We study general dynamic programming problems with continuous and discrete choices and general constraints. The value functions may have kinks arising (1) at indifference points between discrete choices and (2) at constraint boundaries. Nevertheless, we establish a general envelope theorem:...

Classical models of money are typically based on a competitive market without capital or credit. They then impose exogenous timing structures, market participation constraints, or cash-in-advance constraints to make money essential. We present a simple model without credit where money arises...

We study the use of asset-backed money in a neoclassical growth model with illiquid capital. A mechanism is delegated control of productive capi- tal and issues claims against the revenue it earns. These claims constitute a form of asset-backed money. The mechanism determines (i) the number of...

In the United Kingdom, money demand deviates from the convex relationship suggested by monetary theory. Limited commitment of borrowers via banks can explain this observation. Our finding is based on a microfounded monetary model, where a money market provides insurance against idiosyncratic...

In response to the financial crisis of 2007/08, all major central banks decreased interest rates to historically low levels and created large excess reserves. Central bankers and academics currently discuss how to implement monetary policy, going forward. We find that paying interest on reserves...

The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright...

Channel systems for conducting monetary policy are becoming increasingly popular. Despite their popularity, the consequences of implementing policy with a channel system are not well understood. We develop a general equilibrium framework of a channel system and investigate the optimal policy. A...

In monetary models in which agents are subject to trading shocks there is typically an ex-post inefficiency in that some agents are holding idle balances while others are cash constrained. This inefficiency creates a role for financial intermediaries, such as banks, who accept nominal deposits...

An increasing number of central banks implement monetary policy via two standing facilities: a lending facility and a deposit facility. In this paper we show that it is socially optimal to implement a non-zero interest rate spread. We prove this result in a dynamic general equilibrium model...

When agents are liquidity constrained, two options exist - sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government (outside) bonds and in the other they can borrow by issuing (inside) bonds. All transactions are voluntary, implying no...