Working Papers Series
Papers below are in pdf.
Joseph Haslag
WP 07-04
Money, output and the payment system: Optimal monetary policy in a model with hidden effort
Joydeep Bhattacharya, Joseph H. Haslag and Antoine Martin
We propose a new explanation for the observed difference in the cost of intraday and overnight liquidity. We argue that the low cost of intraday liquidity is an application of the Friedman rule in an environment where a deviation of the Friedman rule is optimal with respect to overnight liquidity. In our environment the cost of overnight liquidity affects output while the cost of intraday liquidity only redistributes resources between money holders and non-money holders. We show that it is optimal to set a high overnight rate to reduce the incentives to overuse money. In contrast, intraday liquidity should have a low cost to provide risk-sharing.
JEL Codes: E31; E51; E58
Keywords: Friedman rule; monetary policy; random-relocation models
WP 04-21
Who is Afraid of the Friedman Rule?
Joydeep Bhattacharya, Joseph H. Haslag, Antoine Martin and Rajesh Singh
In this paper, we explore the connection between optimal monetary policy and heterogeneity among agents. We study a standard monetary economy with two types of agents in which the stationary distribution of money holdings is non-degenerate. Sans type-specific fiscal policy, we show that the zero-nominal-interest rate policy (the Friedman rule) does not maximize type-specific welfare; it may not maximize aggregate social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. Our results suggest a positive explanation for why central banks around the world do not implement the Friedman rule.
JEL Codes: E31; E51; E58
Keywords: Friedman rule, monetary policy, money-in-the-utility-function
WP 04-15
Sub-Optimality of the Friedman Rule in Townsend’s Turnpike and Limited Communication Models of money: Do finite lives and initial dates matter?
Joydeep Bhattacharya, Joseph H. Haslag & Antoine Martin
We construct an economy populated with infinitely-lived agents and show that the Friedman rule is suboptimal. We do that by showing that our economy and an overlapping generations model in which the Friedman rule is known to be suboptimal are homomorphic. We also discuss the importance of whether or not the economy has an initial date for this result.
JEL Codes: E31, E51, E58
Keywords: Friedman Rule; Monetary Policy; Overlapping Generations; Turnpike
WP 04-10
Accounting for Fluctuations in Social Network Usage and Migration Dynamics
Mark G. Guzman, Joseph H. Haslag & Pia M. Orrenius
In this paper, we examine network capital usage and migration patterns in a theoretical model. Networks are modeled as impacting the migration decision in many ways. When young, larger networks reduce the time lost moving from one region to another. In addition networks decrease the time spent searching for a job. Finally, when old, migrants receive transfer payments through the network. We show that the number and properties of steady state equilibria as well as the global dynamics depend crucially on whether the returns to network capital accumulation exhibit constant, increasing, or decreasing returns to scales relative to the level of network capital. With constant returns to scale, migration flows and network capital levels are characterized by either a unique steady state equilibria or by a two-period cycle. The fluctuations in network capital usage exhibited by our model are consistent with recent empirical data regarding the usage of networks by Mexican immigrants. In the case of increasing returns to scale, either there exists a unique, stable steady state equilibria or multiple equilibria which are characterized as either sinks or saddles. When the returns to scale are decreasing, there exists a unique, stable steady state equilibrium. Finally, we show that increasing barriers to migration will result in an increase in the flow of immigrants, contrary to the desired effect, in the constant and increasing returns to scale cases.
JEL Codes: F22, F43, H21
WP 03-12
A Role for Sunspots in Explaining Endogenous Fluctutations in Illegal Immigration
Mark G. Guzman, Joseph H. Haslag & Pia M. Orrenius
In this paper we provide an alternative explanation for why illegal immigration can exhibit substantial fluctuations despite a constant wage gap. We develop a model economy in which migrants make decisions in the face of uncertain border enforcement and lump-sum transfers from the host country. The uncertainty is extrinsic in nature, a sunspot, and arises as a result of ambiguity regarding the commodity price of money. Migrants are restricted from participating in state-contingent insurance markets in the host country, whereas host country natives are not. We establish the existence of sunspot equilibria that are not mere randomizations over certainty equilibria. Volatility in migration flows stems from two distinct sources: the tension between transfers inducing migration and enforcement discouraging it and secondly the existence of a sunspot. Finally, we examine the impact of a change in tax/transfer policies by the government on migration
JEL Codes: F22, F42
Keywords:. Sunspots, Immigration, International Migration
WP 03-11
The Effect of Monetary Policy on Economic Output
R.W. Hafer, Joseph H. Haslag & Garett Jones
There is substantial research effort devoted to identifying a sufficient statistic for monetary policy. The purpose of this paper is to broaden the scope of the on-going investigation along three dimensions. First, we follow up the Rudebusch-Svensson claim of parameter instability in the output regressions by examining the statistical stability of the parameter estimates with post-1996 data. Second, we examine whether alternative measures of the cyclical component affect the correlation between money supply, interest rates and output. Third, we consider alternative measures of the money supply, permitting us to assess the distinct roles of inside and outside money in terms of the correlation between each component and output.
JEL Codes: E31, E52, E61
Keywords: Monetary Policy, Money Supply
WP 03-06
Optimality of the Friedman rule in overlapping generations model with spatial separation
Joseph H. Haslag and Antoine Martin
Recent papers suggest that when intermediation is analyzed seriously, the Friedman rule does not maximize social welfare in overlapping generations model in which money is valued because of spatial separation and limited communication. These papers emphasize a trade-off between productive efficiency and risk sharing. We show financial intermediation or a trade-off between productive efficiency and risk sharing are neither necessary nor sufficient for that result. We give conditions under which the Friedman rule maximizes social welfare and show any feasible allocation such that money grows faster than the Friedman rule is Pareto dominated by a feasible allocation with the Friedman rule. The key to the results is the ability to make intergenerational transfers.
JEL Codes: E31, E51, E58
Keywords: Monetary Policy, Friedman Rule, Fiat Money
WP 03-01
Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?
Joydeep Bhattacharya, Joseph H. Haslag, Steven Russell
In this paper, we study the optimal steady state monetary policy in overlapping generations (OG) models. In contrast to economies populated by infinitely-lived representative agents (ILRA), the Friedman Rule is frequently not the policy that maximizes the welfare of two-period lived consumers. Our principal goal is to understand why the Friedman Rule is suboptimal in OG economies. To this end, we construct a mechanism-specifically, a monetary policy regime-that renders money useless in the sense of executing intergenerational transfers. Under this governmental regime, we show that the optimal monetary policy is the Friedman Rule. Our finding is robust to alternative rationales for valued fiat money; specifically, whether money is held voluntarily or involuntarily.
JEL Codes: E31, E51, E58
Keywords: Monetary Policy, Friedman Rule, Fiat Money
forthcoming in Journal of Monetary Economics
WP 02-03
Coyote Crossings: The Role of Smugglers in Illegal Immigration and Border Enforcement
Mark G. Guzman, Joseph H. Haslag, Pia M. Orrenius
Illegal immigration and border enforcement in the United States have increased concomitantly for over thirty years. One interpretation is that U.S. border policies have been ineffective. We offer an alternative view, extending the current immigration-enforcement literature by incorporating both the practice of people smuggling and a role for non-wage income into a two- country, dynamic general equilibrium model. We state conditions under which two steady state equilibria exist: one with a low level of capital and high amount of illegal immigration and the other with a high level of capital, but relatively little migration. We then analyze two shocks: a positive technology shock to smuggling services and an increase in border enforcement. In the low-capital steady state, the capital-labor ratio declines with technological progress in smuggling, while illegal immigration increases. In the high-capital steady state, a technology shock causes the capital-labor ratio to rise while the effect on migration is indeterminate. We show that an increase in border enforcement is qualitatively equivalent to a negative technology shock to smuggling. Finally, we show that a developed country would never chose small levels of border enforcement over an open border. Moreover, a high level of border enforcement is optimal only if it significantly decreases capital accumulation. In addition we provide conditions under which an increase in smuggler technology will lead to a decline in the optimal level of enforcement.
WP 01-10
Crony Capitalism and Financial System Stability
Joseph Haslag and Rowena Pecchenino
With the Asian fiancial crises, people identified crony relationships as the ultimate cause of bank instability. We examine the issue of crony capitalism in the context of model economy in which cronies are a class of project owners that have access to a government loan guarantee. While such a loan guarantee may induce more risk taking on the part of the crony--moral hazard--bank instability does not necessarily follow from the moral hazard problem. Rather, it is collapse of the government loan guarantee program that plays an important role in destablizing banks. Banks have insufficient equity stockpiled against the unexpected abandonment of the government loan guarantee.
WP 01-08
Inflationary Finance in a Simple Voting Model
Joydeep Bhattacharya, Helle Bunzel and Joseph Haslag
This paper is an attempt at answering the somewhat counterfactual question: if monetary policy was to be decided in the arena of public voting (that is not by independent central banks), then what kind of monetary policies (specifically, inflation rates) would get elected? Alternatively, if central banks cannot turn off the "political pressure valve", what kind of monetary policies are they likely to implement? We employ a standard overlapping generations model with heterogenous young-age endowments, and a government that funds an exogenous spending via a combination of lump-sum income taxes and the inflation tax. In the baseline model with money as the sole asset, we find that elected reliance on seigniorage increases (at a decreasing rate) as the extent of income inequality increases. When the baseline model is augmented to allow for costly access to a fixed real return asset, we find that the relationship between elected reliance on the inflation tax and income inequality becomes non-monotonic; in particular, the reliance inseigniorage may actually decrease as income inequality rises. We find strong impirical backing for this hypothesis from a cross-section of countries. We also find that the likelihood of non-existence of majority voting equilibria is high in economies with a sufficiently high degree of income inequality. These economies would resumably benefit the most from a truly independent central bank.
WP 01-07
Monetary Policy, Fiscal Policy, and the Inflation Tax: Equivalence Results
Joydeep Bhattacharya, Joseph Haslag and Steven Russell
This paper clarifies and extends previous work on the equivalence between monetary regimes and fiscal regimes involving social security systems. We consider equivalence across regimes, showing that monetary regimes are equivalent to one or both of two alternative types of social security regimes. Two implications emerge. One is that financing a real expenditure by increasing the inflation rate is equivalent, across regimes, to financing the expenditure by increasing the tax rate on social security benefits. In addition, our results imply that a wide range of monetary policy actions are equivalent, across regimes, to fiscal policy actions that change the scale of the social security system and the tax rates on social security benefits and/or bank deposits.
WP 00-07
On the Use of the Inflation Tax when Non-Distortionary Taxes are Available
Joydeep Bhattacharya and Joseph H. Haslag
If a inflation tax base has been created via a fixed reserve requirement, will a benevolent government use the inflation tax as a (partial) source of revenue even though a non-distortionary revenue source is available? Using a simple overlapping generations model with return dominated money, we show that the answer can be yes.
WP 00-06
On Fed Watching and Central Bank Transparency
Joseph H. Haslag
In this paper, I examine central bank transparency in two different general equilibrium settings. A transparent central bank eliminates any uncertainty about future money growth. Agents can expend resources to process messages about future money growth, which is labelled fed watching. So transparency is equivalent to a case in which a private agent processes all of the central bank's messages and correctly infers what the future money growth rate will be. In both settings, conditions are derived in which a proper subset of messages are processed. In one setting, this outcome reflects the central bank's efforts to be secretive. In the other, the central bank is opaque because the absence of transparency is the key to letting a benevolent central bank follow a state-contingent rule.