On the Usefulness of the Constrained Planning Problem in a Model of Money
Bhattacharya, Joydeep; Singh, Rajesh
Macroeconomic Dynamics Vol. 12 no. 4 (September 2008): 503-525. (Originally published as WP #06027, August 2006 (Revised on March 6, 2007))
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.
JEL Classification: E31, E42, E63
Keywords: planning problems, overlapping generations, random relocation model