Efficient Propagation of Shocks and the Optimal Return of Money
AbstractWe show that price stickiness is predicted by the theory of second best, applied to a random- matching model of money. The economy is hit with iid, aggregate, preference shocks, and allocations are allowed to be history dependent. Due to individual anonymity and lack of commitment, implementable allocations must satisfy participation constraints. Price stickiness becomes necessary for optimality, in terms of average, ex-ante welfare, when aggregate uncen- tainty is present but not too severe, and the degree of patience is neither too low or too high. By applying mechanism design to an alternative economy with centralized markets, we also Ãžnd important that macroeconomic policies, such as the taxation of money holdings, are unable to implement the Ãžrst best for price stckiness to have a social role
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 738.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Mechanism Design; monetary theory; history dependence;
Other versions of this item:
- O. Cavalcanti, Ricardo de & Erosa, Andrés, 2008. "Efficient propagation of shocks and the optimal return on money," Journal of Economic Theory, Elsevier, vol. 142(1), pages 128-148, September.
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-13 (All new papers)
- NEP-CBA-2007-01-13 (Central Banking)
- NEP-DGE-2007-01-13 (Dynamic General Equilibrium)
- NEP-MAC-2007-01-13 (Macroeconomics)
- NEP-MON-2007-01-13 (Monetary Economics)
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- Rocheteau, Guillaume, 2012.
"The cost of inflation: A mechanism design approach,"
Journal of Economic Theory,
Elsevier, vol. 147(3), pages 1261-1279.
- Guillaume Rocheteau, 2011. "The cost of inflation: a mechanism design approach," Working Paper 1103, Federal Reserve Bank of Cleveland.
- Guillaume Rocheteau, 2011. "On the coexistence of money and higher-return assets and its social role," Working Paper 1104, Federal Reserve Bank of Cleveland.
- Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
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