Rehypothecation refers to the practice of reusing (selling or pledging as collateral) an asset that has already been pledged as collateral for a cash loan. In high inflation economies, rehypothecation improves economic welfare, but there is generally too much of it. We find that regulatory...

We analyze dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and can self-insure through savings. We study Markov-perfect insurance contracts in which neither party can commit beyond the current period. We show that...

When governments trade-off maximizing general welfare with maximizing their own expenditure, the degree of central bank independence has implications for inflation, taxes and debt. Making the central bank more independent implies that, for any given level debt, inflation and taxes decrease,...

Recent events in the U.S. and Europe have renewed interest in the desirability of imposing constraints on fiscal policy. In the U.S., the implementation of large and persistent deficits as a response to the financial crisis and subsequent recession motivated debates about debt ceilings and...

A government that cannot commit to future policy choices faces a trade-off that explains the level of debt. On the one hand, there is an incentive to increase debt and delay taxation, so as to reduce current distortions. On the other hand, inflating current prices lowers the real value of...

In the absence of government commitment, the conduct of fiscal and monetary policy depends on the sign of inherited net nominal government obligations. When these obligations are negative, monetary policy is non-distortionary and fiscal policy distortions are smoothed over time, either forever...

Conventional theory suggests that fiat money will have value in capitalpoor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social...

When commitment is lacking, intertemporal trade is facilitated with the use of exchange media--interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected...

All developed countries have government debt, usually a sizeable proportion of output. This paper proposes that governments that cannot commit to future policy choices face a trade-off that explains the level of debt. On the one hand, the government would like to increase debt and delay...

Overestimating how far the economy is away from its potential unnecessarily risks delaying the end of unusual monetary accommodation.