Competing fiat moneys and nominal rigidities
with Adam Baybutt and J. Zachary Mazlish
Monetary economics traditionally does not consider a market-based benchmark: when we study trade, we start with a benchmark of free trade; when we study monetary economics, however, we start with a benchmark of central banking. This paper aims to fill that gap. We study competition among unbacked, costless (“fiat”) moneys. First, under flexible prices, there is a first welfare theorem for money: When producers of such moneys have commitment technology — such as blockchain technology — then competition implements the optimum quantity of money. Second, under nominal rigidities where the competing moneys also serve as competing units of account, then competition can also implement the equivalent of “optimal monetary policy” to avoid macroeconomic fluctuations, if the competing moneys pay interest.
The ZLB is NBD: 5 theses on the New Keynesian “liquidity trap”
Draft available – send me an email!
I make five conceptual points about optimal monetary and fiscal policy at the zero lower bound (ZLB) in representative agent New Keynesian models, using the simplest possible version of such a model.
- Monetary policy is typically described as facing a time consistency problem at the zero lower bound; but if ZLB episodes are a repeated game rather than a one-shot game – as is empirically realistic – then the time consistency problem can be easily overcome by reputational effects.
- The ZLB is not special, in terms of the constraint it creates for monetary policy: an intratemporal rigidity, such as the minimum wage or rent control, creates exactly the same kind of constraint on monetary policy as the intertemporal rigidity of the ZLB.
- Austerity is stimulus: in the representative agent New Keynesian model, fiscal stimulus works through the change in government spending. Promising to cut future spending – committing to austerity – has precisely the same effect on inflation and the output gap as a decision to raise spending today.
- Fiscal stimulus can be contractionary, when targeted heterogeneously: if fiscal spending is targeted at certain sectors, this can in fact lower inflation and deepen the output gap.
- Fiscal policy faces a time consistency problem at the ZLB, just as monetary policy does.
Overall, I suggest that – in this class of models – the power of monetary policy at the ZLB has been underrated, and the power of fiscal policy has been overrated.
Toward an understanding of the economics of apologies: evidence from a large-scale natural field experiment (The Economic Journal, 2022)
with Ben Ho, John A. List, and Ian Muir
[publisher's version]; [slides]; [Twitter thread]
We use a theory of apologies to analyze a nationwide field experiment involving 1.5 million Uber ridesharing consumers who experienced late rides. Several insights emerge. First, apologies are not a panacea: the efficacy of an apology and whether it may backfire depend on how the apology is made. Second, across treatments, money speaks louder than words - the best form of apology is to include a coupon for a future trip. Third, in some cases sending an apology is worse than sending nothing at all, particularly for repeated apologies. For firms, caveat venditor should be the rule when considering apologies.
Monetary Misperceptions: Optimal monetary policy under incomplete information (2017)
Inflation targeting is strictly suboptimal when economic actors have incomplete information about the state of the economy. Nominal income targeting is approximately optimal, and exactly optimal under certain parameterizations. We derive this result in a “Lucas islands” monetary misperceptions model built from, unlike prior work, explicit microfoundations. Agents have knowledge of local productivity and money supply conditions, but must perform a signal extraction problem each period to estimate the aggregate productivity shock and the aggregate money supply shock. Without full information, agents cannot perfectly distinguish between relative price shocks and aggregate shocks, causing monetary policy to affect the real economy. Since the model is built from agents optimizing from first principles, we are able to take a second-order welfare approximation and ask what monetary policy rule is optimal. In contrast to sticky price or sticky information models, inflation and price level targeting are always suboptimal, as price level variation provides useful information to agents. Under log utility, nominal income targeting is optimal.