Dan Peled

Informational diversity over time and the optimality of monetary equilibria

Abstract The temporal realizations of a random state variable in an overlapping generations model create an informational diversity between members of different generations and require a reexamination of the optimality that competitive equilibria might display in such an environment. Using an optimality criterion that reflects this informational diversity we prove the optimality of competitive equilibrium in a model with a fixed stock of fiat money, a single-spot market, and good endowments that follow a Markov process. The need for an optimality criterion that incorporates informational diversity is further motivated by studying the same model with the operation of complete contingent commodities markets.

The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets

This paper examines the implications of the absence of complete annuity markets on the distribution of wealth and welfare of agents whose saving decisions are obtained under uncertainty regarding the length of their life. The absence of annuities is shown to yield a unique nondegenerate intragenerational distribution of wealth, which is fully characterized. This characterization is then used to evaluate the Pareto desirability of an annuity system. Alternative welfare criteria that can be used when the proposed change has differential impacts on the initial state of subsequent generations are considered.

Stochastic inflation and government provision of indexed bonds

Abstract This paper examines the consequences of using indexed bonds as one of the government financing instruments, along with money and taxes. It is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics. Increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money. When provided by means other than open market operations, indexed bonds can affect the allocation of resources, but these reallocations cannot be Pareto-improving.

Competitive Banking with Fractional Reserves and Regulations

Institutions providing demand-deposit-like services have been singled out among financial intermediaries, because demand deposits, unlike an insurance contract, must be paid solely upon its owner’s demand. Therefore, when demand deposits are backed by fractional reserves, self-fulfilling panics may occur, so that banks become inherently unstable (Friedman (1959)). Rolnick and Webber (1985) present the conventional view that inherent instability in banking means that bank panics can occur without economy-wide real shocks that directly disturb aggregate economic activity. They, and Smith (1986), emphasize the usual explanation for how this can happen through a local real shock that propagates by the actions of incompletely informed depositors. In the face of this instability governments have found it necessary to intervene and regulate the banking industry. However, there is no agreement concerning the desirability, or even feasibility of the actual policies adopted by various governments.