Ronald W. Michener

Variance Bounds in a Simple Model of Asset Pricing

This paper presents a parametric example of a one-asset exchange economy in which the asset price is endogenously determined. It is demonstrated that the volatility of the assets price uniformly violates the theoretical upper bound implied by the present value relation. In addition, the variance bounds may be violated by a significant margin at the same time the assets price is almost a random walk. The example has a dual interpretation as a consumption function, and under this interpretation it is demonstrated that the permanent-income hypothesis does not necessarily restrict the time-series properties of consumption.

Chaotic dynamics in a cash-in-advance economy

Abstract This paper introduces sufficient conditions for the existence of deterministic cycles and chaos in cash-in-advance models, building on the earlier work of Woodford (1994) . Chaotic equilibria are shown to be particularly likely in the cash-in-advance model, because of a unique characteristic of such models: a discontinuous derivative in the difference equation map at the satiation level of real balances. The existence of a kink means that chaotic equilibria may exist without implausibly large curvatures in the utility function. Since a chaotic time series that makes use of the kink would sometimes exhibit zero nominal interest rates, the paper also gives an example of chaos in which nominal interest rates remain strictly positive.

Permanent income in general equilibrium

Abstract This paper reviews recent tests of the permanent income hypothesis. This literature suggests that consumption is ‘too sensitive’ to current income, relative to the predictions of the usual (partial equilibrium) model. It is then argued that in general equilibrium, attempts to move along a consumption possibilities frontier exhibiting diminishing returns would naturally give rise to endogenous changes in interest rates, creating a link between consumption and current income. A fully specified general equilibrium example is introduced which does indeed exhibit the same ‘excess sensitivity’ reported in the literature, for precisely this reason.

Development of the US monetary union

While much about the colonial, revolutionary, Confederation, early republican, and antebellum monetary systems remains unknown or contested, the basic outlines of the field have long since been clearly delineated.2 In most times and places, early Americans used a wide variety of exchange media to make payments. The local unit of account served to convert each transaction, regardless of the medium of exchange used, into a well-understood value. Early Americans usually defined the value of their local accounting units in terms of gold and/or silver bullion and/or specific full-bodied coins; rather than reckon prices as so many ounces of silver or gold, early Americans reckoned in their local accounting units. So when early Americans mentioned so many pounds or so many dollars, they usually had an equivalent value of gold or silver in mind, not a specific medium of exchange. Early American governments issued paper money, known as bills of credit, denominated in their respective local units of account. Ostensibly, the bills were issued to augment the medium of exchange, not to change the local accounting unit’s specie value. Colonists could usually exchange the bills for specie at their face

A Neoclassical Model of the Balance of Payments

This paper analyses the transitory and long run effects of devaluation and tariffs, as well as the effects of alterations in the domestic money supply and the terms of trade, for a small country on fixed exchange rates. These issues are investigated in a self-contained dynamic optimization model of the sort popularized by Brock (1974, 1975). Familiar results in the trade literature are thereby explicated for the nonspecialist who is nonetheless familiar with Brocks work. There are some new results regarding the role played by income and substitution effects in determining the consequences of terms-of-trade shifts.

Inflation, expectations, and output: Lucas's Islands revisited*

This paper examines the underlying assumptions that were used to derive the natural rate hypothesis in Lucas, 1972a , Lucas, 1972b and Lucas (1973) . In both cases, the natural rate result is shown to be a consequence of a debatable assumption: one assumption being proportional transfers, the other being a choice of dating explicitly rejected by other proponents of the new classical school. In either case, changing the assumption transforms the model into one in which expected inflation is strictly more important than unexpected inflation. The result has implications for econometric practice, since structural VARs are often identified by imposing the natural rate hypothesis.

Rules, commitment, and the search for stable money: A review essay

Political economists have always criticized existing monetary institutions and struggled to articulate a vision of an ideal monetary system. The volume under review, The Search for Stable Money: Essays on Monetary Reform, edited by James A. Dorn and Anna J. Schwartz (University of Chicago Press, 1987), stands firmly in this tradition; it addresses the shortcomings of modern monetary institutions and debates the merits of various alternative arrangements. The volume consists of nineteen essays and a number of short comments. Among the contributors are three Nobel prize winners (Buchanan, Friedman, and Hayekthough Buchanan simply comments on Bernholz). Generally speaking, the essayists disapprove of the virtually unlimited discretion invested in the Federal Reserve: they argue that discretion leads to unnecessarily high and variable rates of inflation. The essayists also agree that the solution ought to take the form of a change in the political rules which would have the effect of limiting government control over the monetary system, Beyond this there is no consensus. The contributors consider money growth rules, the gold standard, a proposal for a compensated dollar, and competitive currency systems, but often find one anothers proposals as objectionable as the status quo. The essays in this volume are about five years old; with the exception of the introductory piece by James Dorn, each was originally published elsewhere. Most originally appeared in the Cato Journal in 1983. Sometimes the age of the essays shows. Careful analysis of Federal Reserve policy in 1981-82 was no doubt of topical interest when the essays were written, but is less so now.

Farley Grubb on Colonial New Jersey: The Redemption Theory's Death Rattle

Farley Grubb has recently published a series of papers addressing the monetary and financial history of colonial New Jersey. These papers purport that the best way to explain the value of colonial currencies in general, and New Jersey’s colonial currency in particular, is to consider them discount bonds. Grubb’s work revises and restates the redemption theory championed by other economists before him. This paper argues that there is no historical, theoretical, or empirical basis for the claim and that Grubb’s work highlights the inescapable shortcomings of redemption theories.