Huberto M. Ennis

Search, money, and inflation under private information

I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wrights model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

ON RANDOM MATCHING, MONETARY EQUILIBRIA, AND SUNSPOTS

We study comparative statics results for the steady-state monetary equilibria of a simple random matching model of money with endogenous prices and no extrinsic uncertainty. Some of the results appear counterintuitive (both when take-it-or-leave-it offer or when Nash–Rubinstein bargaining is used in the model). Consistency of the equilibrium expectations causes the partial equilibrium intuitions to be reversed. We then proceed to apply the new insights to the analysis of sunspot equilibria in these type of models of bilateral trade with money.

Commitment and equilibrium bank runs

We study the role of commitment in a version of the Diamond-Dybvig model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment, the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to dissuade depositors from participating in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

Optimal Banking Contracts and Financial Fragility

We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the constrained efficient allocation of resources in closed form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation resembles a standard bank deposit in that it has a demand able debt-like structure. When withdrawals are unusually high, however, depositors who withdraw relatively late experience significant losses. This contractual arrangement can be fragile, admitting another equilibrium in which depositors run on the bank by withdrawing funds regardless of their liquidity needs.

A Simple General Equilibrium Model of Large Excess Reserves

I study a non-stochastic, perfect foresight, general equilibrium model with a banking system that may hold large excess reserves when the central bank pays interest on reserves. The banking system also faces a capital constraint that may or may not be binding. When the rate of interest on reserves equals the market rate, if the quantity of reserves is large and bank capital is not scarce, the price level is indeterminate. However, for a large enough level of reserves, the bank capital constraint becomes binding and the price level moves one to one with the quantity of reserves.

Loanable Funds, Monitoring and Banking

This paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role for third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large nationwide bank coexists with a number of community-regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy. JEL classification: E44, G21, G28

Macroeconomic fluctuations and bargaining

I study the limit rule for bilateral bargaining when agents recognize that the aggregate economy (influencing the match surplus) follows a dynamic process that randomly switches back and forth between a finite number of possible states. The rule derived in this paper is of special importance for decentralized exchange economies with bargaining. Two simple applications are presented to illustrate this fact. The first example is a model of wage bargaining and trade externalities. I show that in those situations sophisticated bargaining tends to increase the volatility (due to extrinsic uncertainty) of the wage bill. The second example is based on the Kiyotaki-Wright model of money. I explain how equilibrium prices depend in a fundamental way on the dynamic bargaining solution.

Optimal Policy with Probabilistic Equilibrium Selection

This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. With this, the optimal policy is well defined. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach generates a theory of how government policy affects the process of equilibrium selection; we illustrate this theory by applying it to problems related to the choice of technology and the optimal sales tax on Internet commerce.

Banking and the political support for dollarization

In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction among dollarization, the introduction of international banks, and the political process, we find that bank internationalization may help to attain the necessary political support that can make dollarization a viable policy.

A simple general equilibrium model of large excess reserves

In a general equilibrium macroeconomic model with a banking system that can hold large excess reserves and is subject to (possibly binding) capital constraints, I study how the quantity of government-provided monetary assets is related to the price level in steady state. When the central bank does not pay interest on reserves, the price level moves one-for-one with the monetary base. If, instead, the central bank can pay interest on reserves at market rates, the price level can decouple from the quantity of monetary assets in the economy: a larger monetary base need not imply a higher price level. However, for large enough levels of reserves, the capital constraint binds and the tight link between money and prices reemerges.