A Course in Monetary Economics: Sequential Trade, Money, and Uncertainty

Monetary Economics and Sequential Trade is an insightful introduction to the advanced topics in monetary economics. Accessible to students who have mastered the diagrammatic tools of economics, it discusses real issues with a variety of modeling alternatives, allowing for a direct comparison of the implications of the different models. The exposition is clear and logical, providing a solid foundation in monetary theory and the techniques of economic modeling. The text is rooted in the author's years of teaching and research, and will be highly suitable for monetary economics courses in both the upper-level undergraduate and graduate levels.

Table of Contents:
Preface xiii Part I: Introduction to Monetary Economics 1 1 Overview 5 1.1 Money, Inflation, and Output: Some Empirical Evidence 5 1.2 The Policy Debate 8 1.3 Modeling Issues 13 1.4 Background Material 14 1.4.1 The Fisherian diagram 15 1.4.2 Efficiency and distortive taxes 18 1.4.3 Asset pricing 21 2 Money in the Utility Function 26 2.1 Motivating the Money in the Utility Function Approach: The Single-period, Single-agent Problem 26 2.2 The Multi-period, Single-agent Problem 28 2.3 Equilibrium with Constant Money Supply 33 2.4 The Social and Private Cost for Accumulating Real Balances 34 2.5 AdministrativeWays of Getting to the Optimum 36 2.6 Once and for All Changes in M 36 2.7 Change in the Rate of Money Supply Change: Technical Aspects 37 2.8 Change in the Rate of Money Supply Change: Economics 38 2.9 Steady-state Equilibrium (SSE) 41 2.10 Transition from One Steady State to Another 41 2.11 Regime Changes 43 2.12 Introducing Physical Capital and Bonds 45 2.13 The Golden Rule and the Modified Golden Rule 47 Appendix 2A A dynamic programming example 53 3 The Welfare Cost of Inflation in a Growing Economy 57 3.1 Steady-state Equilibrium in a Growing Economy 57 3.2 Generalizing the Model in Chapter 2 to the Case of Growth 58 3.3 Money Substitutes 64 Appendix 3A A dynamic programming formulation 69 4 Government 72 4.1 The Revenues from Printing Money 72 4.1.1 Steady-state revenues 72 4.1.2 Out of the steady-state revenues 73 4.1.3 The present value of revenues 75 Appendix 4A Non-steady-state equilibria 76 4.2 The Government’s “Budget Constraint” 78 4.2.1 Monetary and fiscal policy: Who moves first? 81 4.2.2 The fiscal approach to the price level 81 4.3 Policy in the Absence of Perfect Commitment: A Positive Theory of Inflation 82 5 More Explicit Models of Money 86 5.1 A Cash-in-advance Model 86 5.1.1 A two-goods model 87 5.1.2 An analogous real economy 89 5.1.3 Money super-neutrality in a one-good model 92 5.2 An Overlapping Generations Model 94 5.3 A Baumol–Tobin Type Model 96 Appendix 5A 98 6 Optimal Fiscal and Monetary Policy 100 6.1 The Second-best Allocation 100 6.2 The Second Best and the Friedman Rule 103 6.3 Smoothing Tax Distortions 109 6.4 A Shopping Time Model 112 7 Money and the Business Cycle: Does Money Matter? 123 7.1 VAR and Impulse Response Functions: An Example 125 7.2 Using VAR Impulse Response Analysis to Assess the Money–Output Relationship 127 7.3 Specification Search 135 7.4 Variance Decomposition 142 8 Sticky Prices in a Demand-satisfying Model 147 9 Sticky Prices with Optimal Quantity Choices 155 9.1 The Production to Order Case 156 9.2 The Production to Market Case 161 10 Flexible Prices 170 10.1 Lucas’ Confusion Hypothesis 170 10.2 Limited Participation 174 Part II: An Introduction to the Economics of Uncertainty 179 11 Preliminaries 182 11.1 Trade in Contingent Commodities 185 11.2 Efficient Risk Allocation 190 12 Does Insurance Require Risk Aversion? 197 12.1 The Insurance-buying Gambler 200 12.2 Socially Harmful Information 201 13 Asset Prices and the Lucas “Tree Model” 202 Part III: An Introduction to Uncertain and Sequential Trade (UST) 207 14 Real Models 210 14.1 An Example 210 14.1.1 Downward sloping demand 215 14.1.2 Welfare analysis 218 14.1.3 Demand and supply analysis 221 14.2 Monopoly 224 14.2.1 Procyclical productivity 226 14.2.2 Estimating the markup 227 14.3 Relationship to the Arrow–Debreu Model 228 14.4 Heterogeneity and Supply Uncertainty 231 14.4.1 The model 233 14.5 Inventories 237 14.5.1 Temporary (partial) equilibrium 238 14.5.2 Solving for a temporary equilibrium 240 14.5.3 Full equilibrium 243 14.5.4 Efficiency 243 Appendix 14A The firm’s problem 247 Appendix 14B The planner’s problem 248 15 A Monetary Model 250 15.1 An Example 251 15.2 Working with the Money Supply as the Unit of Account 253 15.3 Anticipated and Unanticipated Money 255 15.4 Labor Choice, Average Capacity Utilization andWelfare 256 15.5 A Generalization to Many Potential Markets 256 15.6 Asymmetric Equilibria: A Perfectly Flexible Price Distribution is Consistent with Individual Prices That Appear to Be “Rigid” 258 15.7 Summary of the Implications of the Model 259 16 Limited Participation, Sticky Prices, and UST: A Comparison 261 16.1 Limited Participation 261 16.2 Sticky Prices 265 16.3 UST 268 16.4 A Real Business Cycle Model withWedges: Some Equivalence Results 274 16.5 Additional Tests Based on Unit Labor Cost and Labor Share 276 17 Inventories and the Business Cycle 280 17.1 Introducing Costless Storage 282 17.2 Adding Supply Shocks 288 17.3 Testing the Model with Detrended Variables 292 17.4 Using an Impulse Response Analysis with Non-detrended Variables to Test for Persistence 297 Appendix 17A The Hodrick–Prescott (H–P) filter 300 18 Money and Credit in the Business Cycle 302 18.1 A UST Model with Credit 302 18.2 Inventories Are a Sufficient Statistic for Past Demand Shocks 305 18.3 Estimating the Responses to a Money Shock 306 18.4 Estimating the Responses to an Inventories Shock 310 18.5 Concluding Remarks 312 19 Evidence from Micro Data 313 19.1 A Menu Cost Model 313 19.2 The Serial Correlation in the Nominal Price Change 315 19.3 A Two-Sided Policy 316 19.4 Relative Price Variability and Inflation 317 19.5 A Staggered Price Setting Model 319 20 The Friedman Rule in a UST Model 327 20.1 A Single-Asset Economy 327 20.2 Adding a Costless Bonds Market 330 20.3 Costly Transactions in Bonds 331 21 Sequential International Trade 333 21.1 A Real Model 334 21.2 A Monetary Model 341 21.3 Exchange Rates 348 Appendix 21A Proofs of the Claims in the Monetary Model 350 Appendix 21B Example 7 in detail 353 22 Endogenous Information and Externalities 356 22.1 A Real Model 356 22.2 A Monetary Model 361 22.3 Relationship to the New Keynesian Economics 367 23 Search and Contracts 369 23.1 Search over Time 369 23.2 Random Choice of Markets 371 23.3 Capacity Utilization Contracts and Carlton’s Observations 375 References 385 Index 395

About the Author :
Benjamin Eden is a Professor of Economics at Vanderbilt University and the University of Haifa in Israel. He has published articles in numerous academic journals, including The Journal of Political Economy, The Quarterly Journal of Economics, and The American Economic Review. Professor Eden served for many years as a consultant to the Bank of Israel, and has taught monetary economics at various schools including Carnegie Mellon University, UCLA, the University of Iowa and the University of Chicago.