Money, Intermediation and Financial Markets.

New York University, New York NY

Investigators

Abstract

ABSTRACT Prop ID: 0350302 PI: Gale, Douglas M. Organization: New York University Title: Money, Intermediation and Financial Markets Project Summary Recent events, including the financial crises in South Asia and elsewhere and the expansion (and later collapse) of the stock market bubble in the United States have focused attention on the relationship between monetary policy and the financial system. Concern about financial fragility means that any turbulence in the financial system leads to questions about what can and should be done by policy makers. Should the Federal Reserve System target stock prices as well as the prices of goods and services in formulating its monetary policy? Can interest rates control the stock market? What impact does the wealth effect have on real consumption? What is the optimal policy with respect to financial crises? Can timely provision of liquidity prevent crises? Should crises be prevented at all costs or is a cost-benefit analysis necessary to decide which crises to prevent? The objective of this project is (i) to incorporate money in a meaningful way into a theoretical account of transactions and monetary equilibrium and (ii) show how the CB's control of standard instruments (money supply, interest rates) determines the price level and hence the real value of financial securities and then (iii) to apply these tools to the understanding of financial intermediation, markets, and crises. Intellectual merit of proposed activity The project will develop theoretical tools and frameworks for the analysis of activist monetary policy, for the analysis of optimal liquidity provision, and the design of optimal financial system. It will also address important policy issues which will provide greater insight into the formulation of policies in areas such as deflation, liquidity traps, and monetization of the debt; the role of liquidity in asset price volatility; and optimal currency areas. Broader impacts of proposed activity The results of this research will be disseminated through publications in peer reviewed journals, through the World Wide Web, and through conferences and seminar participation. Graduate students will be involved in the research directly as RAs and indirectly as participants in workshops and graduate courses where the results and methods will be taught and discussed. As indicated above, the ultimate aim of the research is to inform ongoing debates about the policy of governmental and inter-governmental organizations, such as the Federal Reserve, the IMF, the ECB, etc. Every effort will be made to encourage the most diverse participation possible in the public activities associated with the project.