Final Activity Report Summary - IMMP (Incomplete markets and monetary policy)
The objective of the research is to study monetary economies by making use of microeconomic foundations. As stressed in the original proposal, in the academic literature, the dominant approach has been to study the implications of monetary policy in a representative agent model with complete financial markets and infinite horizon as in Samuelson, Wilson, Lucas-Stokey, Woodford and Cochrane. Although these models have very interesting results on the effects of monetary policy, they are limited in some aspects: representative agent models can't study for instance the issue of how monetary policy can effect redistribution of revenue that could be captured in a model with heterogeneous agents. Moreover, complete markets are idealisation that agents can trade all commodities (goods and services) on future states of the world. This modelling approach has generated interesting results and can be used for macroeconomic analysis, but considering incomplete financial markets is closer to reality of financial systems and lead to more realistic situation for policy analysis.
In a recent work Bloise-Drèze-Polemarchakis contributed to the general equilibrium theory of monetary economies by considering a model with heterogeneous agents and a complete markets and an active monetary authority can effect changes in the money supply by either trading in assets or by distributing subsidies and levying taxes. Following the same lines of research, Dubey-Geneakolplos considered a two period model with heterogeneous agents and incomplete financial markets but where the only function of the authority is to distribute money to agents. The aim of the research project was to reconcile these two results, and extend them to infinites horizon in order to be able to study macroeconomic implications as economic growth and long-term effects of shocks on the economy.
When undertaking this research project, and as it was noted in Section B2.5 of the original proposal, the two period setting was developed, presented in several international conference and submitted for publication. The aim was to study indeterminacy of equilibria and the infinite horizon setting. But thanks to two anonymous referees, the way money circulated in our original model wasn't clear enough and we were asked to do some more work on the two period setting. Moreover, as mentioned in the work of Bai-Schwarz, we were tackling the same research theme independently. Hence, given that there work was published before ours, by restudying our two period setting we had to consider further development than originally planned in order to distinguish the two research works. The first months of the fellowship were to reconstruct the two period model. Once this accomplished, we tackled the issue of infinite horizon.
One of the other objectives of the fellowship was to develop some individual research. I followed a Macroeconomic class at my host institution that got me interested in economic growth model and I decided to attend a class on Economic development as well. These classes helped me develop a new independent line of research on economic growth and education. The first step is to write a survey on the link between education and economic Growth.
I also had the opportunity to continue work on a paper initiated with my former manager at my assignment at the World Bank on more financial issues, more precisely the cost of capital in a non-interest bearing economy. Finally, Another aim was to submit for publication my other thesis chapter The first cahter dealing with the survival assumption is published in "Annales d'Economie et de Statistiques" in July 2007. As for the second chapter, it considered nominal assets in a general equilibrium framework with incomplete frictional financial markets. Presenting this paper in several international conferences raised the fact that the interpretation of a nominal assets does not reconcile all the experts of the field. With my co-author, we decided to tackle the issues raised by nominal assets in a separate working paper.
In a recent work Bloise-Drèze-Polemarchakis contributed to the general equilibrium theory of monetary economies by considering a model with heterogeneous agents and a complete markets and an active monetary authority can effect changes in the money supply by either trading in assets or by distributing subsidies and levying taxes. Following the same lines of research, Dubey-Geneakolplos considered a two period model with heterogeneous agents and incomplete financial markets but where the only function of the authority is to distribute money to agents. The aim of the research project was to reconcile these two results, and extend them to infinites horizon in order to be able to study macroeconomic implications as economic growth and long-term effects of shocks on the economy.
When undertaking this research project, and as it was noted in Section B2.5 of the original proposal, the two period setting was developed, presented in several international conference and submitted for publication. The aim was to study indeterminacy of equilibria and the infinite horizon setting. But thanks to two anonymous referees, the way money circulated in our original model wasn't clear enough and we were asked to do some more work on the two period setting. Moreover, as mentioned in the work of Bai-Schwarz, we were tackling the same research theme independently. Hence, given that there work was published before ours, by restudying our two period setting we had to consider further development than originally planned in order to distinguish the two research works. The first months of the fellowship were to reconstruct the two period model. Once this accomplished, we tackled the issue of infinite horizon.
One of the other objectives of the fellowship was to develop some individual research. I followed a Macroeconomic class at my host institution that got me interested in economic growth model and I decided to attend a class on Economic development as well. These classes helped me develop a new independent line of research on economic growth and education. The first step is to write a survey on the link between education and economic Growth.
I also had the opportunity to continue work on a paper initiated with my former manager at my assignment at the World Bank on more financial issues, more precisely the cost of capital in a non-interest bearing economy. Finally, Another aim was to submit for publication my other thesis chapter The first cahter dealing with the survival assumption is published in "Annales d'Economie et de Statistiques" in July 2007. As for the second chapter, it considered nominal assets in a general equilibrium framework with incomplete frictional financial markets. Presenting this paper in several international conferences raised the fact that the interpretation of a nominal assets does not reconcile all the experts of the field. With my co-author, we decided to tackle the issues raised by nominal assets in a separate working paper.