Suchergebnisse

This paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned.

This paper presents a simple theoretical model of the term structure and analyzes the relations among optimal portfolio decisions, the real term structure of asset returns, and the risks and price volatilities of assets with different terms to maturity when the investor preferences are non-time-separable. It is argued that specifying utility to be a non-time-separable function of consumption allows for richer term structure relations than separable specifications. The model is capable to explain why term premiums vary and why the term structure may fail to be monotone. Our analysis also demonstrates that the planning horizon of the agents critically affects the term structure of asset returns. The competitive mechanism tends to undervalue short-term risks relative to long-term risks if the investors have short planning horizons.

When the asset market is incomplete, there typically exist taxes on trades in assets and a redistribution of revenue in the asset market that are Pareto improving. The policy is anonymous, it economizes on complexity, and it results in ex post Pareto optimal allocations; it is publicly announced before markets open, thus fully and correctly anticipated by traders, it does not require that financial markets be shut down, and it does not modify the asset market structure. As such, it improves over previously proposed constrained interventions.

I study how trading motives in asset markets affect equilibrium outcomes and welfare. I focus on two types of trading motives - informational and allocational. I show that while a fully separating equilibrium is the unique equilibrium when trading motives are known, multiple equilibria exist when trading motives are unknown. Moreover, forcing traders to reveal their trading motives may harm welfare. I also use this model to study how an asset market may exit a fire sale equilibrium and how government programs may eliminate private information and improve agents' welfare.