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On the Usefulness of the Constrained Planning Problem in a Model of Money

  • Bhattacharya, Joydeep
  • Singh, Rajesh

In this paper, we study a decentralized monetary economy with a specified set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is an extremely "efficient" (easy and quick) way of deriving optimal policies for the corresponding decentralized economies.

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File URL: http://www2.econ.iastate.edu/papers/p1763-2006-08-01.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 12660.

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Date of creation: 01 Aug 2006
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Publication status: Published in Macroeconomic Dynamics, September 2008, vol. 12 no. 4, pp. 503-525
Handle: RePEc:isu:genres:12660
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

Phone: +1 515.294.6741
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Web page: http://www.econ.iastate.edu
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  1. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  2. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, And The Friedman Rule," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, 05.
  3. Beatrix Paal & Bruce D. Smith, 2013. "The sub-optimality of the Friedman rule and the optimum quantity of money," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 911-948, November.
  4. Gaetano Antinolfi & Elisabeth Huybens & Todd Keister, 2000. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Working Papers 0001, Centro de Investigacion Economica, ITAM.
  5. Joseph H. Haslag & Antoine Martin, 2003. "Optimality of the Friedman rule in overlapping generations model with spatial separation," Research Working Paper RWP 03-03, Federal Reserve Bank of Kansas City.
  6. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  7. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2004. "The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?," Staff General Research Papers 11950, Iowa State University, Department of Economics.
  8. Antinolfi, Gaetano & Keister, Todd, 2006. "Discount Window Policy, Banking Crises, And Indeterminacy Of Equilibrium," Macroeconomic Dynamics, Cambridge University Press, vol. 10(01), pages 1-19, February.
  9. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, vol. 92(2), pages 128-134, May.
  10. Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
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