John Bryant

A Price Discrimination Analysis of Monetary Policy

Monetary policy is analysed within a model that appeals to legal restrictions on private intermediation to explain the coexistence of currency and interest-bearing default-free bonds. The interaction between such legal restrictions and monetary policy is illustrated in a version of the overlapping generations model. The model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the Pareto criterion than a linear inflation tax.

The Inefficiency of Interest-bearing National Debt

The coexistence of money and default-free interest-bearing government bonds is explained by transaction costs; the private sector absorbs money with less real difficulty than it absorbs bonds. Under the assumption that the costs of issuing money and issuing bonds are identical, it follows that the presence of government bonds is inefficient. Further, the steady-state inflation rate is higher with bond financing of a given real deficit because there is less net output, less real saving, and hence the need for the government to inflate faster. This is demonstrated in a version of Samuelsons pure consumption-loans model.

COORDINATION, CREDIT, AND AN ELASTIC CURRENCY

The market economy is modeled as a decentralized joint production system. Markets in such an economy require the use of money or credit instruments to facilitate exchange. As a result, market economies are at risk for monetary instability induced by real-side production coordination failure. In particular, economies decentralized via centralized wholesaling markets are subject to precipitous collapses. The most stable monetary system is trade in specie. However, there very likely is a scarcity of specie, which generates inefficiency and discourages production. There is, then, a need for an elastic currency. Bank-issued bills of exchange are a perfectly elastic medium and eliminate the scarcity of specie and its attendant inefficiency, but are a less stable monetary system than is trade in specie. In the trade-off between elasticity and stability, fiduciary currency (or fiduciary deposits) lies between specie and bank-issued bills of exchange.

Perfection, the infinite horizon and dominance

Abstract Consideration of time and independence, brought into focus by the example of perfection in the infinite horizon, leads the author to a modified contraction by dominance solution for game theory.

Trade, credit and systemic fragility

This paper treats an idealized monetary framework in which merchant banks finance trade; trade which is induced by decentralized production. Indeed, merchant bank credit instruments, coupled with local bank deposits, facilitate decentralization of both production and trade. At the same time, decentralized production, exhibiting technological complementarity, induces systemic monetary fragility. However, with the decentralization of trade, the indemnification of either merchant bank credit instruments or of local bank deposits eliminates fragility. In particular, deposit insurance also stabilizes credit. The result is a stable cashless economy, a replacement of trade in specie. 2002 Elsevier Science B.V. All rights reserved.

A Clower constraint model of unbacked money

Abstract The stylized monetary facts — (1) money growth causes inflation, (2) inflation is bad, (3) money demand depends upon the nominal interest rate, (4) the real interest rate equals a parametrically fixed rate of time preference, and (5) investment depends upon the real interest rate — are produced in a Grandmont-Younes modified Clower constraint model of money. Inflation is distorting, but is no ones intertemporal rate of substitution. Inflation discourages trade, but not investment. As a by-product the Friedman hypothesis, that the optimal deflation equals the rate of time preference, is confirmed in the model.

An example of a dominance approach to rational expectations

Abstract Dominance and independence produce an alternative approach to rational expectations in a simple stationary overlapping-generations model. Dominance and independence delimit rational behaviour, but predict a range of rational choice rather than a single rational choice. In particular, a coherent interpretation of multiple rational expectations equilibria is provided.

Sunk Cost, "Contestable" Markets, and Long-Term Contracts

The principle guiding the design of the model is parsimony. The structure of our economy is as follows. Time is discrete and divided into periods t = 1, 2, ... There aren> 1 identical owners and Nn, N > 1, identical workers in the economy who live forever. Each owner possesses a technology, or site, for generating C output of a single transferrable but nonstorable consumption good per period per worker. C is common to all production technologies. At the beginning of period 1 each worker can costlessly choose a single technology at which to locate. In subsequent periods the worker can change technologies at cost K, 0 < K < C. This is the &dquo;sunk cost,&dquo; which takes the form of an exit cost.

Banking, recession, depression, and government expenditure

We examine public good expenditure given a stylized business cycle. This cycle exhibits three characteristics, (a) a full employment path, (b) occasional drops from that path followed by reconvergence and (c) sustained underemployment following a large drop. A banking system, modeled using Samuelsons overlapping generations approach, propagates shocks. Two sources of shocks are treated, anticipated future shocks to technology and inherent instability of the banking system, both of which precipitate shocks to demand. We conclude that under gross substitutes the government acting as competitive purchasing agent follows countercyclical policy.