9308819 Williamson The main goal of this research is to advance understanding of government intervention in monetary and financial affairs. The research consists of three projects. The first will be a study of the quantitative importance of monetary policy for economic welfare and business cycles in the United States. This topic has been neglected in macroeconomics over the last ten to fifteen years, as macroeconomists focused much of their attention on the role of "real" or supply-side factors in business cycle behavior. This project will answer the following questions. What is the magnitude of the welfare loss from long-run inflation relative to the loss from uncertainty about monetary policy? Could the behavior of the Federal Reserve System over the period 1954-1992 be characterized as "close" to optimal? If the answer to the last question is no, then how might policy have been improved? The second project will study the role for government-provided deposit insurance and the optimal design of deposit insurance schemes. Recently, it has become painfully clear that something is dramatically wrong with the system of deposit insurance in the United States, while economists have had surprisingly little to say about the provision of deposit insurance. The modeling framework is capable of explaining why U.S. deposit insurance appeared to work well for a long period of time prior to failing miserably in the 1980s, and of showing how the system could be improved. The third project will examine the link between monetary policy and credit. Recent evidence suggests that "credit crunches" have played an important role in transmitting changes in Federal Reserve behavior to real activity, yet there is little agreement on the mechanism by which central bank actions affect the allocation of credit. The modeling framework to be used here builds on recent advances in information economics. Credit crunches arise as period where monetary policy can interact with f inancial regulations to produce an undesirable allocation of credit.
