John H. Kareken

On the Indeterminacy of Equilibrium Exchange Rates

In this paper we consider a particular international economic policy regime: the laissez-faire regime, the distinguishing features of which are unrestricted portfolio choice and floating exchange rates. And as we show, this regime, although favored by many economists, is not economically feasible. It does not have a determinate equilibrium. That is an implication of an overlapping-generations model. More basically, it is an implication of the notion that money is wanted only in order to accomplish trades.

Portfolio autarky: A welfare analysis

Portfolio autarky obtains when residents of every country are prohibited from owning real assets located in other countries. Such a regime and a laissez-faire regime, both characterized by free trade in goods, are studied in a model whose resource and technology assumptions are those of the standard two-country, two- (nonreproducible) factor, two- (nonstorable) good model. But to ensure a market for assets (land), the model is peopled by overlapping generations; each two-period lived individual supplies one unit of labor only in the first period of his life. Unique equilibria are described and shown to exist, and, in terms of a ?growth model? version of the Pareto criterion, laissez-faire is shown to be optimal and portfolio autarky to be nonoptimal.

The emergence and regulation of contingent commitment banking

Abstract In but a relatively few years banking has changed considerably. Now it is very much a business of making contingent promises or commitments; and even just a decade ago it was not. Recognizing change is apparently easier, though, than accounting for it. Or than not worrying about it. In this paper, an attempt is made to account for the change from traditional to contingent commitment banking, an attempt which must, however, be regarded as less than brilliantly successful. And responding to the concern that has been expressed by, among others, Federal Reserve officials, it is argued that even if banking keeps on changing until the last vestige of the traditional has disappeared, the Federal Reserve need not in the end be less effective as the U.S. monetary authority than it is at present. There is also a concern, shared by some Federal Reserve officials, that if change persists, then, unless bank regulatory policy is altered appropriately, financial stability will be increasingly threatened. That could be, but as is argued in the paper it is far from obvious that more capital (and/or a risk-adjusted capital requirement) will make bank failures rarer than they otherwise would be.

Lending, Lying, and Costly Auditing

In this paper, we describe a bankruptcy game played in a pure-exchange, perfectly competitive economy, and establish the existence of competitive equilibria. The game admits of lying by borrowers and costly auditing by lenders. The equilibria are characterized by (endogenously determined) equilibrium probabilities of default, loan quantities, interest rates, and default risk premia, and by equilibria simultaneously determined in risk-free debt markets. We find that the optimal debt contract is the standard debt contract, and that the risk-free debt market may be inactive, as all parties may strictly prefer risky debt contracts to risk-free debt.