Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-05T15:11:25.733Z Has data issue: false hasContentIssue false

USEFULNESS OF THE CONSTRAINED PLANNING PROBLEM IN A MODEL OF MONEY

Published online by Cambridge University Press:  01 September 2008

Joydeep Bhattacharya
Affiliation:
Iowa State University
Rajesh Singh*
Affiliation:
Iowa State University
*
Address correspondence to: Professor Rajesh Singh, Department of Economics, Iowa State University, 260 Heady Hall, Ames, IA 50011, USA; e-mail: [email protected].

Abstract

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 generated by these policies. 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 potentially an extremely “efficient” (easy and quick) way of deriving optimal policies for the corresponding decentralized economies.

Type
Articles
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Antinolfi, Gaetano, Huybens, Elizabeth, and Keister, Todd (2001) Monetary stability and liquidity crises: the role of the lender of last resort. Journal of Economic Theory 99, 187219.CrossRefGoogle Scholar
Antinolfi, Gaetano and Keister, Todd (2006) Discount window policy, banking crises, and indeterminacy of equilibrium. Macroeconomic Dynamics 10, 119.Google Scholar
Bhattacharya, Joydeep, Haslag, Joseph, and Martin, Antoine (2005) Heterogeneity, redistribution, and the Friedman rule. International Economic Review 46 (2), 437454.CrossRefGoogle Scholar
Bhattacharya, Joydeep, Haslag, Joseph, and Russell, Steven (2005) The role of money in two alternative models: when and why is the Friedman rule optimal? Journal of Monetary Economics 52 (8), 14011433.CrossRefGoogle Scholar
Bhattacharya, Joydeep and Singh, Rajesh (2007) Optimal choice of monetary instruments in an economy with real and liquidity shocks. Journal of Economic Dynamics and Control.Google Scholar
Champ, Bruce, Smith, Bruce D., and Williamson, Stephen D. (1996) Currency elasticity and banking panics: Theory and evidence. Canadian Journal of Economics 29 (4), 828864.Google Scholar
Haslag, Joseph and Martin, Antoine (2007) Optimality of the Friedman rule in overlapping generations models with spatial separation. Journal of Money, Credit, and Banking 39 (7)17411758.Google Scholar
Paal, Beatrix and Smith, Bruce D. (2000) The Sub-Optimality of the Friedman Rule and the Optimum Quantity of Money. Manuscript University of Texas at Austin.Google Scholar
Schreft, Stacey and Smith, Bruce D. (1997) Money, banking, and capital formation. Journal of Economic Theory 73, 157182.Google Scholar
Schreft, Stacey and Smith, Bruce D. (2004) The Social Value of Risk-Free Government Debt. Federal Reserve Bank of Kansas City working paper 03–02.Google Scholar
Smith, Bruce D. (2002) Monetary policy, banking crises, and the Friedman rule. American Economic Review 92, 128134.CrossRefGoogle Scholar
Townsend, Robert M. (1987) Economic organization with limited communication. American Economic Review 77, 954971.Google Scholar