Modeling Monetary Economies

by Bruce Champ , Scott Freeman

• ISBN13: 9780521789745
• ISBN10: 0521789745
• Edition: 2nd
• Format: Paperback
• Copyright: 2001-01-15
• Publisher: Cambridge University Press

Summary

This upper-level undergraduate textbook, now in its second editon, approaches monetary economics using the classical paradigm of rational agents in a market setting. Too often monetary economics has been taught as a collection of facts about existing institutions for students to memorize. By teaching from first principles, the authors aim to instruct students not only in existing monetary policies and institutions but also in what policies and institutions may or should exist in the future. The text builds on a simple, clear monetary model and applies this framework consistently to a wide variety of monetary questions. The authors have added in this second edition new material on speculative attacks on currencies, social security, currency boards, central banking alternatives, the payments system, and the Lucas model of price surprises. Discussions of many topics have been extended, presentations of data greatly expanded, and new exercises added.

Table of Contents

Preface	xv
Part I Money	3	(112)
A Simple Model of Money	3	(30)
Building a Model of Money	3	(1)
The Environment	4	(1)
Preferences	5	(4)
Future Generations	5	(4)
The Initial Old	9	(1)
The Economic Problem	9	(1)
Feasible Allocations	10	(3)
The Golden Rule Allocation	12	(1)
The Initial Old	13	(1)
Decentralized Solutions	13	(2)
Equilibrium without Money	14	(1)
Equilibrium with Money	15	(1)
Finding the Demand for Fiat Money	15	(7)
An Individual's Budget	16	(2)
Finding Fiat Money's Rate of Return	18	(3)
The Quantity Theory of Money	21	(1)
The Neutrality of the Fiat Money Stock	22	(1)
The Role of Fiat Money	22	(1)
Is This Monetary Equilibrium the Golden Rule?	22	(1)
A Monetary Equilibrium with a Growing Economy	23	(4)
The Feasible Set with a Growing Population	24	(1)
The Budget Set with a Growing Population	25	(2)
Summary	27	(1)
Exercises	27	(2)
Appendix: Using Calculus	29	(4)
An Example	31	(1)
Appendix Exercise	32	(1)
Barter and Commodity Money	33	(15)
A Model of Barter	33	(5)
Direct Barter	35	(1)
Monetary Exchange	36	(2)
What Should be Used as Money?	38	(2)
Exchange Costs	38	(2)
A Model of Commodity Money	40	(5)
A Commodity Money Equilibrium	40	(2)
The Consumption of Gold	42	(1)
The Inefficiency of Commodity Money	43	(2)
Summary	45	(1)
Exercises	45	(3)
Inflation	48	(26)
A Growing Supply of Fiat Money	48	(11)
The Budget Set with Monetary Growth	50	(2)
The Inefficiency of Inflation	52	(3)
The Golden Rule Monetary Policy in a Growing Economy	55	(2)
A Government Policy to Fix the Price Level	57	(2)
Financing Government Purchases	59	(6)
Is Inflation an Efficient Tax?	61	(2)
A Nondistorting Tax	63	(2)
The Limits to Seigniorage	65	(5)
Summary	70	(1)
Exercises	70	(3)
Appendix: Equilibrium Consumption Is at the Edge of the Feasible Set	73	(1)
International Monetary Systems	74	(25)
A Model of International Exchange	74	(2)
Foreign Currency Controls	76	(3)
Fixed Exchange Rates	78	(1)
The Costs of Foreign Currency Controls	79	(1)
The Indeterminancy of the Exchange Rate	79	(6)
Exchange Rate Fluctuations	81	(2)
International Currency Traders	83	(2)
Fixing the Exchange Rate	85	(10)
Cooperative Stabilization	85	(2)
Unilateral Defense of the Exchange Rate	87	(6)
Speculative Attacks on Currencies	93	(1)
Inflationary Incentives	94	(1)
The Optimal International Monetary System	95	(1)
Summary	96	(1)
Exercises	97	(2)
Price Surprises	99	(16)
The Data	99	(1)
The Phillips Curve	99	(1)
Cross-Country Comparisions	100	(1)
Expectations and the Neutrality of Money	100	(9)
The Lucas Model	102	(1)
Nonrandom Inflation	103	(3)
Random Monetary Policy	106	(3)
The Lucas Critique of Econometric Policy Evaluation	109	(2)
Optimal Policy	111	(1)
Summary	112	(1)
Exercises	113	(1)
Appendix: A Proof by Contradiction	114	(1)
Part II Banking	115	(116)
Capital	117	(21)
Capital	117	(2)
Rate-of-Return Equality	119	(1)
Can Fiat Money Coexist with Another Asset?	120	(3)
The Tobin Effect	121	(2)
When Fiat Money and Other Assets Are Not Substitutes	123	(3)
Nominal Interest Rates	123	(2)
Anticipated Inflation and the Nominal Interest Rate	125	(1)
Anticipated Inflation and the Real Interest Rate	125	(1)
Risk	126	(2)
Summary	128	(1)
Exercises	128	(1)
Appendix A: A Model of Private Debt	129	(5)
Private Debt	129	(2)
Private Debt and Capital	131	(2)
Appendix Exercises	133	(1)
Appendix B: The Golden Rule Capital Stock	134	(4)
Appendix Exercise	137	(1)
Liquidity and Financial Intermediation	138	(12)
Money as a Liquid Asset	138	(5)
A Model of Illiquidity	139	(4)
The Business of Banking	143	(2)
A Sample Arbitrage Plan	143	(1)
The Effect of Arbitrage on Equilibrium	143	(2)
Summary	145	(1)
Exercises	145	(1)
Appendix	146	(4)
Banks as Monitors	146	(4)
Central Banking and the Money Supply	150	(19)
Legal Restrictions on Financial Intermediation	150	(1)
Reserve Requirements	151	(10)
Banks with Reserve Requirements	151	(1)
Prices	152	(1)
Seigniorage	153	(1)
Capital and Real Output	153	(1)
Deposits	154	(1)
Welfare	155	(1)
Central Bank Definitions of Money	156	(3)
The Total Money Supply in Our Model	159	(2)
Central Bank Lending	161	(6)
Limited Central Bank Lending	161	(3)
Unlimited Central Bank Lending	164	(2)
Central Bank Lending Policies in Canada and the United States	166	(1)
Summary	167	(1)
Exercise	168	(1)
Money Stock Fluctuations	169	(16)
The Correlation Between Money and Output	170	(2)
A Model of Currency and Deposits	172	(4)
A Model of Inside and Outside Money	172	(4)
Linking Output and the Money Multiplier	176	(5)
Correlation or Causality?	178	(1)
A Once-and-for-All Change in the Fiat Money Stock	178	(1)
A Monetary Stabilization Policy?	179	(1)
Another Look at Monetary Aggregates	180	(1)
Anticipated Inflation and Output Revisited	181	(1)
Summary	182	(1)
Appendix: The Money Supply with Reserves and Currency	182	(3)
Appendix Exercise	184	(1)
Fully Backed Central Bank Money	185	(15)
Paying Interest on Money	186	(3)
Another Look at the Quantity Theory	189	(3)
Deflation	192	(2)
Currency Boards	194	(2)
Summary	196	(1)
Exercises	197	(1)
Appendix: Price Level Indeterminancy	198	(2)
The Payments System	200	(14)
A Model of the Clearing of Debt	201	(3)
Trading	202	(2)
Institutions for the Clearing of Debt	204	(1)
Providing Liquidity	205	(3)
Equilibrium with an Inelastic Money Supply	205	(1)
An Elastic Fiat Money Supply	205	(1)
An Elastic Supply of Inside Money	206	(1)
Fully Backed Bank Notes	207	(1)
A Potential for an Inflationary Overissue of Bank Notes	208	(2)
The Short-Term Interest Rate	210	(3)
Policy Options	211	(2)
Summary	213	(1)
Bank Risk	214	(17)
Demand Deposit Banking	214	(3)
A Model of Demand Deposit Banking	215	(2)
Bank Runs	217	(2)
Preventing Panics	219	(2)
Interbank Lending	219	(1)
Identifying Unnecessary Withdrawals	219	(1)
Suspensions of Withdrawals	220	(1)
Government Deposit Insurance	220	(1)
Bank Failures	221	(3)
The Moral Hazard of Deposit Insurance	224	(1)
The Importance of Capital Requirements	224	(4)
Capital Requirements for Insured Banks	225	(1)
Closing Insolvent Banks	225	(3)
Summary	228	(1)
Exercises	228	(3)
Part III Government Debt	231	(76)
Deficits and the National Debt	233	(22)
High-DenominationGovernment Debt	233	(4)
A Model of Separated Asset Markets	234	(2)
Introducing Government Bonds	236	(1)
Continual Debt Issue	237	(6)
The Burden of the National Debt	243	(4)
The Government Budget Constraint	243	(2)
The Government's Intertemporal Choice	245	(2)
Open Market Operations	247	(2)
Political Strategy and the National Debt	249	(2)
Open Market Operations Revisted	251	(1)
Summary	252	(1)
Exercises	253	(2)
Savings and Investment	255	(15)
The Savings Decisions	255	(7)
Wealth	257	(1)
Present Value	257	(2)
Wealth and Consumption	259	(2)
Income and Saving	261	(1)
The Effect of Taxes on Consumption and Savings	262	(2)
Wealth-Netural Tax Changes	262	(2)
Wealth Effects	264	(1)
Summary	264	(1)
Exercises	265	(1)
Appendix: Social Security	265	(5)
Fully Funded Government Pensions	265	(2)
Pay-as-You-Go	267	(2)
Appendix Exercises	269	(1)
The Effect of the National Debt on Capital and Savings	270	(18)
The National Debt and the Crowding Out of Capital	270	(2)
Deficits and Interest Rates	272	(1)
Neutral Government Debt	272	(2)
Summary	274	(1)
Exercise	275	(1)
Appendix A: Fiat Money and the Crowding Out of Capital	276	(3)
Offsetting Wealth Transfers	278	(1)
Appendix B: Infinitely Lived Agents	279	(9)
A Model of Infinitely Lived People	279	(1)
Wealth, Capital, and Interest-Bearing Government Debt	280	(2)
Wealth, Capital, and Real Money Balances	282	(2)
Parents, Bequests, and Infinite Lives	284	(3)
Appendix Exercises	287	(1)
The Temptation of Inflation	288	(19)
Defaulting on the Debt	288	(3)
The Inconsistency of Default	289	(1)
Commitment	290	(1)
Reputation	290	(1)
The Rate of Return on Risky Debt	291	(1)
Inflation and the Nominal National Debt	291	(10)
Unanticipated Inflation and the Real National Debt	292	(1)
Anticipated Inflation and the Real National Debt	293	(1)
Rational Experctations	294	(2)
The Lucas Critique Revisited	296	(1)
Self-Fulfilling Inflationary Expectations	297	(2)
Hyperinflation	299	(1)
Commitment in Monetary Policy	300	(1)
The Temptation of Seigniorage	301	(1)
Inflation and Private Debt	302	(1)
Summary	303	(1)
Exercises	304	(1)
Appendix: An Activist Monetary Policy	304	(3)
References	307	(6)
Author Index	313	(2)
Subject Index	315