Work in Progress



1.   A Positive Theory of the Income Redistributive Focus of Social Security (with R. Reed)

Abstract: Many countries around the world have large public pension programs. Traditionally, these programs have been used to induce retirement by the elderly in order to free up jobs for the young and to redistribute income across generations. This paper provides an efficiency rationale for the inter-generational income redistribution focus of such programs in a framework which explicitly accounts for the role of the lifecycle as well as search and matching frictions in the labor market. In our model, public pension programs alter the age composition of the labor force by inducing the jobless elderly to retire. By requiring a long history of labor market attachment in order to receive benefits, these programs raise the future value of current employment for the young which serves to redistribute bargaining power, and hence income, from the young to the old. The paper argues that pension programs through their effect on the wage structure, the age distribution of the labor force and firm entry decisions, can improve the operation of the labor market and might therefore be desirable on efficiency grounds alone (abstracting from equity and insurance motives).
2.  Monetary Policy and the Distribution of Income

Abstract: This paper represents a first attempt at a tractable analysis of how monetary policy influences the income distribution in an economy. It presents a monetary growth model in which inflation affects credit market efficiency, and via this link, influences capital accumulation, and the income distribution. In the model, a fraction of the population is capitalists, who have access to a risky but high return capital production technology. Capital investment must be partially externally financed via workers' savings, and is subject to a costly state verification (CSV) problem. Successful capitalists leave bequests to their offspring which serve as internal finance, more of which promotes credit market efficiency and capital formation. Inflation acts as an unavoidable tax on the capital incomes of the capitalists thereby reducing their bequests and worsening the CSV friction. Computational experiments reveal that in the model economy, irrespective of whether the government rebates the proceeds of the inflation tax to capitalists or workers, inflation decreases the steady-state capital stock, although the capital stock is highest when all transfers go to workers. The regime where workers get the entire transfer is shown to be "superior" in many respects to one where the capitalists get all the transfer. When monetary policy is instead implemented via changes in the reserve requirement, the effects are largely similar except that the regime where seigniorage is rebated to workers is clearly preferred by all workers and all capitalists.
3.  Who is Afraid of the Friedman Rule? (with A. Martin, J. Haslag, and R. Singh)

Abstract: We explore the connection between optimal monetary policy and heterogeneity among agents in a standard monetary economy with two types of agents where the stationary distribution of money holdings is non-degenerate. Sans type-specific fiscal policy, we show that the zero-nominal-interest rate policy (the Friedman rule) does not maximize type-specific welfare; it may not maximize aggregate ex ante social welfare either. Indeed one, or more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. Our results suggest a positive explanation for why central banks around the world do not implement the Friedman rule.

4.  Optimal Choice of Monetary Instruments in an Economy with Real and Liquidity Shocks (with R. Singh)

Abstract: Poole (1970) using a stochastic IS-LM model presented the first formal treatment of the classic question: how should a monetary authority decide whether to use the money stock or the interest rate as the policy instrument? We update the seminal work of Poole in a microfounded flexible-price general equilibrium model of money using explicit welfare criteria. Specifically, we study the optimal choice of monetary policy instruments in a overlapping-generations economy where limited communication and stochastic relocation creates an endogenous transactions role for fiat money. We characterize stationary welfare maximizing monetary and inflation targets for settings in which the economy is separately hit with i.i.d endowment and liquidity shocks. Our analysis suggests that the central insight of Poole survives: when the shocks are real, welfare is higher under money growth targeting; when the shocks are nominal and not large, welfare is higher under inflation rate targeting.
5. The Role of Foreign Banks in Developing Countries: A Survey of the Evidence [a scanned version of a paper I wrote in 1993 as a summer intern at the World Bank; given the fairly steady interest in this paper, I have decided to put it here; please note I no longer work in this area]

E-mail me if you want a hard copy of any of the above

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Updated May 10, 2005