We present a new simple and short proof of the existence of equilibria in the classical single-sector growth model.

Models of the exchange process based on search theory can be used to analyze the features of objects that make them more or less likely to emerge as money in equilibrium. These models illustrate the trade-off between endogenous acceptability (an equilibrium property) and intrinsic characteristics of goods, such as storability or recognizability. We look at how the relative supply and demand for various goods affect their likelihood of becoming money. Intuitively, goods in high demand and/or low supply are more likely to appear as commodity money, subject to the qualification that which object ends up circulating as a medium of exchange depends at least partly on convention. Welfare properties and fiat money are discussed.

Futures-market exchanges guarantee the performance of all contracts to encourage active trading between anonymous partners. Traders buy from or sell to the clearinghouse. The exchanges rely primarily on a margin system — traders post a performance bond that they forfeit if they default — to manage their risk exposure. The market value of the performance guarantee is the amount a trader would have to pay to insure his performance if there were no exchange guarantee. An underpriced guarantee subsidizes high-risk traders and ultimately undermines the credibility of the exchange's commitment to perform. An adequate margin policy fairly prices the exchange performance guarantee within an (economically insignificant) varepsilon neighborhood. I show that the value of a call (put) option with a strike price equal to the futures price minus (plus) the margin is an upper bound to the market value of the exchange's performance guarantee. The probability that the futures price change exceeds the margin is the probability that the option expires “in the money.” I estimate the value of the option on the December S&P 500 futures contract during the market crash in October 1987 to illustrate the technique. For the first half of the month the value of the performance guarantee was fairly priced. On the day of the crash it was underpriced by as much as 10% of the value of the futures contract. Futures-market margin committees moved quickly; by the end of the month the value of the performance guarantee was fairly priced.

This paper considers a nonborrowed-monetary-base VAR and a targets and instrument framework favored by the monetarists to resolve the puzzles thrown up by monetary VAR studies. The results show that nonborrowed-monetary-base shocks produce responses consistent with a priori expectations about the effects of monetary policy on interest rates, prices, and output.

We demonstrate that multiple stationary rational-expectations equilibria exist in a version of Lucas's island economy. The existence of these equilibria follows from the fact that there is an indeterminate set of monetary equilibria in the two-period overlapping-generations model. We show how to construct stationary rational-expectations equilibria by randomizing over the set of nonstationary monetary equilibria. In some of our equilibria, a positively sloped Phillips curve exists even though our economy contains no signal-extraction problem as in the original Lucas paper. Our equilibria are indexed by beliefs and are examples of the existence of sunspot equilibria in which allocations may differ across states of nature for which preferences, technology, and endowments are identical. Our technique for constructing stationary sunspot equilibria should prove useful in a wide class of models in which an indeterminate stationary equilibrium exists.

The market economy is modeled as a decentralized joint production system. Markets in such an economy require the use of money or credit instruments to facilitate exchange. As a result, market economies are at risk for monetary instability induced by real-side production coordination failure. In particular, economies decentralized via centralized wholesaling markets are subject to precipitous collapses. The most stable monetary system is trade in specie. However, there very likely is a scarcity of specie, which generates inefficiency and discourages production. There is, then, a need for an elastic currency. Bank-issued bills of exchange are a perfectly elastic medium and eliminate the scarcity of specie and its attendant inefficiency, but are a less stable monetary system than is trade in specie. In the trade-off between elasticity and stability, fiduciary currency (or fiduciary deposits) lies between specie and bank-issued bills of exchange.