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Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions with those investing in risky equity. Integration eliminates a credit spread, reducing aggregate banking sector profitability; so while integration increases output it also entails larger, more frequent bailouts of retail customers. Bailouts boost economic activity but are costly. The optimal structure of banking depends on the efficiency of government intervention, the competitiveness of the banking sectors and shocks. Separated institutions are preferred when government bailouts are costly. Optimal bank regulation tolerates profits at investment and universal banks to limit bailouts, but imposes strict antitrust on retail banks.

We present an evolutionary growth model where the degree of gender equality evolves towards the value maximising social output. It follows that a woman’s bar- gaining power should depend positively on her relative productivity. When an economy is less developed, physical strength plays a key role in production and thus, total out- put is greater when the man gets a larger share. As society develops and accumulates physical capital and human capital, the woman becomes relatively more productive, which drives the output maximising social norm towards gender equality. Empirical results support these predictions of the theoretical model. Simulations show that in the long run, an economy with gender equality can outperform an economy where gender balance of power maximises social output, although in the short run, it can lag behind.

This paper studies firm entry with financial frictions. We motivate our analysis by documenting that a fall in firm entry and a widening of the interest rate spread occur when there is a rise in idiosyncratic uncertainty. We then develop a model of firm entry and financial frictions – with fluctuations in the volatility of firm-level demand shocks – consistent with this empirical evidence. Finally, we study dividend and labor-income taxation. Financial frictions weaken the incentive to support firm entry, and in a calibrated version of our model, accounting for the increase in volatility observed during the 2007-09 recession, optimal fiscal policy raises (lowers) dividend (labor)-income taxes by up to 7 (1.5) percentage points.

In this paper, we consider a model where producers set their prices based on their prediction of the aggregated price level and an exogenous variable, which can be a demand or a cost-push shock. To form their expectations, they use OLS-type econometric learning with bounded memory. We show that the aggregated price follows the random coefficient autoregressive process and we prove that this process is covariance stationary.

What is the seigniorage-maximizing level of inflation? Three models' formulae for the seigniorage-maximizing inflation rate (SMIR) are compared. A sticky-price model prescribes a somewhat lower SMIR to Cagan's formula and a variant of a flex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labor market: The sticky-price (Calvo) model implies that inflation and output are negatively related and that output is falling in price stickiness. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the United States and the United Kingdom may be quite close to the SMIR.

The aim of this paper is two-fold. First, it provides a simple framework for the analyses of the transitions between two steady states with different fiscal policies. This allows us to clarify the existing results on the possibility of Pareto-improving transitions from pay-as-you-go to fully funded pension systems. We show that the reduction in the marginal tax rate is a sufficient condition for the possibility of such pension reforms. Second, the paper investigates the features and the duration of the shortest Pareto-improving pension reform in an open economy.

This article provides a simple proof of the Lorenz dominance criterion for two non-decreasing income transformations. The criterion is extended to the most general case, with only very mild restrictions on the form of initial income distribution or the properties of the income transformations.

This paper reviews the economic conditions in central Asia at the time of the Russian financial crisis of August 1998; the channels by which the crisis was transmitted to the central Asian region; and the policy responses. The paper concludes that, while real exchange rates of central Asian national currencies vis-à-vis the Russian ruble have returned to their pre-crisis levels following the nominal devaluations that ensued, other indicators of external competitiveness, such as unit labor cost indices, suggest the need for further surveillance in this area. Also, it is not yet clear if full exchange rate flexibility has been established in central Asia despite the protracted and costly exits from the nominal exchange rates in place at the time of the crisis. Finally, the debt-to-GDP ratios in central Asia, which grew rapidly between 1998 and 1999 in the context of large exchange rate adjustments, remain a challenge for the Tajik and Kyrgyz authorities, in particular.

We study monetary optimal policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.

A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.

We study optimal policy in a New Keynesian model at zero bound interest rate where households use cash alongside with house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall we observe decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or in the loan to collateral value ratio. We also find that optimal monetary policy generates large and more persistent fall in the money multiplier in response to drop in the loan to collateral value ratio.

A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We find that the financial sector can move very sharply from safe to risky investment strategies and that the degree of competitiveness is important for risk premia. We also compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The benefits of universal banking are positive but decreasing in the value and volatility of shocks to the quality of financial capital. When shock is moderate, competition improves the welfare. However, banks with some market power have a cushion of profits against adverse shocks which is beneficial since there is an excess burden associated with government bailouts. Hence, when a worse shock hits the economy, the optimal degree of competitiveness of separate banking firms is higher than for universal firms. So, the welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.

Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.

What is the seigniorage-maximizing level of inflation? Four models formulae for the seigniorage maximizing inflation rate (SMIR) are compared. Two sticky-price models arrive at very different quantitative recommendations although both predict somewhat lower SMIRs than Cagan’s formula and a variant of a .ex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labour market: The Calvo model implies that inflation and output are negatively related and that output is falling in price stickiness whilst the Rotemberg cost-of-price-adjustment model implies exactly the opposite. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the USA and the UK may be quite close to the SMIR.

This paper establishes that one can generally obtain a purely quadratic approximation to the unconditional expectation of social welfare when the steady-state is distorted. A specific example is provided employing a canonical New Keynesian model. Unlike in the non-distorted steady state case, the approximate loss function is not defined simply over terms in inflation and output. Furthermore, optimal steady state inflation and the nominal interest rate are positive.

This article examines the determinants of tax non-compliance when we recognise the existence of an imperfectly competitive "tax advice" industry supplying schemes which help taxpayers reduce their tax liability. We apply a traditional industrial organisation framework to model the behaviour of this industry. This tells us that an important factor determining the equilibrium price and hence, the level of noncompliance, is the convexity of the demand schedule. We show that in this context, this convexity is affected by the distribution of pre-tax income, the progressivity of the tax-schedule and the way in which monitoring and penalties vary with income. It is shown that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the frequently advocated policy of reducing the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of the penalty and monitoring functions.

We discuss the issue of time consistency of monetary policy. We develop a simple and intuitive procedure to derive analytically the unconditionally optimal (UO) policy in a general linear-quadratic set-up, a perspective stressed by Taylor (1979) and Whiteman (1986). We compare the UO perspective on optimal monetary policy with alternative approaches. We use our approach in simple backward- and forward-looking models and argue that the UO perspective is worthy of renewed interest.

We develop a simple and intuitive approach for analytically deriving unconditionally optimal (UO) policies, a topic of enduring interest in optimal monetary policy analysis. The approach can be employed in both general linear-quadratic problems and in the underlying non-linear environments. A detailed example is provided using a canonical New Keynesian framework.

Many sticky-price models suggest that relative price distortion is one of the major costs of inflation. We show that this resource misallocation is costly even at quite low rates of inflation. This is because inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a negative shift in productivity. Similarly, the utility cost of price dispersion is large. We incorporate price dispersion in a linearized model. This radically affects how shocks are transmitted through the economy. Notably, a contractionary nominal shock has a persistent, negative hump-shaped impact on inflation, but may have a positive hump-shaped impact on output. Observed persistence in the policy rate is not due to the policy rule per se.

Duopoly competition can take different forms: Bertrand, Cournot, Bertrand-Stackelberg, Cournot-Stackelberg and joint profit maximization. In this paper we find a clear price ranking among these five markets when goods are substitutes and an output ranking when goods are complements. Moreover, the ranking can be explained by different levels of conjectural variation associated with those markets.

In this paper we review and extend some of the key lessons that seem to be emerging from the Ramsey-inspired theory of dynamic optimal monetary and fiscal policies. We construct measures of the key distortions in our economy; we label these ‘dynamic wedges’. Inflation, actual or anticipated, distorts these wedges in the present period, it shrinks the tax base and increases the deadlweight loss. We show that, if possible, labour as well as capital ought to be subsidized in steady state. We point to a number of extensions to the Ramsey literature that may help in the formulation of actual policy.

This paper investigates the relationship between the disparity in tax base and tax collection. I address the tax collection problem with traditional industrial organization approach. Thus, I model the "tax minimization" industry where the supplier helps taxpayers to avoid their tax liability. I find that lower income inequality as well as a less progressive tax code may result in a smaller number of tax payers committing to their tax duties. Finally, I question the reduction in the highest tax rate as a policy directed at the improvement of tax discipline.

This article provides a simple proof of the Lorenz dominance criterion for two non-decreasing income transformations. The criterion is extended the most general case, with only very mild restrictions on the form of initial income distribution or the properties of the income transformations.

The timelessly optimal monetary policy proposed by Woodford (2003) may be dominated by alternative timeless policies. We provide a formal justification for these alternative policies. We demonstrate why discount rates do not matter and establish that optimizing over the unconditional expectation of the policy criterion function recovers these alternative strategies.

This article provides a proof of Lorenz dominance criterion for two increasing income transformations. The criterion is extended on the most general case, without any restriction on the form of initial income distribution or the properties of the income transformations. The simplicity of the proof makes it suitable for teaching purpose.

This paper investigates the relationship between tax base distribution and tax collection rate. We approach the tax collection problem using traditional industrial organization tools. Thus, we model the tax optimization industry and investigate the impact of the change in aggregate demand on the price setting which, in turn, affects the number of tax payers. It is found that lower income inequality as well as a less progressive tax code may result in a decreasing number of tax payers. Furthermore, we criticize the reduction in the highest tax rate as the policy for tax collection improvement.

This paper provides the policy for implementing the shortest Pareto-improving pension reform in an open economy with an endogenous labor supply. It also estimates the duration of the transition period.

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.