P. Dean Corbae

Money and Price Dispersion

We relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion. In this case, buyers and sellers enter matches with potentially different willingness to trade. Across the distribution of possible bilateral matches, prices generally will differ even though agents have identical preferences and technologies. We provide existence conditions for a particularly simple equilibrium pattern of exchange. We prove that in the limiting case where search frictions are eliminated, equilibrium prices are uniform. We also show that a higher initial money stock can raise the average price level and increase price dispersion. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Directed Matching and Monetary Exchange

We develop a model of monetary exchange where, as in the random matching literature, agents trade bilaterally and not through centralized markets. Rather than assuming they match exogenously and at random, however, we determine who meets whom as part of the equilibrium. We show how to formalize this process of directed matching in dynamic models with double coincidence problems, and present several examples and applications that illustrate how the approach can be used in monetary theory. Some of our results are similar to those in the random matching literature; others differ significantly. Copyright Econometric Society, 2002.

Endogenous Market Participation and the General Equilibrium Value of Money

We study the monetary theory implications of fixed costs associated with trade in private assets. We show that with heterogeneous endowment profiles it is possible for an endogenous subset of agents to hold currency even when it is dominated in return by a competing asset. With respect to positive issues in monetary theory, the model implies that changes in the steady-state growth rate of the money supply have a negative effect on real interest rates because of endogenous market participation measures. On the normative side, we show that there may be an equity-efficiency trade-off from monetary deflation.

Robust tests for unit roots in the foreign exchange market

Abstract Empirical studies that have tested for unit roots in foreign exchange rate data have assumed independent and identically distributed errors in order to apply Dickey-Fuller test procedures. This assumption ignores the temporal dependence of the error sequence present in many simple efficient market tests, as discussed in Hansen and Hodrick (1980), as well as Krasker (1980). In this paper we apply unit root test statistics that allow for heterogeneously distributed and mildly dependent error processes, and thus provide superior tests of the unit root hypothesis in the case of foreign exchange rates.

Financial Collapse: A Lesson from the Great Depression☆

Abstract We analyze financial collapses, such as the one that occurred during the U.S. Great Depression, from the perspective of a monetary model with multiple equilibria. The multiplicity arises from the presence of a strategic complementarity due to increasing returns to scale in the intermediation process. Intermediaries provide the link between savers and firms who require working capital for production. Fluctuations in the intermediation process are driven by variations in the confidence agents place in the financial system. From a positive perspective, our model matches quite closely the qualitative changes in important financial and real variables (the currency/deposit ratio, ex post real interest rates, deflation and production) over the Great Depression period, an experience often attributed to financial collapse. Further, we assess whether the policy prescription advocated by Friedman and Schwartz, adding liquidity to the banking system through increases in the money supply, would have overcome strategic uncertainty and thus avoided a financial collapse.

A finite-life private-information theory of unsecured consumer debt

The authors present a theory of unsecured consumer debt that does not rely on utility costs of default or on enforcement mechanisms that arise in repeated-interaction settings. The theory is based on private information about a persons type and on a persons incentive to signal his type to entities other than creditors. Specifically, debtors signal their low-risk status to insurers by avoiding default in credit markets. The signal is credible because in equilibrium people who repay are more likely to be the low-risk type and so receive better insurance terms. The authors explore two different mechanisms through which repayment behavior in the credit market can be positively correlated with low-risk status in the insurance market. Their theory is motivated in part by some facts regarding the role of credit scores in consumer credit and auto insurance markets.

Matching and Money

In Corbae, Temzelides, and Wright (2001) (hereafter, CTW) we proposed a new version of the framework that uses bilateral matching to model the exchange process, and in particular to model the use of money as a medium of exchange. Our version does not have agents meeting exogenously and at random, but rather has agents meeting endogenously. That is, agents are matched at each date subject to a stability condition that requires, roughly, that no agents prefer to be paired with each other or to be unmatched, rather than to be paired with the partners they get along the equilibrium path. While similar in spirit to the cooperative matching concept introduced by David Gale and Lloyd Shapley (1962), we had to generalize their framework to dynamic models because we are interested in monetary economics. Here we present a version of the solution concept in CTW, specialized in some ways but also generalized to include extrinsic uncertainty (sunspots). We then discuss some applications of endogenous matching models to issues that have previously been addressed using random matching, including the existence of sunspot equilibria and the efficiency of inside versus outside money. One of our main goals is to show how endogenous matching is a useful alternative to random matching. This may be interesting to those who think that bilateral trade is a reasonable friction upon which to build a theoretical foundation for monetary economics but perhaps think that random matching is an extreme and unrealistic simplification. Another goal is to provide examples where it makes a difference for substantive results how we model the matching process, and also examples where it does not. I. Endogenous Matching

Money and finance with costly commitment

The authors develop a variant of Townsends turnpike model where the trading friction is related to a commitment problem rather than spatial separation alone. Specifically, expenditure on financial services is necessary to ensure commitment. When commitment is costless, the equilibrium allocation is equivalent to that from an Arrow sequential markets equilibrium. When commitment is prohibitively expensive, the allocation is similar to the Townsend equilibrium. The authors use numerical examples to study the consequences of costly commitment for co-existence of money and credit, asset pricing, welfare implications of currency and variations in its growth rate, and the relationships between income and financial development.

The demand for money: A variable adjustment model

Abstract Standard models of the demand for money employ the partial adjustment framework in which the adjustment parameter is specified as a constant over the entire sample period. This paper relaxes this assumption. The adjustment parameter is specified as a function of the short-term interest rate. The variable adjustment model is estimated using US quarterly data spanning the 1959.III–1983.IV period and is found to reject the constant partial adjustment model.

Great Depression, monetary and financial forces in

What caused the worldwide collapse in output from 1929 to 1933? Why was the recovery from the trough of 1933 so protracted for the United States? How costly was the decline in terms of welfare? Was the decline preventable? These are some of the questions that have motivated economists to study the Great Depression.