policy implementation and provide support for policies in line with the quantity theory.
Lending Relationships and Optimal Monetary Policy
with Zachary Bethune, Guillaume Rocheteau, and Tsz-Nga Wong
Review of Economic Studies, 89(4), 1833-1872.
We construct and calibrate a monetary model of corporate finance with endogenous formation of lending relationships. The equilibrium features money demands by firms that depend on their access to credit and a pecking order of financing means. We describe the mechanism through which monetary policy affects the creation of relationships and firms' incentives to use internal or external finance. We study optimal monetary policy following an unanticipated destruction of relationships under different commitment assumptions. The Ramsey solution uses forward guidance to expedite creation of new relationships by committing to raise the user cost of cash gradually above its long-run value. Absent commitment, the user cost is kept low, delaying recovery.
How Long is Forever in the Laboratory? Three Implementations of an Infinite Horizon Monetary Economy
with Janet Hua Jiang and Daniela Puzzello
Slides for the 2020 Jordan-Wabash Conference on Experimental Economics
Journal of Economic Behavior and Organization
We propose a new implementation of infinite horizons in experiments, where subjects play a game for a fixed number of periods and the discount factor is captured by a weighting factor that shrinks payoffs over time. Dynamic incentives are preserved by paying subjects a continuation value based on prior outcomes. Unlike implementations based on random termination, which interpret the discount factor as the probability a game continues to the next period, our approach does not rely on the belief that the experimenter can credibly implement a game that lasts an arbitrarily long time. We apply our proposed scheme in an infinite horizon monetary economy and compare behavior with two commonly used implementations based on random termination. We find that dynamic incentives are preserved and behavior is similar in all three implementations. Our new method has a relative advantage if it is desirable to collect data on multiple supergames and the discount factor is high.
Optimal Monetary and Fiscal Policy in a Currency Union with Frictional Goods Markets
with Pedro Gomis-Porqueras
Macroeconomic Dynamics
We develop an open economy model of a currency union with frictional goods markets and endogenous search decisions to study optimal monetary and fiscal policy. Households finance consumption with a common currency and can search for locally produced goods across regions that differ in their market characteristics. Equilibrium is generically inefficient due to regional spillovers from endogenous search decisions. While monetary policy alone cannot correct this distortion, fiscal policy can help improve allocations by taxing or subsidizing production at the regional level. When households of only one region can search, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in search decisions. Optimal policy when households from both region search requires the Friedman rule and zero production taxes in both regions.
Corporate Finance and Monetary Policy
with Guillaume Rocheteau and Randall Wright
American Economic Review (2018), 108(4-5), 1147-1186.
We develop a general equilibrium model where entrepreneurs finance random investment opportunities using trade credit, bank-issued assets, or currency. They search for bank funding in over-the-counter markets where loan sizes, interest rates, and down payments are negotiated bilaterally. The theory generates pass through from nominal interest rates to real lending rates depending on market microstructure, policy, and firm characteristics. Higher banks' bargaining power, e.g., raise pass through but weaken transmission to investment. Interest rate spreads arise from liquidity, regulatory, and intermediation premia and depend policy in the form of money growth or open-market operations.
Competing Currencies in the Laboratory
with Janet Jiang
Journal of Economic Behavior and Organization (2018), 154, 253-280.
We investigate competition between two currencies as a result of decentralized interactions between human subjects. We design a laboratory experiment based on a simple two-country, two-currency search model to study factors that affect circulation patterns and equilibrium selection. Experimental results indicate foreign currency acceptance rates decrease with relative country size but are not significantly affected by the degree of integration. Subjects tend to always accept both currencies even though
rejecting either currency is consistent with equilibrium. Introducing government transaction policies biased towards domestic currency significantly reduces the acceptability of foreign currency. These findings suggest government policies can serve as a coordination device when multiple currencies are available.
Responding to the Inflation Tax (Supplemental Material)
with Tai-Wei Hu
Macroeconomic Dynamics, 23(6), 2378-2408.
We adopt mechanism design to study the consequences of inflation on aggregate output, trade, and welfare. Our theory captures multiple channels for individuals to respond to inflation: search intensity, market participation, and substitution between money and a higher return asset. We characterize constrained efficient allocations and show inflation has non-monotonic effects on both the frequency of trades (extensive margin) and the total quantity of goods traded (intensive margin). The model reconciles qualitative patterns emphasized in historical anecdotes, including monetary superneutrality for low inflation rates, non-linearities in trading frequencies, and substitution of money for capital for high inflation rates. While these effects are difficult to capture in previous monetary models, we show how they are intimately related by all being features of an optimal trading mechanism.
Money and Credit as Means of Payment: A New Monetarist Approach
with Sebastien Lotz
Journal of Economic Theory (2016), 164, 68-100.
(previously circulated under the title "The Coexistence of Money and Credit as Means of Payment")
Slides for lecture at the University of Chicago
We study the choice of payment instruments in a model with money and credit, where sellers must invest in a record-keeping technology to accept credit and buyers have limited commitment. Our model captures the two-sided market interaction between consumers and retailers that can generate multiple equilibria. Limited commitment yields an endogenous debt limit that depends on monetary policy. Money and credit coexist for a range of parameters, and bargaining related hold-up problems can lead to inefficiencies in the adoption of monitoring technologies. Changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants.
An Information-Based Theory of International Currency (Online Appendix)
Journal of International Economics (2014), 93(2), 286-301.
Slides for lecture at the University of Chicago
This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. The calibrated model can produce a welfare cost of losing international status for the issuing country larger than previous findings, though estimates depend critically on inflation rates and information costs.
WORKING PAPERS
On the Emergence of International Currencies New!
with Marcos Mardozo and Yaroslav Rosokha
Submitted.
We integrate theory and experimental evidence to study the emergence of different international monetary arrangements based on the circulation of two intrinsically worthless fiat currencies as media of exchange. Our framework is based on a two-country, two-currency search model where the value of each currency is jointly determined by private agents' decisions and monetary policy formalized as changes in a country's money growth rate. Results from the experiments indicate subjects coordinate on a regime where both currencies are accepted even when other regimes are theoretical possibilities. At the same time, we find the emergence of international currency depends on relative inflation rates where sellers tend to reject payment with a more inflationary foreign currency.
Frictional Cash Management
with Lucie Lebeau and Sebastien Lotz
Slides for Wisconsin School of Business bag lunch
We develop a dynamic general equilibrium model to study the role of banks in creating and reallocating liquidity and households' cash management. Our approach combines a theory of financial intermediation where banks swap assets with different liquidity properties with a microfounded model of households' money demand. Households and banks negotiate the terms of the contract in an over-the-counter market which includes an exchange of illiquid assets for liquid bank liabilities and an endogenous transaction cost for cash management. We show how the agenda of the negotiation matters and discuss implications for monetary policy transmission -- through money growth, open market operations, and quantitative easing -- on interest spreads between liquid and illiquid assets, asset holdings, and transaction costs.
DISCUSSIONS
(Philadelphia Fed Conference on Digital Currencies; 2021)
Discussion of "Privacy as a Public Good: A Case for Electronic Cash" by R. Garratt and M. van Oordt
(American Economic Association / ASSA Annual Meeting in San Diego; 2020)
Discussion of "Money, Credit, and Central Banks" by Michele Boldrin
(Missouri Macro Workshop, University of Washington at St. Louis; 2017)
Discussion of "Can Currency Competition Work?" by Jesus Fernandez-Villaverde and Daniel Sanches
(7th Annual Conference on Money, Banking, and Asset Markets; University of Wisconsin, Madison; 2016)
OTHER RESEARCH
with Gary Richardson
Economia (2013), 2(3), 337-344.
Defining, Modeling, and Measuring Investor Sentiment
(my senior honors thesis from 2008 at U.C. Berkeley)