Bailey's measure of the welfare costs of infiation as a general-equilibrium measure

Lucas (2000) has ShO\nl t hat Baile,\"'s formula for t hc \\'elfare costs of inflatioIl caIl bc rcgardpd as an approximation to t hc gcneral-equilibriuIll IllCaSllH'S \\"hich emerge from thc Sidrauski anrl the shopping-time models, In this paper \\'c shm\' that Baile~"s mcaSllrc can bc cxactly obtairlf'd in tllf' Siclrauski geIleral-equilibri1lIn framp\\'ork under the assUIllption of quasilinpar prefpreIlC'cs, The rpslllt. based on ",heter or not \\'Palt h pffpcts are incorporatccl into t hp analysis, is also helpful in darif\'ing \\'hy Lucas' Illeasurp clerin'd from the Siclrauski model turns 01lt to be aIl upper bOllIlcl to Bailp~"s, T,,'o eXaInplcs arp used to illustratc t he main C'ondusions,

A note on an application of Arrow's theorem: sufficient conditions for Lucas' inflation and welfare

Bellman's methods for dynamic optimization constitute the present mainstream in economics. However, some results associated with optimal controI can be particularly usefuI in certain problems. The purpose of this note is presenting such an example. The value function derived in Lucas' (2000) shopping-time economy in Infiation and Welfare need not be concave, leading this author to develop numerical analyses to determine if consumer utility is in fact maximized along the balanced path constructed from the first order conditions. We use Arrow's generalization of Mangasarian's results in optimal control theory and develop sufficient conditions for the problem. The analytical conclusions and the previous numerical results are compatible .

Regras monetárias e dinâmica macroeconômica no Brasil: uma abordagem de expectativas racionais

Neste artigo estimamos e simulamos um modelo macroeconômico aberto de expectativas racionais (Batini e Haldane [4]) para a economia brasileira, com o objetivo de identificar as características das regras monetárias ótimas e a dinâmica de curto prazo gerada por elas. Trabalhamos com uma versão forward-Iooking e uma versão backward-Iooking a fim de comparar o desempenho de três parametrizações de regras monetárias, que diferem em relação à variável de inflação: a tradicional regra de Taylor, que se baseia na inflação passada; uma regra que combina inflação e taxa de câmbio real (ver Ball [5]) e uma regra que utiliza previsões de inflação (ver Bank af England [3]). Resolvemos o modelo numericamente e contruímos fronteiras eficientes em relação às variâncias do produto e da infiação por simulações estocásticas, para choques i.i.d. ou correlacionados. Os conjuntos de regras ótimas para as duas versões são qualitativamente distintos. Devido à incerteza quanto ao grau de forward-Iookingness sugerimos a escolha das regras pela soma das funções objetivos nas duas versões. Concluímos que as regras escolhidas com base neste critério têm perdas moderadas em relação às regras ótimas, mas previnem perdas maiores que resultariam da escolha da regra com base na versão errada. Finalmente calculamos funções de resposta a impulso dos dois modelos para algumas regras selecionadas, a fim de avaliar como diferentes regras monetárias alteram a dinâmica de curto prazo dos dois modelos.

The role of consumer's risk aversion on price rigidity

This paper aims at contributing to the research agenda on the sources of price stickiness, showing that the adoption of nominal price rigidity may be an optimal firms' reaction to the consumers' behavior, even if firms have no adjustment costs. With regular broadly accepted assumptions on economic agents behavior, we show that firms' competition can lead to the adoption of sticky prices as an (sub-game perfect) equilibrium strategy. We introduce the concept of a consumption centers model economy in which there are several complete markets. Moreover, we weaken some traditional assumptions used in standard monetary policy models, by assuming that households have imperfect information about the ineflicient time-varying cost shocks faced by the firms, e.g. the ones regarding to inefficient equilibrium output leveIs under fiexible prices. Moreover, the timing of events are assumed in such a way that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center. Since such choices under uncertainty may decrease the expected utilities of risk averse consumers, competitive firms adopt some degree of price stickiness in order to minimize the price uncertainty and fi attract more customers fi.'

Inflation and occupational choices

This paper studies the impact of (high rates) of infiation on ocupational choices in a model where the demand for labor is derived from a production technology that uses capital, productive labor, and managerial services done by administrative labor and money; while the supply of both kinds of labor is rigid in the short-run due to irreversible professional choices. The dynamic path of the economy after stabilization plans exhibits the main sty!ized facts reported in the literature inc1uding an initial consumption boon followed by a gradual adjustment. In its open economy version, the initial phase of the transitional dynamics exhibits capital infiight. The model also generates an increase of income inequality during the trasitional dynamics.

Debt management in Brazil: evaluation of the Real Plan and challenges ahead

The Brazilian domestic debt has posed two challenges to policy-makers: it has grown very fast and its maturity is extremely short. This has prompted fears that a default or a compulsory lengthening scheme would be imposed. Here, we analyse the domestic public debt management experience in Brazil, searching for policy prescriptions for the next few years. After briefiy reviewing the recent domestic public debt history, we decompose the large rise in federal bonded debt during 1995-2000, searching for its macroeconomic causes. The main culprits are the extremely high interest payments-which, unti11998, were caused by the weak fiscal stance and the quasi-fixed exchange-rate regime; and since 1999, by the impact ofthe currency depreciation On the dollar-indexed and the externai debt-, and the accumulation of assets of doubtful value, much of which may have to be written off in the future. Simulation exercises of the net debt path for the near future underscore the importance of a tighter fiscal stance to prevent the debt-GDP ratio from growing further. Given the need to quickly lengthen the debt maturity, our main policy advice is to foster, and rely more on, infiation-linked bonds.

Welfare cost of inflation considering adoption decisions and interest-bearing deposits

Attanasio et al. (JPE, 2002) have used microeconomic data on households to provide new estimates of the welfare costs of infiation using Bailey's unidimensional welfare measure as a basis for their calculations. Such a measure does not properly take into consideration lhe fact that the majority of households in their sample (58.7 percent) holds not only bank deposits and currency, but also a second type of interest-bearing assct. This work devises alternative formulas which account for the existence of bank deposits and a sccond interest-bearing asset in the economy, as well as for adoption decisions regarding alternative financiai technologies.