Title

On the usefulness of the constrained planning problem in a model of money

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

9-1-2008

Journal or Book Title

Macroeconomic Dynamics

Volume

12

Issue

4

First Page or Article ID Number

503

Last Page

525

DOI

10.1017/S1365100508070284

Abstract

In this paper, we study a decentralized monetary economy with a specified set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations generated by these policies. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is potentially an extremely “efficient” (easy and quick) way of deriving optimal policies for the corresponding decentralized economies.

JEL Classification

E31, E42, E63

Comments

This article is published as On the Usefulness of the Constrained Planning Problem in a Model of Money (with R. Singh), Macroeconomic Dynamics, 4(12), 503-525, 2008. DOI: 10.1017/S1365100508070284. Posted with permission.

Copyright Owner

Cambridge University Press

Language

en

File Format

application/pdf

Published Version Working Paper

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