This paper shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run. Bank runs in the model cause real economic damage, rather than simply reflecting other problems. Contracts which can prevent runs are studied, and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts.

/pdf/bank-runs-deposit-insurance-and-liquidity-5acmze0roa.pdf

Bank Runs, Deposit Insurance, and Liquidity

WHEN T H E BROOKINGS Panel on Economic Activity began in 1970, the world economy roughly accorded with the idea of three distinct economic systems: a capitalist first world, a socialist second world, and a developing third world which aimed for a middle way between the first two. The third world was characterized not only by its low levels of per capita GDP, but also by a distinctive economic system that assigned the state sector the predominant role in industrialization, although not the monopoly on industrial ownership as in the socialist economies. The years between 1970 and 1995, and especially the last decade, have witnessed the most remarkable institutional harmonization and economic integration among nations in world history. While economic integration was increasing throughout the 1970s and 1980s, the extent of integration has come sharply into focus only since the collapse of communism in 1989. In 1995 one dominant global economic system is emerging. The common set of institutions is exemplified by the new World Trade Organization (WTO), which was established by agreement of more than 120 economies, with almost all the rest eager to join as rapidly as possible. Part of the new trade agreement involves a codification of basic principles governing trade in goods and services. Similarly, the International Monetary Fund (IMF) now boasts nearly universal membership, with member countries pledged to basic principles of currency convertibility. Most programs of economic reform now underway in the developing world and in the post-communist world have as their strategic aim the

/pdf/economic-reform-and-the-process-of-global-integration-29a1wosjcb.pdf

Economic Reform and the Process of Global Integration

With the collapse of the Bretton Woods system, any pretense of a connection of the world's currencies to any real commodity has been abandoned. Yet since the 1980s, most central banks have abandoned money-growth targets as practical guidelines for monetary policy as well. How then can pure "fiat" currencies be managed so as to create confidence in the stability of national units of account? Interest and Prices seeks to provide theoretical foundations for a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets. In such a world, effective monetary policy requires that central banks construct a conscious and articulate account of what they are doing. Michael Woodford reexamines the foundations of monetary economics, and shows how interest-rate policy can be used to achieve an inflation target in the absence of either commodity backing or control of a monetary aggregate. The book further shows how the tools of modern macroeconomic theory can be used to design an optimal inflation-targeting regime--one that balances stabilization goals with the pursuit of price stability in a way that is grounded in an explicit welfare analysis, and that takes account of the "New Classical" critique of traditional policy evaluation exercises. It thus argues that rule-based policymaking need not mean adherence to a rigid framework unrelated to stabilization objectives for the sake of credibility, while at the same time showing the advantages of rule-based over purely discretionary policymaking.

Interest and prices : foundations of a theory of monetary policy

Part 1 Empirical evidence on money and output: introduction some basic correlations estimating the effect of money on output summary. Part 2 Money in a general equilibrium framework: introduction the Tobin effect money in the utility function summary appendix - the MIU approximation problems. Part 3 Money and transactions: introduction shopping-time models cash-in-advance models other approaches summary appendix - the CIA approximation problems. Part 4 Money and public finance: introduction bugdet accounting equilibrium seigniorage optimal taxation and seigniorage Friedman's rule revisited nonindexed tax systems problems. Part 5 Money and output in the short run: introduction flexible prices sticky prices and wages a framework for monetary analysis inflation persistence summary appendix problems. Part 6 Money and the open economy: introduction the Obstfeld-Rogoff two-country model policy coordination the small open economy summary appendix problems. Part 7 The credit channel of monetary policy: introduction imperfect information in credit markets macroeconomic implications does credit matter? summary. Part 8 Discretionary policy and time inconsistency: introduction inflation under discretionary policy solutions to the inflation bias is the inflation bias important? do central banking institutions matter? lessons and conclusions problems. Part 9 Monetary-policy operating procedures: introduction from instruments to goals the instrument-choice problem operating procedures and policy measures problems. Part 10 Interest rates and monetary policy: introduction interest-rate rule and the price level interest rate policies in general equilibrium models the term structure of interest rates a model for policy analysis summary problems.

Monetary Theory and Policy

Preliminaries: Note on conventions Basic homotopy notions Surgery below the middle dimension Appendix: Applications Simple Poincare complexes The main theorem: Statement of results An important special case The even-dimensional case The odd-dimensional case The bounded odd-dimensional case The bounded even-dimensional case Completion of the proof Patterns of application: Manifold structures on Poincare complexes Applications to submanifolds Submanifolds: Other techniques Separating submanifolds Two-sided submanifolds One-sided submanifolds Calculations and applications: Calculations: Surgery obstruction groups Calculations: The surgery obstructions Applications: Free actions on spheres General remarks An extension of the Atiyah-Singer $G$-signature theorem Free actions of $S^1$ Fake projective spaces (real) Fake lens spaces Applications: Free uniform actions on euclidean space Fake tori Polycyclic groups Applications to 4-manifolds Postscript: Further ideas and suggestions: Recent work Function space methods Topological manifolds Poincare embeddings Homotopy and simple homotopy Further calculations Sullivan's results Reformulations of the algebra Rational surgery References Index.

Surgery on compact manifolds

On different interpretations of the General Theory

The Invalidity of Classical Monetary Theory

Keynes, Cambridge and The General Theory

l This paper was written while I was visiting at M.I.T. during 1968 under a research grant from the National Science Foundation (NSF Grant GS 1812). I am grateful to both these institutions for making this work possible. I am happy to express my deep appreciation to Mr. Stanley Fischer of M.I.T. for his invaluable assistance at all stages of the preparation of this paper and particularly in the examination of the relevant literature. In addition, I have benefited from discussions with him and from his criticisms of earlier drafts. I am also indebted to my Jerusalem colleagues Yosef Attiyeh, Yoram Ben-Porath, and Giora Hanoch, whose thoughful suggestions have greatly improved the general organization of this paper, as well as the discussion of specific points. As usual, it is a pleasure to thank Miss Susanne Freund for her careful and conscientious checking of the final manuscript and its references. Needless to say, responsibility for the interpretations and views presented in this paper remain entirely my own. 2 I would like to dedicate this paper to the memory of Miguel Sidrauski. His untimely death in August, 1968 was a great loss, not only to his family and friends, but to the economics profession in general and particularly to the development of monetary theory. Though I do not think Miguel had a strong interest in the history of doctrine, I hope that as a Chicago graduate he would have been interested in reading the final product of a work whose beginliings he witnessed. 3 In Studies in the Quantity Theory of Money, ed. M. Friedman [8], pp. 3-21 referred to henceforth as Quantity Theory I. In self-defense, I might, however, note that I have on previous occasions discussed in passing some of the points presented below, and that I have also emp. 81, n.8. See also the implicit criticism in Patinkin [29], p. 480b. See also pp. 60-61 below. 4 Friedman [10], referred to henceforth as Quantity Theory II.

The Chicago Tradition, The Quantity Theory, And Friedman

Frank Knight as Teacher

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