This paper analyzes the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze extensions with firm heterogeneity and stochastic bubbles.

The authors introduce a comprehensive revision of the Divisia monetary aggregates for the United States published by the Federal Reserve Bank of St. Louis, referred to as the Monetary Services Indexes (MSI). These revised MSI are available at five levels of aggregation, including a new broad level of aggregation that includes all of the assets currently reported on the Federal Reserve’s H.6 statistical release. Several aspects of the new MSI differ from those previously published. One such change is that the checkable and savings deposit components of the MSI are now adjusted for the effects of retail sweep programs, beginning in 1994. Another change is that alternative MSI are provided using two alternative benchmark rates. In addition, the authors have simplified the procedure used to construct the own rate of return for small-denomination time deposits and have discontinued the previous practice of applying an implicit return to some or all demand deposits. The revised indexes begin in 1967 rather than 1960 because of data limitations.

Abstract We develop a model where: (i) banks take deposits and make investments; (ii) their liabilities facilitate third-party transactions. Other models have (i) or (ii), not both, although we argue they are intimately connected: we show that they both emerge from limited commitment. We describe an environment, characterize desirable allocations, and interpret the outcomes as banking arrangements. Banks are essential: without them, the set of feasible allocations is inferior. As a technical contribution, we characterize dynamically optimal credit allocations with frictions, show they involve backloading, and analyze how this interact with banking. We also confront the theory with economic history. * We thank many colleagues for comments and discussions, especially

The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.

thePresidentoftheSociety,ChrisPissarides. Wearehonored and grateful for his support of our ongoing work, sufficiently so that we are submiting the flagship paper in the project, rather than a spinoff or summary (for the record, this paper has never been submitted for publication elsewhere). A previous version was titled “Really,

In addition to providing utility, and possibly capital gains, housing facilitates credit transactions when home equity serves as collateral. We document big increases in home-equity loans coinciding with the US house-price boom, and suggest a connection. When it is used as collateral, housing bears a liquidity premium. Since liquidity is endogenous, and depends to some extent on beleifs, even when fundamentals are deterministic and time invariant equilibrium house prices can display complicated patterns, including cyclic, chaotic and stochastic trajectories. Some equilibrium price paths look a lot like bubbles. The framework is tractable, yet captures several salient features of housing markets qualitatively, and to some extent quantitatively. We examine various mechanisms for determining the terms of trade, and different ways of specifying credit restrictions. We also study the impact of monetary policy on housing markets,

We examine whether the presence of money as a medium of exchange promotes efficient trades and improves welfare by comparing trading outcomes between two environments: with money and without money. The environment with money is the Lagos-Wright (2005) model of monetary exchange. We find that subjects generally avoid the autarkic equilibrium of that model and make trading decisions consistent with the model’s monetary equilibrium. The environment without money is based on Aliprantis, Camera and Puzzello (ACP, 2007), who show that providing periodic access to centralized markets as in the Lagos and Wright framework may facilitate the sustainability of a social norm of gift exchange that is Pareto superior to the monetary equilibrium and thus renders money inessential for decentralized exchange. We explore this hypothesis by replacing the centralized market of the Lagos-Wright model with two different versions of the centralized market of ACP’s model. We find that the efficiency of allocations and welfare are significantly higher in the environment with money than without money, suggesting that money plays a role as an efficiency enhancing coordination device.

This paper adopts mechanism design to investigate the coexistence of …at money and higher-return assets. We consider an economy with pairwise meetings where …at money and risk-free capital compete as means of payment, as in Lagos and Rocheteau (2008). The trading mechanism in pairwise meetings is chosen among all individually rational, renegotiation-proof mechanisms to maximize societys welfare. We show that in any stationary monetary equilibrium capital commands a higher rate of return than …at money.

Abstract not found

School of Business for research support. We also thank the Toulouse School of Economics, where we began this project, for their hospitality. The usual disclaimers apply. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.