DOCSLIB.ORG

Market Power, Misconceptions, And

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Market Power, Misconceptions, And American Journal of Agricultural Economics Advance Access published November 24, 2012 MARKET POWER,MISCONCEPTIONS, AND MODERN AGRICULTURAL MARKETS RICHARD J. SEXTON Although microeconomics textbook writers many other textbook writers: “Thousands of Downloaded from continue to point to agricultural markets as farmers produce wheat, which thousands of examples of competitive markets, in real- buyers purchase to produce flour and other ity probably none are, especially in light of products. As a result, no single farmer and no dramatically increased concentration in food single buyer can significantly affect the price manufacturing (Rogers 2001) and grocery of wheat,” (p. 8). Yet, the U.S. Department of retailing (McCorriston 2002; Reardon et al. Justice (1999) sued to prevent the merger of http://ajae.oxfordjournals.org/ 2003), emphasis on many dimensions of prod- Cargill and Continental Grain Company,alleg- uct quality and differentiation (Saitone and ing that, “Unless the acquisition is enjoined, Sexton 2010), and the rapid increase in vertical many American farmers likely will receive coordination through integration and contracts lower prices for their grain and oilseed crops, (MacDonald and Korb 2011; Goodhue 2011). including corn, soybeans, and wheat.”1 Sales For the basic precept of a competitive mar- from the production of the “thousands” of ket to hold, namely that all buyers and sellers farmers in Canada, the second-largest wheat are price-takers, three conditions must be met: exporting country, were until August 1, 2012, under the control of a single state trader, and at Libraries-Montana State University, Bozeman on March 20, 2013 • Buyers and sellers must be small relative wheat is a highly differentiated product based to the total size of the market, meaning upon protein content and other factors (Wil- there must be many of each; son 1989; Lavoie 2005). Indeed, Lavoie (2005) • The products of all sellers must be homo- showed econometrically that the Canadian geneous in the eyes of buyers; Wheat Board was able to influence the price • Information in the market place must be of Canadian wheat, which directly contradicts perfect, so that all buyers and sellers are the price-taking claim. aware of the prices being charged and the When researchers have pursued imperfect characteristics of the products being sold. competition issues in agricultural markets, the traditional focus has been food manufacturers’ I don’t know of any modern agricultural mar- and on occasion retailers’ market power over ket that meets all three of these conditions. consumers (Connor et al. 1985; Marion 1986). Most don’t meet any of them. For example, The market-power pendulum has, however, consider the classic case of the wheat market swung increasingly to focus upon processors’ offered by Pindyck and Rubinfeld (2009) and and occasionally retailers’ roles as buyers from farmers,as reflected in the competition policies proposed, and to some extent implemented, in the 2002 and 2008 farm bills, and now under Presidential Address. consideration with the impending 2012 farm Richard J. Sexton ([email protected]), Professor and Chair, Department of Agricultural and Resource Economics, University bill. of California,Davis and member,University of California Giannini As a profession we have only begun to under- Foundation ofAgricultural Economics.The author is grateful to Ian Sheldon and seminar attendees at Ohio State University for helpful stand the implications of increasing prod- comments on this paper and to colleagues and graduate students uct differentiation and vertical coordination at UC Davis who contributed to the research which provides the backdrop to the present paper. Presented at the 2012 AAEA annual meeting, Seattle, WA. 1 The merger ultimately was allowed to proceed, but only after Invited addresses are not subjected to the journal’s standard the firms agreed to divest themselves of 10 grain elevators in seven refereeing process. states (MacDonald 1999). Amer. J. Agr. Econ. 1–11; doi: 10.1093/ajae/aas102 © The Author (2012). Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved. For permissions, please e-mail: [email protected] 2 Amer. J. Agr. Econ. among firms for market performance and concentration is rising over time (Kaufman distribution of benefits among participants. 2000; Rogers 2001). For example, the average A key point of this paper is that we must 4-firm concentration ratio (CR4) in 15 key not focus on concentration alone when think- food-manufacturing industries (comprising ing about departures from perfect competition 41% of total food-processing sales) in 2002 in modern agricultural markets, nor in eval- was 56% compared to 45% in 1982 (U.S. uating their performance. Rather, the trends Government Accountability Office [GAO] towards greater concentration and vertical 2009). Particular concern has been expressed coordination, along with increased emphasis regarding rather dramatic increases in con- on product quality and differentiation, must centration in livestock processing. The leading be considered and evaluated jointly. Although four firms slaughtered 64% of all U.S. hogs Downloaded from such an expanded focus can greatly compli- in 2007, compared with 32% in 1985, while cate efforts at formal modeling, conclusions CR4 for steer and heifer processing rose generated from such analyses are likely to dif- from 41% in 1982 to 84% by 2007 (Johnson fer significantly from those based upon tradi- and Becker 2009).2 Relevant procurement tional market power analyses that have tended markets for farm products, depending upon to ignore product differentiation and vertical the commodity,may be localized in geographic http://ajae.oxfordjournals.org/ coordination. scope due to high costs of transportation, In what follows, the recent evolution of meaning that national concentration ratios agricultural markets in the dimensions of con- may vastly understate the level of buyer centration, product differentiation and qual- concentration in relevant geographic markets ity, and vertical coordination and control for raw agricultural products. is discussed. If these developments render Leading grocery retailers have emerged as the perfect competition model inappropriate, dominant players in the food chain worldwide. what are the consequences of its application? In the United States national CR4 in food I provide some answers based upon work I retailing, only 16.8% in 1992, increased almost at Libraries-Montana State University, Bozeman on March 20, 2013 have conducted with colleagues and graduate continuously, to 35.5% in 2005. However, students over the past several years. How- because consumers are distributed geograph- ever, the core analytical framework for that ically and incur significant transaction costs in research, a flexible, homogeneous-product traveling to and from stores, relevant retail oligopoly/oligopsony model, may itself be too markets are localized in geographic scope. restrictive to capture essential features of mod- Average grocery retailing CR4 in 2006 for 229 ern agricultural markets. I thus offer some key metropolitan statistical areas based on analysis stylized facts that characterize many of today’s of Nielsen Market Scope data was 79.4%. agricultural markets and arguably will charac- terize even more in the near future. I argue Product Quality and Differentiation that these stylized facts are fundamental to how these markets operate, but they are too often The dimensions of food quality that are valued ignored in economic analyses. Finally, I sketch by consumers have expanded rapidly. In addi- ways in which these features might be incorpo- tion to traditional characteristics such as taste, rated into our analysis, and indicate the likely appearance, convenience, brand appeal, and consequences of doing so. healthfulness, characteristics of the production process (e.g. usage of chemicals, sustainability, location, or confinement conditions of ani- mals), marketing arrangements (in particular, Key Trends in the Structure of U.S. their “fairness”), and implications of produc- Agricultural Markets tion and consumption of the product for the environment also matter increasingly to some I emphasize market conditions in the United consumers. States for the sake of brevity, but the same Empirical studies have demonstrated con- evolutionary forces are impacting markets sumers’ willingness to pay for differenti- worldwide in both developed and developing ated product attributes such as organic, pro- economies. duced with sustainable practices, produced in Concentration The U.S. food industry is highly concentrated 2 CR4 in cattle processing is now higher due to the JBS acquisi- at both the retail and processing stages, and tion of the Smithfield cattle operations in 2009. Richard J. Sexton Market Power, Misconceptions, and Modern Agricultural Markets 3 particular geographic locations, certified safe, downstream trading partner restraining the and marketed under fair-trade practices. behavior of its upstream suppliers in terms An additional critical dimension of product of varieties produced, inputs used, production quality is its consistency. If firms are differen- schedules, handling practices, etc. By control- tiating themselves based on quality attributes ling the use and application of key inputs, of their products, they must ensure a consis- downstream firms address moral hazard issues tent supply of products capable of attaining the that could
Load more

Recommended publications
  • Understanding Open Market Operations
    Foreword The Federal Reserve Bank of New York is responsible for Michael Akbar Akhtar, vice president of the day-to-day implementation of the nation’s monetary pol- Federal Reserve Bank of New York, leads the reader— icy. It is primarily through open market operations—pur- whether a student, market professional or an interested chases or sales of U.S. Government securities in the member of the public—through various facets of mone- open market in order to add or drain reserves from the tary policy decision-making, and offers a general per- banking system—that the Federal Reserve influences spective on the transmission of policy effects throughout money and financial market conditions that, in turn, the economy. affect output, jobs and prices. Understanding Open Market Operations pro- This edition of Understanding Open Market vides a nontechnical review of how monetary policy is Operations seeks to explain the challenges in formulat- formulated and executed. Ideally, it will stimulate read- ing and implementing U.S. monetary policy in today’s ers to learn more about the subject as well as enhance highly competitive financial environment. The book high- appreciation of the challenges and uncertainties con- lights the broad and complex set of considerations that fronting monetary policymakers. are involved in daily decisions for open market opera- William J. McDonough tions and details the steps taken to implement policy. President Understanding Open Market Operations / i Acknowledgment Much has changed in U.S. financial markets and institu- Partlan for extensive comments on drafts; and to all of tions since 1985, when the last edition of Open Market the Desk staff for graciously and patiently answering my Operations, written by Paul Meek, was published.
    [Show full text]
  • The Economic Contribution of Agriculture and Forestry Production and Processing in Mississippi: an Input-Output Analysis
    The Economic Contribution of Agriculture and Forestry Production and Processing in Mississippi: An Input-Output Analysis Agriculture and forestry are major components of Data for the direct effects and estimation of the indirect Mississippi’s economy. In 2014 alone, agriculture and and induced effects came from a well-known input-output forestry production and processing sectors directly modeling system called Impact for Planning and Analysis, accounted for 113,934 jobs paying $3.04 billion in wages or IMPLAN, software that is updated annually by the and salaries (Table 1). In addition, agriculture and forestry IMPLAN Group LLC (2015). IMPLAN is a computerized related sectors also directly accounted for $26.4 billion in database and modeling system for constructing regional sales with a value-added generation of $8.4 billion. Clearly, economic accounts and regional input-output tables. The agriculture and forestry provide a major contribution to IMPLAN 536 sector input-output model is based primarily the Mississippi economy. on data from the U.S. Bureau of Economic Analysis, U.S. Yet, this contribution has a much larger effect on Bureau of Labor Statistics, U.S. Census Bureau, U.S. the Mississippi economy. A larger total contribution Department of Agriculture, and U.S. Geological Survey. results when also accounting for the stimulative effect This study used an input-output model constructed with of spending by the employees of the agriculture and the most recent 2014 IMPLAN data. forestry industries. This report provides an estimate of the The total economic contribution of agriculture and economic contribution of agriculture and forestry sectors forestry (i.e.
    [Show full text]
  • Economics of Competition in the U.S. Livestock Industry Clement E. Ward
    Economics of Competition in the U.S. Livestock Industry Clement E. Ward, Professor Emeritus Department of Agricultural Economics Oklahoma State University January 2010 Paper Background and Objectives Questions of market structure changes, their causes, and impacts for pricing and competition have been focus areas for the author over his entire 35-year career (1974-2009). Pricing and competition are highly emotional issues to many and focusing on factual, objective economic analyses is critical. This paper is the author’s contribution to that effort. The objectives of this paper are to: (1) put meatpacking competition issues in historical perspective, (2) highlight market structure changes in meatpacking, (3) note some key lawsuits and court rulings that contribute to the historical perspective and regulatory environment, and (4) summarize the body of research related to concentration and competition issues. These were the same objectives I stated in a presentation made at a conference in December 2009, The Economics of Structural Change and Competition in the Food System, sponsored by the Farm Foundation and other professional agricultural economics organizations. The basis for my conference presentation and this paper is an article I published, “A Review of Causes for and Consequences of Economic Concentration in the U.S. Meatpacking Industry,” in an online journal, Current Agriculture, Food & Resource Issues in 2002, http://caes.usask.ca/cafri/search/archive/2002-ward3-1.pdf. This paper is an updated, modified version of the review article though the author cannot claim it is an exhaustive, comprehensive review of the relevant literature. Issue Background Nearly 20 years ago, the author ran across a statement which provides a perspective for the issues of concentration, consolidation, pricing, and competition in meatpacking.
    [Show full text]
  • The Distributional Impacts of Agricultural Programs*
    II Division of Agricultural Sciences UNIVERSITY OF j CA~IFORNIA !". ~- .. - Working Paper No. 194 THE DISTRIBUTIONAL IHPACTS OF AGRICULTIJRAL PROGRAMS by Gordon C. Rausser and David Zilberman QIANNINI ,.OUNDAT10NO,. ACJltJCULTURAL ECONOMICS LIBRARY MAR 1 U1982 Financial support under Project No. 58-3J23-1-0037X is gratefully apprecia t ed . California Agricultural Experiment Station Giannini Foundation of Agricultural Economics March, 1982 ---.,All : " Giannini FDN Library , I1\\1 ~ \\111 \\1 II lllll 11\l1 IllIl III IIII 0052 19 THE DISTRIBUTIONAL IMPACTS OF AGRICULTURAL PROGRAMS* 1. Introduction Scholars of all persuasions agree that economic policies emanating from our political system aim at slicing the pie in a particular fashion and/or increasing its size. As a result~ economists interested in policy analysis must not limit their analysis to efficiency issues but must also investigate equity implications. In the latter regard~ . it is our view that much remains to be accomplished by our profession on both conceptual and empirical fronts. Our efforts in developing methodologies and rmodels capable of analyzing distributional issues should intensify. The purpose of this paper is to present several new ap- pro aches for analyzing distributional impacts of agricultural policies. To gain some perspective on the potential value of these approaches~ we have to realize their role within the process of modeling for policy analysis. Figure 1 (Rausser and Hochman, 1979~ p. 22) depicts a graphical presentation of this process. The process outlined in this figure is useful for prescriptive or normative analysis--aiding policymakers in evaluating alternatives and selecting more nearly optimal poli- cies. It can also be used to structure positive analysis in order to improve our understanding of political economics of • 2.
    [Show full text]
  • Macroeconomics Course Outline and Syllabus
    City University of New York (CUNY) CUNY Academic Works Open Educational Resources New York City College of Technology 2018 Macroeconomics Course Outline and Syllabus Sean P. MacDonald CUNY New York City College of Technology How does access to this work benefit ou?y Let us know! More information about this work at: https://academicworks.cuny.edu/ny_oers/8 Discover additional works at: https://academicworks.cuny.edu This work is made publicly available by the City University of New York (CUNY). Contact: [email protected] COURSE OUTLINE FOR ECON 1101 – MACROECONOMICS New York City College of Technology Social Science Department COURSE CODE: 1101 TITLE: Macroeconomics Class Hours: 3, Credits: 3 COURSE DESCRIPTION: Fundamental economic ideas and the operation of the economy on a national scale. Production, distribution and consumption of goods and services, the exchange process, the role of government, the national income and its distribution, GDP, consumption function, savings function, investment spending, the multiplier principle and the influence of government spending on income and output. Analysis of monetary policy, including the banking system and the Federal Reserve System. COURSE PREREQUISITE: CUNY proficiency in reading and writing RECOMMENDED TEXTBOOK and MATERIALS* Krugman and Wells, Eds., Macroeconomics 3rd. ed, Worth Publishers, 2012 Leeds, Michael A., von Allmen, Peter and Schiming, Richard C., Macroeconomics, Pearson Education, Inc., 2006 Supplemental Reading (optional, but informative): Krugman, Paul, End This Depression
    [Show full text]
  • Nathalie Lavoie
    NATHALIE LAVOIE Department of Resource Economics University of Massachusetts Amherst 80 Campus Center Way Amherst, MA 01003 Phone: (413) 545-5713 Fax: (413) 545-5853 [email protected] EDUCATION Ph.D., Agricultural and Resource Economics, University of California, Davis, CA. Fall 2001. Dissertation: Price Discrimination in the Context of Vertical Differentiation: An Application to Canadian Wheat Exports. Advisor: Professor Richard Sexton. M.Sc., Agricultural Economics, University of Saskatchewan, Saskatoon, Canada. Fall 1996. Thesis: Viability of a Voluntary Price Pool Within a Cash Market. Advisors: Professors Murray Fulton and James Vercammen. B.Sc., Agricultural Economics, McGill University, Montreal, Canada, Spring 1994. FIELDS OF INTEREST Industrial Organization, International Trade, Agricultural Markets, Agricultural Policy. EMPLOYMENT AND RESEARCH EXPERIENCE Associate Professor, Department of Resource Economics, University of Massachusetts, Amherst, MA, 09/08 – current. Visiting Scholar, Institut National de Recherche Agronomique (INRA), Laboratoire Montpelliérain d’Économie Théorique et Appliquée (LAMETA), Université de Montpellier 1, Montpellier, France, 01/12-06/12. Assistant Professor, Department of Resource Economics, University of Massachusetts, Amherst, MA, 09/01 – 08/08. Instructor, Department of Resource Economics, University of Massachusetts, Amherst, MA, 08/00 – 08/01. Visiting Scholar, Institut National de Recherche Agronomique (INRA), Midi-Pyrénée School of Economics, Université des Sciences Sociales of Toulouse,
    [Show full text]
  • Money Supply ECON 40364: Monetary Theory & Policy
    Money Supply ECON 40364: Monetary Theory & Policy Eric Sims University of Notre Dame Fall 2017 1 / 59 Readings I Mishkin Ch. 3 I Mishkin Ch. 14 I Mishkin Ch. 15, pg. 341-348 2 / 59 Money I Money is defined as anything that is accepted as payments for goods or services or in the repayment of debts I Money serves three functions: 1. Medium of exchange 2. Unit of account 3. Store of value I Any asset can serve as a store of value (e.g. house, land, stocks, bonds), but most assets do not perform the first two roles of money I Money is a stock concept { how much money you have (in your wallet, in the bank) at a given point in time. Income is a flow concept 3 / 59 Roles of Money I Medium of exchange role is the most important role of money: I Eliminates need for barter, reduces transactions costs associated with exchange, and allows for greater specialization I Unit of account is important (particularly in a diverse economy), though anything could serve as a unit of account I As a store of value, money tends to be crummy relative to other assets like stocks and houses, which offer some expected return over time I An advantage money has as a store of value is its liquidity I Liquidity refers to ease with which an asset can be converted into a medium of exchange (i.e. money) I Money is the most liquid asset because it is the medium of exchange I If you held all your wealth in housing, and you wanted to buy a car, you would have to sell (liquidate) the house, which may not be easy to do, may take a while, and may involve selling at a discount if you must do it quickly 4 / 59 Evolution of Money and Payments I Commodity money: money made up of precious metals or other commodities I Difficult to carry around, potentially difficult to divide, price may fluctuate if precious metal or commodity has consumption value independent of medium of exchange role I Paper currency: pieces of paper that are accepted as medium of exchange.
    [Show full text]
  • Introduction to Agricultural Economics
    INTRODUCTION TO AGRICULTURAL ECONOMICS Definitions of Agricultural Economics by various Authors • Agricultural economics is an applied field of economics concerned with the application of economic theory in optimizing the production and distribution of food and fibre—a discipline known as agricultural economics. Definitions contd. •Prof. Gray defines agricultural economics, “as the science in which the principles and methods of economics are applied to the special conditions of agricultural industry.” •No doubt both these definitions are wider in scope, but these are not explanatory and are characterised by vagueness unsettled. Definitions contd. • Prof. Hubbard has defined agricultural economics as, “the study of relationship arising from the wealth-getting and wealth-using activity of man in agriculture.” • This definition is based on Prof. Ely’s definition of economics and is mere akin to Marshall’s conception of economic activities and therefore it is also limited in scope. Definitions contd. • According to Lionel Robbins, economics deals with the problems of allocative efficiency i.e. choice between various alternative uses-particularly when resources are scarce— to maximize some given ends. • Thus it provides analytical techniques for evaluating different allocations of resources among alternative uses Prof. Taylor defines agricultural economics in Robbinsian tone. Definitions contd. • To use his words, “Agricultural economics treats of the selection of land, labour, and equipment for a farm, the choice of crops to be grown, the selection of livestock enterprises to be carried on and the whole question of the proportions in which all these agencies should be combined. • These questions are treated primarily from the point of view of costs and prices.” Definitions contd.
    [Show full text]
  • Voluntary National Content Standards in Economics 2Nd Edition Voluntary National Content Standards in Economics
    Voluntary national ContEnt StandardS in EConomics 2nd Edition Voluntary national ContEnt StandardS in EConomics 2nd Edition WRITING COMMITTEE ACKNOWLEDGMENTS John Siegfried, Writing Committee Chair Many individuals reviewed the Voluntary National Vanderbilt University Content Standards in Economics, 2nd Edition. The individuals listed below provided special assistance Alan Krueger, Writing Committee Co-Chair in helping develop the content of the standards. Through February 2009 Princeton University Stephen Buckles Vanderbilt University Susan Collins University of Michigan Bonnie Meszaros University of Delaware Robert Frank Cornell University James O’Neill University of Delaware Richard MacDonald St. Cloud State University Robert Strom Ewing Marion Kauffman Foundation KimMarie McGoldrick University of Richmond John Taylor Stanford University George Vredeveld University of Cincinnati FUNDING The Council for Economic Education gratefully acknowledges the funding of this publication by the United States Department of Education, Office of Innovation and Improvement, Excellence in Economic Education: Advancing K-12 Economic & Financial Education Nationwide grant award U215B050005-08. Any opinions, findings, conclusions, or recommendations expressed in the publication are those of the authors and do not necessarily reflect the view of the U.S. Department of Education. Copyright © 2010, Council for Economic Education, 122 East 42 Street, Suite 2600, New York, NY 10168. All rights reserved. The Content Standards and Benchmarks in this document may be reproduced for non-commercial educational and research purposes. Notice of copyright must appear on all pages. Printed in the United States of America. ISBN 978-1-56183-733-5 5, 4, 3, 2, 1 ii Voluntary national Content StandardS IN eCONOMiCS Contents PREFACE . v FOREWORD TO THE FIRST EDITION .
    [Show full text]
  • (Missing: How Lowering Land Prices Encourages Saving
    George’s Economics of Abundance: Replacing dismal choices with practical resolutions and synergies Mason Gaffney Introduction: Resolutions vs. trade-offs It is part of George’s genius that his proposals solve one problem by resolving it with another, turning two problems into one solution. It is something like tuning up the orchestra for a concert, turning dissonance into harmony, and keeping the beat together, turning cacaphony into rhythm. It is the mark of good solutions that they reconcile and resolve, rather than simply “trade-off.”1 That is what George means when he writes that “the laws of the universe are harmonious.” That is what Founding Fathers like Washington, Jefferson and Franklin meant by a “natural order.” Like them, George is a deist in spirit, a believer in the consistency of the universe. The concept that some things are more “natural” than others is not arbitrary. The clue that one has found the “natural” law is that it makes forces harmonize and team together instead of clashing, and neutralizing each other.2 The principle of constructive synthesis–a touch of Hegel–is another way of perceiving the value of turning cacaphony into harmony.3 Economists today offer us mainly “trade-offs” and hard choices. For every good thing we must give up another, so net gains are just marginal. That is the approved posture: it makes one seem hard-headed, worldly, and practical. Too much positive thinking sounds suspiciously optimistic, and invites rebellious cynical muttering that “there ain’t no free lunch.” It goes back at least to Malthus, who offered mankind the hard choice of food vs.
    [Show full text]
  • Implementing and Maintaining Neoliberal Agriculture in Australia
    IMPLEMENTING AND MAINTAINING NEOLIBERAL AGRICULTURE IN AUSTRALIA. PART II STRATEGIES FOR SECURING NEOLIBERALISM Bill Pritchard School of Geosciences, University of Sydney Introduction The formal attachment to this [multilateral agricultural liberalisation] agenda has displayed a quality akin to religious fervour, unqualified by the details of experience (Jones 1994:1). uring the 1960s and 1970s there was a seismic shift in the intellectual environment of the D discipline of agricultural economics in Australia. The discipline as a whole became more centred on the influence of the Chicago School paradigm, which emphasised the social benefits of free markets. By the 1980s, these views had inculcated key policy arenas within the Australian Government. In combination with a reformist Labour Party administration which sought to challenge the policy authority of National Party influence in rural affairs, 1 these perspectives gained centrality as a guiding vision for public policy interests in agriculture. The first instalment of this two-part series of articles (Pritchard, 2005a) detailed how, by the end of the 1990s, this intellectual juggernaut had radically transformed the relationships between the state and market within Australia’s rural economy. In this article, attention is focused to the issue of how these policy prescriptions have been maintained and justified. Such a focus is extremely timely, coming approximately ten years after the formation of the WTO. The Australian Government’s advocacy of market liberalisation in agriculture is extremely influential within that body. In her history of Australia and the world trading system, for example, Capling (2001:2) argues “Australia has wielded far more influence in multilateral trade institutions than is warranted by its size and power in the global economy”.
    [Show full text]
  • Open Market Operations and Money Supply at Zero Nominal Interest Rates
    Open Market Operations and Money Supply at Zero Nominal Interest Rates Roberto Robatto∗ University of Chicago October 21, 2012 (first draft: February 2012) Abstract What are the paths of money supply that are consistent with zero nominal interest rates and that can be implemented through open market operations? To answer this question, I present an Irrelevance Proposition for some open market operations that exchange money and one-period bonds at the zero lower bound. The result has implications for the conduct of monetary policy (non-irrelevant open market operations modify the equilibrium) and for the implementation of the Friedman rule (any growth rate of money supply above the negative of the rate of time preferences can implement zero nominal interest rate forever, even a positive growth rate, provided that the government collects \large enough" surpluses). The result holds under several specifications, including models with heterogeneity, non- separable utility, borrowing constraints, incomplete and segmented markets and sticky prices; and generalizes to any situation in which the cost of holding money vs. bonds is zero, such as the payment of interest on money. ∗Email: [email protected]. I am extremely greatful to Fernando Alvarez for his suggestions and guidance. I would like to thank also John Cochrane, Thorsten Drautzburg, Tom Sargent, Harald Uhlig and participants to the AMT, Capital Theory and Economic Dynamics Working Groups at the University of Chicago for their comments. 1 1 Introduction At zero nominal interest rates, money is perfect substitutes for bonds from the point of view of the private sector. Money demand is thus not uniquely determined, therefore the equilibrium in the money market depends on the supply of money.
    [Show full text]