DOCSLIB.ORG

A Child's Guide to Rational Expectations Maddock and Carter.Pdf

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
A Child's Guide to Rational Expectations Maddock and Carter.Pdf American Economic Association A Child's Guide to Rational Expectations Author(s): Rodney Maddock and Michael Carter Source: Journal of Economic Literature, Vol. 20, No. 1 (Mar., 1982), pp. 39-51 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2724658 Accessed: 20-03-2015 00:44 UTC Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Literature. http://www.jstor.org This content downloaded from 208.138.56.79 on Fri, 20 Mar 2015 00:44:00 UTC All use subject to JSTOR Terms and Conditions Journal of Economic Literature Vol. XX (March 1982), pp. 39-51 A Child's Guide to Rational Expectations By RODNEY MADDOCK AND MICHAEL CARTER Research School of Social Sciences Australian National University DRAMATISPERSONAE (In order of speaking) Ernie, first student, is something of a Keynesian. Bert, second student, is more inclined to monetarism. Scene i Prologue Scene ii The Idea of Rational Expectations Deriving the Impotence Results Criticisms Scene iii Testing Significance Conclusion Appendix A Aggregate Supply Appendix B Algebra of the Model References Scene i. Prologue Bert: Which? Ernie: Somebody named Bennett McCallum (Two students sharing coffee in the union of was saying that rational expectations an Australian university.) proved that the government could not sta- Ernie: Did you read that ridiculous article in bilize the economy. Hang on, I've got it Challenge the other day? here: "An accurate understanding of how expectations are formed leads to the con- clusion that short-run stabilization policies * Our thanks to Neville Cain for his inspiration are untenable." (McCallum, 1980, p. 37). for this paper and to our colleagues at ANU, notably I don't know how they could develop theo- Malcolm Gray, Adrian Pagan and Jim Trevithick, ries like that. It's pretty obvious that gov- for their comments. We are also grateful to Fred Gruen and to an anonymous referee and the editor ernment policy does affect the economy for their assistance.All faults, of course, remain ours. in the short run. 39 This content downloaded from 208.138.56.79 on Fri, 20 Mar 2015 00:44:00 UTC All use subject to JSTOR Terms and Conditions 40 Journal of Economic Literature, Vol. XX (March 1982) Bert: He didn't say they could not affect the all the people all the time. Therefore, sys- economy in the short run or even in the tematic policy is ineffective.5 long run. The key word is stabilize.' Just Ernie: I'm not at all sure that the long-run think about what's happened in the last Phillips curve is vertical.6 We used to have few years-record inflation and record un- about one percent unemployment; now employment. You don't call that stabiliza- we seem to be stuck at about eight per- tion, do you? cent. How can you explain that with a ver- Ernie: Well, maybe they've been stable at tical Phillips curve. "The Phillips curve is high levels but I take your point. There vertical but moves around a lot"-hardly does seem to have been some break- seems much of a theory.7 Even if it is verti- down of the ways in which the govern- cal and we can't get away from it except ment can influence the macroeconomy. by fooling people, clearly the government Do these rational expectations blokes can fool people. Every time it changes pol- think they have a model to explain stag- icy the people don't know about the new flation? policy for a while so it takes time before Bert: Yes, they do. It's caused by misguided they catch up.8 governments following Keynesian policies Bert: But that's just what rational expecta- that haven't worked, don't work, and tions is all about! It suggests that people won't work in the future.2 anticipate the effects of the new policy. Ernie: I suppose they advocate doing nothing If that's true, then the policies won't cause and letting the 'free market' do its worst. any increase in employment! Great! They sound just like Friedman and Ernie: How on earth are people supposed to all those old-fashioned monetarists. They anticipate the effects of policy? I just can't have always said inflation was just a mone- see it. Have they all got econometric mod- tary phenomenon and macro policy els under the sink?9 couldn't shift the economy to higher levels Bert: (Angrily) Now you're just being silly. of employment. Have you read any of the basic litera- Bert: Yes, that's right. Most economists now ture-Lucas, Sargent, Wallace, and so on? agree that the long-run Phillips curve is Ernie: I've looked at some but it just seems vertical.3 That means that there exists a unreal-too many equations. They never natural rate of unemployment.4 Govern- define exactly how they think anybody ment policy can bring about a departure forms these "rational expectations." from that only in the short run and then Bert: Look, I've got to go to my macro lec- only by fooling people. But you can't fool ture. How about we meet again tomorrow, I Usually defined as minimization of the variance 5 This is Friedman's proposition that in the long around some fixed macroeconomic objectives (Greg- run anticipated and actual economic values must be ory Chow, 1970). equal so that policies that work through illusions, 2 There is a clear ideological component to much or systematically wrong anticipations, will be ineffec- rational-expectations work and opponents will be tive in that long run. tempted to dismiss the theory on ideological 6 Gordon (1976) considers a number of possibilities grounds. Later we suggest that there are merits in mainly relying on different forms of sluggish price the theory quite separate from its use to support adjustment. particular propositions about the role of govern- 7 Robert Hall (1975) makes this criticism. As he ment. interpreted the evidence, most of the variation in 3 See M. Friedman (1968) and Robert J. Gordon output came from changes in the natural rate, pro- (1976) for views on this. Appendix A deals with the voking questions about the importance of a theory issue in some more detail. which only explained deviations from the natural 4 "Natural" in the sense that everybody who wants rate. It would be a useful theory if it explained the a job at the going wage has one. This definition de- movements in the rate itself. nies the possibility of unemployment arising from 8John Taylor (1975) explores the possibilities for a failure of effective demand and hence from the policy while people learn the new rule. Benjamin "Keynesian" problem (Edmond Malinvaud, 1977). Friedman (1979) addresses the same question. There is no necessary connection between verti- 9John Muth (1961, p. 317) in outlining what he cal Phillips curves and a natural rate of employ- meant by rational expectations anticipated this criti- ment. cism. This content downloaded from 208.138.56.79 on Fri, 20 Mar 2015 00:44:00 UTC All use subject to JSTOR Terms and Conditions Maddock and Carter:Rational Expectations 41 and I'll introduce you to the magnificient processing of information and to the for- world of rational expectations. Same time? mation of expectations."1 Ernie: Am I to infer that my utility function Scene ii. A. The Idea and I sit down together and rationally de- of Rational Expectations cide how much information I should ac- quire in order to form the expectations (In the same place, next day.) that will help me maximize my utility? In- Bert: Well, are you ready to try to under- credible! stand what rational expectations is about? Bert: Yes, you can attack it that way if you Ernie: Yes. Have you got it figured out yet? like, but that's a more general criticism Bert: I've been thinking about it. Let's go of utility theory which we can argue about through it systematically. First, we can talk some other time. All I'm saying here is about just what rational expectations are. that if one considers economic agents to Then we can look at the way the policy be rational maximizers, then it's impotence result is derived. By then we consistent12to consider information gath- should have a pretty clear idea of what ering and expectation formation as deter- this line of research is all about so we can mined by the same procedure. try to figure out how it relates to the Phil- Ernie: O.K. So you'd insist upon a rational ex- lips curve, monetarism, econometric mod- pectations postulate that private economic els, and all that. O.K.? agents gather and use information effi- Ernie: Alright. What's the definition of ra- ciently. That means you believe the mar- tional expectations? What on earth might ginal costs of gathering and using informa- irrational expectations be? tion are equated to their marginalbenefits. Bert: First things first. Let's start with famil- McCallumdoesn't agree with you. He says: iar ground.
Load more

Recommended publications
  • Rethinking the Implications of Monetary Policy: How a Transactions Role for Money Transforms the Predictions of Our Leading Models* by JULIA K
    Rethinking the Implications of Monetary Policy: How a Transactions Role for Money Transforms the Predictions of Our Leading Models* BY JULIA K. THOMAS ver the past several decades, economists have everything from car and home sales to consumer spending over the Christmas O devoted ever-growing effort to developing holiday season. Whenever business economic models to help us understand conditions are widely perceived to be weak, most people welcome cuts in the how changes in interest rates brought federal funds rate. about by monetary policy actions affect the production Despite these observations, however, the means through which and provision of goods and services in the economy. changes in an interest rate affect Although New Keynesian models have broad appeal in business activity is, in fact, far from obvious. Over the past few decades, explaining how changes in the money stock can affect economists have devoted ever-growing business activity, these models generate results that are effort to developing formal economic models to help us understand precisely inconsistent with what we know about how interest rates how changes in interest rates brought move with policy-induced changes in the money stock. about by monetary policy actions affect the production and provision of goods In this article, Julia Thomas argues that by extending the and services throughout the economy. New Keynesian model to reintroduce money’s liquidity While there are several different types role, we can resolve some of the remaining divorce of models describing how monetary policy actions drive short-run changes between economic theory and the patterns observed in in total employment and GDP, a the workings of actual economies.
    [Show full text]
  • Monetary Rules and Committees Stanley Fischer
    CHAPTER SIX Monetary Rules and Committees Stanley Fischer In this chapter, I off er some observations on monetary policy rules and their place in decision making by the Federal Open Market Committee (FOMC).1 I have two messages. First, policy makers should consult the prescriptions of policy rules, but—almost need- less to say—they should avoid applying them mechanically. Sec- ond, policy- making committees have strengths that policy rules lack. In particular, committees are an effi cient means of aggregating a wide variety of information and perspectives. MONETARY POLICY RULES IN RESEARCH AND POLICY Since May 2014, I have considered monetary policy rules from the vantage point of a member of the FOMC. But my interest in them began many years ago and was refl ected in some of my earliest publications.2 At that time, the literature on monetary policy rules, especially in the United States, remained predominantly concerned with the money stock or total bank reserves rather than the short- 1. Views expressed in this presentation are my own and not necessarily the views of the Federal Reserve Board or the Federal Open Market Committee. I am grateful to Ed Nelson of the Federal Reserve Board for his assistance. 2. See, for example, Cooper and Fischer (1972). 202 Fischer term interest rate.3 Seen with the benefi t of hindsight, that empha- sis probably derived from three sources: fi rst, the quantity theory of money emphasized the link between the quantity of money and infl ation; second, the research was carried out when monetarism was gaining credibility in the profession; and third, there was a concern that interest rate rules might lead to price- level indeter- minacy—an issue disposed of by Bennett McCallum and others.4 Subsequently, John Taylor’s research, especially his celebrated 1993 paper, was a catalyst in shift ing the focus toward rules for the short- term interest rate.5 Taylor’s work thus helped change the terms of the discussion in favor of rules for the instrument that central banks prefer to use.
    [Show full text]
  • Inside the Economist's Mind: the History of Modern
    1 Inside the Economist’s Mind: The History of Modern Economic Thought, as Explained by Those Who Produced It Paul A. Samuelson and William A. Barnett (eds.) CONTENTS Foreword: Reflections on How Biographies of Individual Scholars Can Relate to a Science’s Biography Paul A. Samuelson Preface: An Overview of the Objectives and Contents of the Volume William A. Barnett History of Thought Introduction: Economists Talking with Economists, An Historian’s Perspective E. Roy Weintraub INTERVIEWS Chapter 1 An Interview with Wassily Leontief Interviewed by Duncan K. Foley Chapter 2 An Interview with David Cass Interviewed jointly by Steven E. Spear and Randall Wright Chapter 3 An Interview with Robert E. Lucas, Jr. Interviewed by Bennett T. McCallum Chapter 4 An Interview with Janos Kornai Interviewed by Olivier Blanchard Chapter 5 An Interview with Franco Modigliani Interviewed by William A. Barnett and Robert Solow Chapter 6 An Interview with Milton Friedman Interviewed by John B. Taylor Chapter 7 An Interview with Paul A. Samuelson Interviewed by William A. Barnett Chapter 8 An Interview with Paul A. Volcker Interviewed by Perry Mehrling 2 Chapter 9 An Interview with Martin Feldstein Interviewed by James M. Poterba Chapter 10 An Interview with Christopher A. Sims Interviewed by Lars Peter Hansen Chapter 11 An Interview with Robert J. Shiller Interviewed by John Y. Campbell Chapter 12 An Interview with Stanley Fischer Interviewed by Olivier Blanchard Chapter 13 From Uncertainty to Macroeconomics and Back: An Interview with Jacques Drèze Interviewed by Pierre Dehez and Omar Licandro Chapter 14 An Interview with Tom J. Sargent Interviewed by George W.
    [Show full text]
  • Limits on Interest Rate Rules in the IS Model
    Limits on Interest Rate Rules in the IS Model William Kerr and Robert G. King any central banks have long used a short-term nominal interest rate as the main instrument through which monetary policy actions are M implemented. Some monetary authorities have even viewed their main job as managing nominal interest rates, by using an interest rate rule for monetary policy. It is therefore important to understand the consequences of such monetary policies for the behavior of aggregate economic activity. Over the past several decades, accordingly, there has been a substantial amount of research on interest rate rules.1 This literature finds that the fea- sibility and desirability of interest rate rules depends on the structure of the model used to approximate macroeconomic reality. In the standard textbook Keynesian macroeconomic model, there are few limits: almost any interest rate Kerr is a recent graduate of the University of Virginia, with bachelor’s degrees in system engineering and economics. King is A. W. Robertson Professor of Economics at the Uni- versity of Virginia, consultant to the research department of the Federal Reserve Bank of Richmond, and a research associate of the National Bureau of Economic Research. The authors have received substantial help on this article from Justin Fang of the University of Pennsylvania. The specific expectational IS schedule used in this article was suggested by Bennett McCallum (1995). We thank Ben Bernanke, Michael Dotsey, Marvin Goodfriend, Thomas Humphrey, Jeffrey Lacker, Eric Leeper, Bennett McCallum, Michael Woodford, and seminar participants at the Federal Reserve Banks of Philadelphia and Richmond for helpful comments.
    [Show full text]
  • Guy Debelle and Stanley Fischer Discussion / 222 Robert E
    Gaals, Guidelines, and Constraints Facing Manetary Palicymakers Goals, Guidelines, and Constraints Facing Monetary Policymakers Proceedings of a Conference Held at North Falmouth, Massachusetts June 1994 Jeffrey C. Fuhrer, Editor Sponsored by: Federal Reserve Bank of Boston Contents Goals, Guidelines, and Constraints Facing Monetary Policymakers: An Overview / Jeffrey C. Fuhrer How Efficient Has Monetary Policy Been? The Inflation/Output Variability Trade-off Revisited / 21 John B. Taylor Discussion / 39 Laurence M. Ball Optimal Monetary Policy and the Sacrifice Ratio / 43 Jeffrey C. Fuhrer Discussion / 70 N. Gregory Mankiw Summary Discussion / 76 Martin S. Eichenbaum Comparing Direct and Intermediate Targeting Monetary Aggregates Targeting in a Low-Inflation Economy / 87 William Poole Discussion / 122 Benjamin M. Friedman Donald L. Kohn Lessons from International Experience Strategy and Tactics of Monetary Policy: Examples from Europe and the Antipodes / 139 Charles A.E. Goodhart and Josd Vi~ials Discussion / 188 Richard N. Cooper How Independent Should a Central Bank Be? / 195 Guy Debelle and Stanley Fischer Discussion / 222 Robert E. Hall How Can Monetary Policy Be Improved? Panel Discussion / 229 Paul A. Samuelson James Tobin Robert J. Barro Lyle E. Gramley Bennett T. McCallum About the Authors / 251 Conference Participants / 257 Goals, Guidelines, and Constraints Facing Monetary Policymakers This conference addressed three broad questions about the conduct of monetary policy. First, how efficiently has U.S. policy balanced the goals of price stability and full employment? Second, have rapidly changing financial markets made the use of intermediate targets, such as monetary aggregates, obsolete? Third, what can domestic policymakers learn from the tactics and strategies employed by foreign central banks? A concluding panel suggested improvements to monetary policy, in light of the conclusions drawn in the previous sessions.
    [Show full text]
  • Download (Pdf)
    Tie-in Sales and Banks John A. Weinberg bank is a multiproduct firm. While its products can be grouped into two broad categories, credit and deposit services, each of these cat- egories comprises many distinct products. In addition to these “tra- A 1 ditional banking services,” some banks, either directly or through affiliated companies, offer a wider array of financial services. A continuing trend toward deregulation is likely to further expand the set of activities and markets open to banking organizations. Some of the services offered by banks are sold to distinct sets of buyers. On the other hand, there are broad classes of bank clientele who regularly obtain multiple services. A business firm’s relationship with a bank, for instance, may include deposit and cash management services as well as regular extensions of credit. The typical household is also a user of multiple bank services. It is not uncommon for a multiproduct firm to undertake joint marketing efforts. The costs incurred to generate sales for the various products sold cannot always be neatly allocated across products. Such joint actions might occur in all aspects of marketing. A seller might, for instance, seek to develop a single brand identity for a variety of products so that expenditures on promotion of the brand might enhance the sales of all the products. Joint efforts might also show up in the pricing of products. For instance, a seller might give discounts on one product that are contingent on the buyer’s purchase of some other product from the same seller. Or a seller might choose to sell two products only as a bundle, not separately.
    [Show full text]
  • Articles the Triumph of Monetarism?
    Monetarism 12/20/14, 2:42 PM Articles Created: 1999-08-14 Last Modified: 1999-10-16 Go to Brad DeLong's Home Page Teaching | Writing | Career | Politics | Book Reviews | Information Economy | Economists | Multimedia | Students | Fine Print | Other | My Jobs Feedback is always very welcome... The Triumph of Monetarism? J. Bradford DeLong U.C. Berkeley and NBER [email protected] http://www.j-bradford-delong.net/ (510) 643-4027 October 16, 1999 Introduction The story of twentieth-century macroeconomics begins with Irving Fisher (1896, 1907, 1911). Appreciation and Interest, The Rate of Interest, and The Purchasing Power of Money fueled the intellectual fire that became known as monetarism. To understand the determination of prices and interest rates and the course of the business cycle, monetarism holds, look first (and often last) at the stock of money--at the quantities in the economy of those assets that constitute readily-spendable purchasing power. Twentieth century macroeconomics ends with the community of macroeconomists split across two groups, and pursuing two research programs. The New Classical research program walks in the footprints of Joseph Schumpeter's (1939) Business Cycles, holding that the key to the business cycle is the stochastic character of economic growth. It argues that the "cycle" should be analyzed with the same models used to understand the "trend" (see Kydland and Prescott (1982), McCallum (1989), Campbell (1994)). http://web.archive.org/web/20140326174826/http://www.j-bradford-delong.net/Econ_Articles/monetarism.html Page 1 of 14 Monetarism 12/20/14, 2:42 PM Prescott (1982), McCallum (1989), Campbell (1994)). The competing New Keynesian research program is harder to summarize quickly.
    [Show full text]
  • Juan Carlos Cordoba
    JUAN CARLOS CORDOBA Associate Professor of Economics Department of Economics – Iowa State University Email: [email protected] Webpage: http://www.econ.iastate.edu/~cordoba/ EDUCATION Ph. D. Economics, University of Rochester, October 2001. M.A. Economics, University of Rochester, May 2000. M.A. Theory and Economic Policy, Universidad Nacional de Colombia, 1995, graduated with honors. B.S. Economics, Universidad Nacional de Colombia, 1993, graduated with honors. EXPERIENCE Associate Professor, Iowa State University, July 2009 – present Visiting Scholar, Federal Reserve Bank of St. Louis, July 2012 Visiting Scholar, IMF, June 2010 Assistant Professor, Rice University, July 2001-June 2009 Visiting Scholar, Federal Reserve Bank of Minneapolis, August 2008 Visiting Assistant Professor, Carnegie Mellon University, 2005 Researcher, Macroeconomic Programming Unit, National Planning Department of Colombia, Summer 1997. Advisor, Macroeconomics Division, Finance Ministry of Colombia, 1993-1996. Researcher, Confis - National Board of Fiscal Policy, Colombia, 1992-1993. Researcher, Program of United Nations and General Controller of Colombia, 1992. PUBLICATIONS AND FORTHCOMING PAPERS Children, Dynastic Altruism and the Wealth of Nations, Review of Economic Dynamics, Volume 1:4, October 2015. Fertility, Social Mobility and Long Run Inequality, with X. Liu and M. Ripoll. To be presented in the Carnegie-Rochester-NYU Conference Series on Public Policy in New York, April 2015, and to be published in the Journal of Monetary Economics Volume 63:1, January 2016. Intergenerational Transfers and the Fertility-Income Relationship, with Marla Ripoll, Economic Journal, published online, April 2 2015. What Explains Schooling Differences Across Countries? with Marla Ripoll, Journal of Monetary Economics, March 2013. Supply Side Structural Change, Eurasian Economic Review, invited paper, 3(1), 2013.
    [Show full text]
  • Limits to Inflation Targeting
    This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: The Inflation-Targeting Debate Volume Author/Editor: Ben S. Bernanke and Michael Woodford, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-04471-8 Volume URL: http://www.nber.org/books/bern04-1 Conference Date: January 23-26, 2003 Publication Date: December 2004 Title: Limits to Inflation Targeting Author: Christopher A. Sims URL: http://www.nber.org/chapters/c9562 7 Limits to Inflation Targeting Christopher A. Sims 7.1 The Two Faces of Inflation Targeting Economists should recognize that they have a history of proposing simple “nominal anchor” prescriptions for monetary policy that have eventually proved not to be very useful. If economists satisfy a demand for spurious technocratic solutions to the political and institutional patholo- gies that generate destructive episodes of deflation or inflation, they can do harm by diverting attention from the sources of the problem. Such nostrums can also be harmful, usually with a delay, by failing to work and thereby undermining the credibility of monetary policy. A cynical view might be that inflation targeting has become attractive less because of ad- vances in our discipline than because of the demand for a replacement for the gold standard, monetarism, and exchange rate anchors. There is some reason to hope, though, that inflation targeting is a “bet- ter nostrum.” This anchor is something that people do in fact care about, rather than an “intermediate target.” It is therefore likely to remain credi- ble that the central bank is committed to its inflation target even though pe- riods when its policies are having difficulties.
    [Show full text]
  • Pdffull Publication
    A Symposium Sponsored By The Federal Reserve Bank of Kansas City PRICE STABILITY AND PUBLIC POLICY A Symposium Sponsored by the Federal Reserve Bank of Kansas City Jackson Hole, Wyoming August 2-3, 1984 Contents Foreword ............................................... v The Contributors ......................................... vii The Moderators .......................................... xi 1. The Causes of Inflation. Frederic S. Mishkin ............... 1 Commentary. William Nordhaus ...................... 25 2. The Benefits of Price Stability. Stanley Fischer .............. 33 Commentary. Robert J Shiller ........................ 51 3. Estimated Tradeoffs Between Unemployment and Inflation. Ray C Fair .......................... 57 Commentary. Robert J Gordon ....................... 83 Rejoinder. Ray C. Fair ............................... 95 4. The Role of the Central Bank in Achieving Price Stability: An International Perspective. Helmut Schlesinger ....... 97 5. Credibility and Monetary Policy. Bennett I: McCallum .......105 Commentary. Alan Blinder ...........................129 6. Monetary Strategy with an Elastic Price Standard. Robert E. Hall ....................................137 Commentary. Raymond Lombra ...................... 161 iv Contents 7. The Value of Intermediate Targets in Implementing Monetary Policy. Benjamin M. Friedman .............. 169 Commentary. Stephen M. Goldfeld .................... 193 8. Overview Panel James Tobin .......................................201 Allan H. Meltzer ...................................209
    [Show full text]
  • Andrew B. Abel Department of Finance Steinberg Hall-Dietrich
    January 13, 2017 CURRICULUM VITAE Andrew B. Abel Department of Finance Steinberg Hall-Dietrich Hall 2315 The Wharton School of the University of Pennsylvania 3620 Locust Walk Philadelphia, Pennsylvania 19104-6367 phone: (215) 898-4801 fax: (215) 573-7244 email: [email protected] www: http://finance.wharton.upenn.edu/~abel Education: Princeton University, A.B., Summa Cum Laude, Economics, 1974 Massachusetts Institute of Technology, Ph.D., Economics, 1978 Honors, Fellowships, Grants: Phi Beta Kappa, 1974 National Science Foundation Graduate Fellowship, 1974-77 Research Fellowship, Federal Reserve Bank of Boston, 1977-78 Grant from U.S. Department of Energy, 1981-82 Grants from National Science Foundation, 1982-91, 1993-1996 John Kenneth Galbraith Award for Excellence in Teaching, 1984 Sloan Research Fellowship, 1986-1988 Fellow of the Econometric Society, 1991- MBA Core Curriculum Cluster Award, 1996-1997 Geewax-Terker Prize in Investment Research, 2000 Wemba West Core Teaching Award, 2003 Employment: Visiting Scholar, ChicagoBooth, January – June 2016 Ronald A. Rosenfeld Professor, Department of Finance, The Wharton School of the University of Pennsylvania, 2003 - Robert Morris Professor of Banking, Department of Finance, The Wharton School of the University of Pennsylvania, 1989- 2003 Professor of Economics, The University of Pennsylvania, 1987- Ronald O. Perelman Professor of Finance, The Wharton School of the University of Pennsylvania, 1988-1989 Visiting Professor, Department of Economics, Tel-Aviv University, December 1986- January
    [Show full text]
  • Stored Value Cards: Costly Private Substitutes for Government Currency
    Stored Value Cards: Costly Private Substitutes for Government Currency Jeffrey M. Lacker tored value cards look like credit cards but are capable of storing mon- etary value. There are a number of stored value card systems being S developed in the United States, and some have already been implemented in Europe and elsewhere. Stored value cards are particularly well-suited for transactions that would otherwise be carried out with currency and thus are a private substitute for government fiat money, like private bank notes. Unlike bank notes, however, stored value cards employ new technologies that are quite different from, and potentially more costly than, the coins and paper currency they are aimed at replacing. This article explores the basic welfare economics of costly private substitutes for government currency, an important class of payments system innovations.1 Consumers and merchants are likely to benefit from the introduction of stored value cards. Many might prefer to avoid the inconvenience and cost of handling paper currency. The usual presumption, in the absence of market imperfection, is that a successful new product must provide social benefits in excess of social costs. Issuers will attempt to cover their costs and earn a competitive return while providing consumers and merchants with a means of payment they prefer. They can do so if consumers and merchants are col- lectively willing to pay enough, either directly or indirectly, to remunerate The author would like to thank Michelle Kezar and Helen Upton for research assistance, reviewers Mike Dotsey, Tom Humphrey, Ned Prescott, and John Weinberg for extensive comments, James McAfee for useful references, Urs Birchler, Scott Freeman, Marvin Good- friend, Don Hester, Dave Humphrey, Peter Ireland, Bob King, Bennett McCallum, Geoffrey Miller, Kevin Reffett, Will Roberds, Stacey Schreft, and Bruce Summers for helpful com- ments and conversations, and an anonymous reviewer for helpful comments.
    [Show full text]