00-01. Antinolfi, G., Huybens, E., and Keister, T., "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort"
Abstract: We evaluate the desirability of having an elastic currency generated by a lender of last resort that prints money and lends it to banks in distress. When banks cannot borrow, the economy has a unique equilibrium that is not Pareto optimal. The introduction of unlimited borrowing at a zero nominal interest rate generates a steady state equilibrium that is Pareto optimal. However, this policy is destabilizing in the sense that it also introduces a continuum of non-optimal inflationary equilibria. We explore two alternate policies aimed at eliminating such monetary instability while preserving the steady-state benefits of an elastic currency. If the lender of last resort imposes an upper bound on borrowing that is low enough, no inflationary equilibria can arise. For some (but not all) economies, the unique equilibrium under this policy is Pareto optimal. If the lender of last resort instead charges a zero real interest rate, no inflationary equilibria can arise. The unique equilibrium in this case is always Pareto optimal.
00-02. Antinolfi, G., and Keister, T., "Liquidity Crises and Discount Window Lending: Theory and Implications for the Dollarization Debate"
Abstract: We study the consequences of a central bank providing an elastic currency through the use of discount window lending. In particular, we compare the set of equilibria generated when the interest rate is fixed in nominal terms with that generated when it is fixed in real terms. The two policies generate the same steady state equilibrium. However, fixing the nominal interest rate always generates additional, inflationary equilibria while the while fixing the real rate never does, regardless of the rate chosen. We argue that dollarization can be viewed as a mechanism for committing to having a fixed real interest rate on short-term credit, and discuss some implications of this analysis for the current debate in Mexico.
00-03. Martinelli, C., and Matsui, A., "Policy Reversals and Electoral Competition with Privately Informed Parties"
Abstract: We develop a spatial model of competition between two policy-motivated parties. Parties know a state of the world which determines which policies are desirable for voters, while voters do not. The announced positions of the parties serve as signals to the voters concerning the parties' private information. In all separating equilibria, when the left-wing party attains power, the policies it implements are to the right of the policies implemented by the right-wing party when it attains power. The intuition behind this result is that when right-wing policies become more attractive, the left party moves toward the right in order to be assured of winning, while the right-wing party stays put in a radical stance.
Key words: spatial models, party competition, asymmetric information, separating equilibria.
00-04. Martinelli, C., "Simple Plurality versus Plurality Runoff with Privately Informed Voters"
Abstract: This paper compares two voting methods commonly used in presidential elections: simple plurality voting and plurality runoff. In a situation in which a group of voters have common interests but do not agree on which candidate to support due to private information, information aggregation requires them to split their support between their favorite candidates. However, if a group of voters split their support between their favorite candidates, they increase the probability that the winner of the election is not one of them. In a model with three candidates, due to this tension between information aggregation and the need for coordination, plurality runoff leads to higher expected utility for the majority than simple plurality voting if the information held by voters about the candidates is not very accurate.
00-05. Martinelli, C., and Matsui, A., "Convergence Results for Unanimous Voting"
Abstract: We develop a unidimensional spatial model of two party competition in which parties are better informed than voters about the bliss point of voters. The announced positions of the two parties serve as signals to the voters concerning the parties' private information. Surprisingly, in all separating equilibria the policies implemented by the left-wing party, when it attains power, are to the right of the policies implemented by the right-wing party when it attains power in turn. The driving force behind this result is that, in the event of a shock making right-wing policies more attractive, the incentives pushing the left party to the right are strong, since by winning the election it can avoid the right party implementing extreme policies, while the right-wing party can stay put in a radical stance with the prospect of seeing relatively attractive policies implemented by the rival party.