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Efficient propagation of shocks and the optimal return on money

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  • O. Cavalcanti, Ricardo de
  • Erosa, Andrés

Abstract

We study optimal allocations in an environment in which money is essential due to lack of commitment and anonymity of individuals. Because the economy features aggregate preference shocks, we apply a notion of implementability that allows for allocations with non-trivial business-cycle dynamics for the propagation of shocks. We show that history dependence is predicted by the theory of second best and becomes necessary for optimality when the degree of patience is neither too low nor too high. Our analysis concludes with a discussion of whether there is a role for the propagation of shocks in alternative economic environments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 142 (2008)
Issue (Month): 1 (September)
Pages: 128-148

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Handle: RePEc:eee:jetheo:v:142:y:2008:i:1:p:128-148

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Web page: http://www.elsevier.com/locate/inca/622869

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Cited by:
  1. Guillaume Rocheteau, 2011. "The cost of inflation: a mechanism design approach," Working Paper 1103, Federal Reserve Bank of Cleveland.
  2. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
  3. Huang, Pidong, 2012. "A comment on: 'Efficient propagation of shocks and the optimal return on money'," MPRA Paper 46621, University Library of Munich, Germany.
  4. Guillaume Rocheteau, 2011. "On the coexistence of money and higher-return assets and its social role," Working Paper 1104, Federal Reserve Bank of Cleveland.

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