common agency with rational expectations theory and application to a monetary union we extend the theory of common agency to the situation where the principals payoffs are affected by their ex ante expectations of the agent s ex post choice we show how the usual truthful schedules must be modified to account for the rational expectations constraint we apply the model to a monetary union where member governments influence the policy of the common central bank using incentive contracts we examine how the outcomes depend on different delegated objectives of the bank and find that some often advocated rules create an excessive deflationary bias

does monetary unification lead to excessive debt accumulation abstract if discretionary monetary policy gives rise to an inflation bias monetary unification boosts the accumulation of public debt the additional debt accumulation harms welfare if governments are sufficiently myopic in the presence of myopic governments debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allowing a conservative independent central bank to focus on price stability with supply shocks monetary unification results in excessive variability of public debt a debt target that constrains stabilization policy helps to prevent this

how should control theory be used to calculate a time consistent government policy we study different solutions to a simple one dimensional linear quadratic game with a large number of private agents and a government a time consistent solution is defined as a solution to the hamilton jacobi bellman equation i e as a policy for which the government has noprecommitment capability this solution is compared to a policy where the government has an instantaneous pre commitment i e an equilibrium in which the government has a period by period leadership in both cases we show how control theory should be applied to calculate the equilibrium and how to relate these equilibria to the differential game literature

rogoff s conservative central banker restored we show that delegation of monetary policy to a weight conservative central banker can be desirable although the government can also use an inflation contract an employment target an inflation target or any combination of these to control the central banker the key feature of our model is a stochastic inflation bias arising when wage setters receive some information about a supply shock prior to signing nominal wage contracts weight conservatism is found to be desirable if fully state contingent delegation is not possible and the stochastic inflation bias cannot be eliminated by optimal choice of the delegation parameters

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

inflation contracts and inflation targets under uncertainty why we might need conservative central bankers this paper compares the relative effectiveness of inflation contracts and inflation targets in the presence of uncertainty regarding the central bank s preferences and the underlying output target the model explains why discretion may be superior to a delegation solution we also show that there might be the need to combine inflation targets and contracts with the appointment of a rogoff type conservative central banker if contracts and targets cannot be made state contingent and that less flexible inflation targets may be appropriate with uncertain central bank preferences

monetary cohabitation in europe how can monetary policy in stage iii of european monetary union be coordinated between the ins and the outs this paper compares alternative institutional mechanisms and concludes that a generalized system of inflation targets at the european level has several merits it strengthens domestic credibility of monetary policy it rules out deliberate attempts to gain competitiveness through devaluations it forces monetary policy to respond automatically to various macroeconomic shocks which is stabilizing for the real exchange rate and it distributes these shocks symmetrically across countries on the basis of a simple theoretical model of policy coordination the paper shows that a system of inflation targets approximates an optimal policy of international cooperation preliminary empirical evidence supports these theoretical results this abstract was borrowed from another version of this item

the choice of conservative bankers in open economies monetary regime options for europe that governments should delegate the operation of monetary policy to independent central banks is widely advocated for a closed economy the optimal choice results in a banker who is more conservative than the representative government assigning a lower weight on output in her welfare function but not overconservative thereby allowing monetary policy to adjust to shocks however for open economies the exchange rate externality results in an inefficient nash equilibrium to this delegation game monetary union or cooperation in the optimal choice of banker can internalize the externality these options are assessed under symmetric and asymmetric shocks assuming different levels of fiscal transfers copyright 1996 by royal economic society

aggregate demand shocks central bank preferences and macroeconomic outcomes with imperfect information abstract assuming imperfect information regarding aggregate demand shocks the paper shows first the distribution of the impact of such shocks between employment and prices depends crucially on central bank preferences second optimal stabilization is achieved by a conservative central banker

central bank independence and public debt policy the various proposals for the institutional design of the european monetary union have drawn fresh attention to the link between monetary and public debt policies this paper explores the strategic interaction between fiscal authorities setting public debt and the central bank controlling monetary policy in the absence of political distortions an optimally designed conservative independent central bank is sufficient to establish the second best in the presence of political distortions or with coordination of monetary and fiscal policy however also a debt target is needed

an equilibrium model of wealth distribution i present an explicitly solved equilibrium model for the distribution of wealth and income in an incomplete markets economy i flrst propose a self insurance model with an inter temporally dependent preference uzawa 1968 lucas and stokey 1984 and obstfeld 1990 i then derive an analytical consumption rule which captures stochastic precautionary saving motive and generates stationary wealth accumulation finally i provide a complete characterization for the equilibrium cross sectional distribution of wealth and income in closed form by developing a recursive formulation for the moments of the distribution of wealth and income using this recursive formulation i show that income persistence and the degree of wealth mean reversion are the main determinants of wealth income correlation and relative dispersions of wealth to income such as skewness and kurtosis ratios between wealth and income

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

supply shocks private sector information and monetary policy is there inevitably a stabilization trade off we assume that while the central bank has an information advantage in respect of aggregate productivity shocks the private sector has superior knowledge of local disturbances it is shown that there is no policy trade off between inflation and employment stability moreover macroeconomic outcomes are independent of the weight assigned to inflation by the central bank

central bank inflation contracts and strategic wage setting in a multiunion economy abstract a shared feature of models used to investigate the welfare enhancing potential of a central bank inflation contract is their stochastic nature central to the benefits conferred by such a contract is the presence of supply shocks in constructing a framework where wages are set strategically by a number of nonatomistic inflation averse unions this note identifies circumstances in which an inflation contract improves macroeconomic outcomes even in the absence of supply shocks

the joneses income and debt market participation empirical evidence from bank account data abstract in this paper we study whether the decision to raise debt is related to average income in the own residential area based on a unique dataset of bank account data we find that bank customers are more likely to hold collateralized and uncollateralized loans and to make use of the overdraft facility when the comparison income is higher even after controlling for socio demographic and financial characteristics this indicates that conspicuous consumption is partly financed by debt

games of monetary and fiscal interactions in the emu abstract this paper constructs various models of the emu and ecb when member countries have different objectives voting in pursuit of national interest can yield moderate and stable inflation the metaphor of walsh type contracts implements a monetary policy rule that averages the member countries most preferred rules in a repeated relationship where a country suffering a large adverse shock can use political bargaining to subvert the ecb s commitment the optimal rule should incorporate some flexibility to forestall that finally freedom of national fiscal policies undermines the ecb s monetary commitment this may justify fiscal constraints like the stability and growth pact

delegation in international monetary policy games abstract in this paper we show that delegation of monetary policy to an independent and more conservative central banker is an optimal policy in a multi country framework with monetary spillovers among countries even in the absence of time inconsistency credibility issues we also study the welfare implications of delegating monetary policy and extend our analysis to the case of coordination of monetary policies

a decentralized and state independent mechanism for internalizing international monetary policy spillovers abstract we propose a decentralized mechanism which internalizes international monetary policy spillovers and eliminates players incentives to deviate from the efficient outcome this institution is state independent which saves redesigning costs and implies that governments need not gather information about the shocks

labor market matching with precautionary savings and aggregate fluctuations we analyze a bewley huggett aiyagari incomplete markets model with labor market frictions consumers are subject to idiosyncratic employment shocks against which they cannot insure directly the labor market has a diamond mortensen pissarides structure firms enter by posting vacancies and match with workers bilaterally with match probabilities given by an aggregate matching function wages are determined through nash bargaining we also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk we use the model to evaluate a tax financed unemployment insurance scheme higher insurance is beneficial for consumption smoothing but because it raises workers outside option value it discourages firm entry we find that the latter effect is more potent for welfare outcomes we tabulate the effects quantitatively for different kinds of consumers we also demonstrate that productivity changes in the model in steady state as well as stochastic ones generate rather limited unemployment effects unless workers are close to indifferent between working and not working thus recent findings are corroborated in our more general setting

inflation targeting under asymmetric preferences this paper develops and estimates a game theoretical model of inflation targeting where the central banker s preferences are asymmetric around the targeted rate specifically positive deviations from the target can be weighted more or less severely than negative ones in the central banker s loss function it is shown that some of the previous results derived under the assumption of symmetry are not robust to this generalization of preferences estimates of the central banker s preference parameters for canada sweden and the uk are statistically different from the one implied by the commonly used quadratic loss function

household debt and social interactions can concern with relative standing which has been shown to influence consumption and labor supply also increase borrowing and the likelihood of financial distress we find that perceived peer income contributes to debt and the likelihood of financial distress among those who consider themselves poorer than their peers we use unique responses describing perceived peer characteristics from a dutch population wide survey to handle two major challenges of uncovering social interaction effects on borrowing 1 debts unlike conspicuous consumption are often hidden from peers and 1 location is missing in anonymized data we employ several approaches to uncover exogenous rather than correlated effects

announcements inflation targeting and central bank incentives this paper studies the incentives a central bank faces in announcing inflation targets when the central bank has private information about the economy and the public is uncertain about the central bank s preferences targeting rules in the absence of announcements reduce the inflationary bias of discretionary policy but they distort the central bank s response to private information about the economy this distortion is eliminated when the central bank is allowed to announce the inflation target announcements also affect credibility although the way they do so depends on the exact definition of credibility that is employed in standard models of monetary policy in which dynamic inconsistency plays a prominent role announcements from the central bank about its policy inten tions are not believable the central bank has an incentive to lie yet central banks often do make announcements and they are legally required to do so in some cases the bank of england for example must issue periodic inflation reports the chairman of the federal reserve is required by the humphrey hawkins act to testify before congress twice each year to explain the fed s policy actions and to detail the fed s outlook for future economic develop ments similarly the reserve bank of new zealand is required under the reserve bank act of 1989 to publish policy statements that spell out its plans the january 1994 legislation governing the banque de france requires its gov ernor to appear before parliament and the european central bank must under the maastricht treaty report at least annually to the european parlia ment if public statements about policy intentions are not credible the question naturally arises as to why central banks are frequently required to make them the answer of course is that announcements do provide the public with some information given the growing interest in policy transparency particu larly among those central banks that have adopted some form of inflation targeting it is perhaps surprising that there has been relatively little explicit analysis of how inflation targeting requirements might combine with reporting requirements to influence the informational content of announcements the conduct of stabilization policies and the central bank s credibility the purpose of this paper is to analyse the way inflation targeting affects the incentives the central bank faces in announcing targets when the central bank has private information about the economy and the public is uncertain about the central bank s preferences inflation targeting has seen increased popularity in recent years but a fixed target for inflation is generally suboptimal in the face of supply shocks while state contingent targets are viewed as not feasible an important result of this paper is that allowing the central bank to announce its own inflation target

minimum wage legislation and unemployment insurance as instruments for redistribution the use of minimum wages and unemployment insurance as instruments for redistributing income is analyzed the government is assumed to be able to implement an optimal income tax in an economy consisting of two types of individuals who differ in ability the effect of introducing a minimum wage which induces involuntary unemployment will be to improve social welfare under weak conditions circumstances under which combining unemployment insurance with the minimum wage will be welfare improving are also considered

mechanisms for achieving monetary stability inflation targeting versus the erm first we modify the barro gordon model so that a credibility stabilization trade off will remain even when a performance contract of the type envisaged by walsh 1995 is imposed on the central bank governor we do this by modeling a real interest rate bias along with the inflation bias then we discuss how various inflation penalties might actually be imposed on a central bank and ask whether inflation targeting supported by one or another of the penalties is likely to bring a better resolution to the credibility stabilization trade off than the erm

the role of a fixed exchange rate system when central bankers are independent abstract in a symmetric model a fixed exchange rate system allows us to reach the cooperative solution in the game between central bankers however as cooperation can be counterproductive such a property may not be beneficial here we reconsider this issue by introducing independent central bankers who need not share the social preferences we show that when countries choose their central bankers cooperatively cooperation between central bankers is neither productive nor counterproductive making fixed and flexible rates equivalent however when central bankers are chosen non cooperatively a fixed rate is better central bankers being too conservative under a flexible rate

global implications of self oriented national monetary rules author s obstfeld maurice rogoff kenneth abstract it is well known that if international linkages are relatively small the potential gains to international monetary policy coordination are typically quite limited but what if goods and financial markets are tightly linked is it then problematic if countries unilaterally design their institutions for monetary stabilization are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination we argue that under plausible assumptions the answer is no unless risk aversion is very high lack of coordination in rule setting is a second order problem compared to the overall gains from monetary policy stabilization

inflation targets and contracts with uncertain central banker preferences within a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker s preferences the optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks however variability due to shocks is enhanced by uncertain central banker preferences quadratic contracts are shown to overcome this problem partly but the advantages of delegation may still be dominated by the excess variability due to shocks hence the credibility stabilization tradeoff is restored

observable contracts strategic delegation and cooperation the role of commitments in noncooperative games is well acknowledged and documented one way to achieve commitments is by letting delegates represent the players of a game in this paper the authors study a delegation game in which the players can use agents strategically to play on their behalf and the contracts they sign with them are common knowledge they show that in such cases every pareto optimal outcome of the game can become the unique subgame perfect nash equilibrium of the delegation game the authors demonstrate this result by discussing the cournot type duopolistic game copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

designing monetary policy committees we integrate monetary policy making by committee into a new keynesian model to assess the consequences of the committee s institutional characteristics for inflation output and welfare our analysis delivers the following results first we demonstrate that transparency about the committee s future composition is typically harmful second we show that short terms for central bankers lead to effective inflation stabilization at the expense of comparably high output variability third larger committees generally allow for more efficient stabilization of inflation but possibly for less efficient output stabilization fourth large committees and short terms are therefore socially desirable if the weight on output stabilization in the social loss function is low fifth we show that a central banker with random preferences may be preferable to a central banker who shares the preferences of society

inventories and money holdings in a search economy the authors analyze a continuous time model with a walrasian labor market and a random search retail market with prices set on a take it or leave it basis the equilibrium distribution of money holdings is the asymptotic steady state of this stochastic process there is a unique uniform price steady state equilibrium the faster the search process the higher the absolute price wage and real wage the instantaneous effect of an equal per capita infusion of money is to raise the price wage real wage and transactions rate the immediate post infusion price and wage can overshoot their new asymptotic values copyright 1990 by the econometric society

monetary policy delegation and polarisation there is by now a comprehensive literature beginning with rogoff 1985 arguing that a government should delegate monetary policy to a central banker who is independent and more conservative than the government itself this will reduce the inflationary bias typically at the cost of stabilisation for a democratic society this result would suggest that the median voter should prefer that monetary policy is delegated to an independent central banker who is more conservative than herself typically the central banker is chosen by the government and the government is chosen by the electorate thus there is some albeit perhaps a weak link between the preferences of the electorate and the central banker although the central banker presumably should be chosen for a long period of time waller and walsh 1996 he has to be chosen at some point in time this paper contains a political economy model where the central issue in politics is the choice of central banker and

the effects of lottery prizes on winners and their neighbors evidence from the dutch postcode lottery each week the dutch postcode lottery pcl randomly selects a postal code and distributes cash and a new bmw to lottery participants in that code we study the effects of these shocks on lottery winners and their neighbors consistent with the life cycle hypothesis the effects on winners consumption are largely confined to cars and other durables consistent with the theory of in kind transfers the vast majority of bmw winners liquidate their bmws we do however detect substantial social effects of lottery winnings pcl nonparticipants who live next door to winners have significantly higher levels of car consumption than other nonparticipants

credibility of optimal monetary delegation while optimal monetary policy is subject to a credibility problem it is often argued that the government should appoint a central banker whose incentives differ from the government s the author argues however that such delegation does not overcome credibility problems given that delegation is discretionary and without costs reappointment costs of delegation are shown to improve suboptimal outcomes but credibility of optimal monetary policy turns out be worsened at best delegation therefore has no effects on credibility but only if reappointment has no costs copyright 1997 by american economic association

human capital and unemployment dynamics why more educated workers enjoy greater employment stability why do more educated workers experience lower unemployment rates and lower employment volatility empirically these workers have similar job finding rates but much lower and less volatile separation rates than their less educated peers we argue that on the job training being complementary to formal education is the reason for this pattern using a search and matching model with endogenous separations we show that investments in match specific human capital reduce incentives to separate but leave the job finding rate essentially unaffected the model generates unemployment dynamics quantitatively consistent with the data finally we provide novel empirical evidence supporting the mechanism studied in the paper this article is protected by copyright all rights reserved

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

the role of unemployment insurance in an economy with liquidity constraints and moral hazard the potential welfare benefits of unemployment insurance along with the optimal replacement ratio are studied using a quantitative dynamic general equilibrium model to provide a role for unemployment insurance agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets in the absence of moral hazard replacement ratios as high as 65 are optimal and the welfare benefits of unemployment insurance are quite large however if there is moral hazard and the replacement ratio is not set optimally but is instead set to an empirically plausible value the economy can be much worse off than it would be without unemployment insurance

international cooperation and exchange rate stabilization abstract we show that exchange rate stabilization can be viewed as a public good consequently when countries do not coordinate their economic policies the exchange rate fluctuates more than in the case of international cooperation we consider a quite standard two country model where the policymakers of each country have at their disposal one policy instrument the money stock and want to reduce the fluctuations of both the domestic output and the domestic price level then we compare the non cooperative nash equilibrium to the set of pareto optima our analysis provides a formal argument for some exchange rate stabilization

reservation wages and unemployment insurance this paper argues that a risk averse worker s after tax reservation wage encodes all the relevant information about her welfare this insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits some existing estimates imply significant gains to raising the current level of unemployment benefits in the united states but highlight the need for more research on the determinants of reservation wages our approach complements those based on baily s 1978 test

optimal monetary policy cooperation through state independent contracts with targets abstract simple state independent monetary institutions are shown to secure optimal cooperative policies in a stochastic linear quadratic two country world with international policy spill overs and national credibility problems institutions characterize delegation to independent central bankers facing quadratic performance related contracts punishing or rewarding deviations from primary and intermediate policy targets

political macroeconomics a survey of recent developments the paper surveys political macroeconomics covering its development from rogoff s conservative central banker to the most recent discussions of monetary policy and institutional design topics include the inflation stabilization trade off central bank independence with escape clauses and overruling with costs inflation targets performance contracts for monetary authorities and the consequences of output persistence for these issues further topics are the political business cycle when output is persistent the political macroeconomics of fiscal policy the government spending bias and the game theoretic interaction between fiscal and monetary policy all work is discussed within a coherent analytical framework

two fallacies concerning central bank independence this paper takes issue with two basic conclusions prevalent in the literature on central bank behavior first the paper argues that it is inappropriate to presume that central banks will in the absence of any precommitment technology necessarily behave in a discretionary fashion that implies an inflationary bias since there is no functional connection between average rates of money creation or inflation and policy responsiveness to cyclical disturbances it is entirely feasible for the bias to be avoided in other words there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any absolute precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it this abstract was borrowed from another version of this item

sustainable international monetary policy cooperation abstract we provide new insight on international monetary policy cooperation in a familiar two country setting a country facing a relatively more volatile markup shock has an incentive to deviate from an assumed cooperation regime to a non cooperation regime a similar result obtains if countries differ in size have non unitary elasticity of substitution between domestic and foreign goods and have different degrees of trade openness home bias in consumption this motivates our study of an endogenous history dependent sustainable cooperation regime its history contingent welfare redistributions are supported by incentive compatible variations in resource transfers through the terms of trade or net exports such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality

inflation government transfers and optimal central bank independence abstract the problem of monetary policy delegation is formulated as a two stage non cooperative game between the government and the central bank the solution to this policy game determines the optimal combination of central bank conservatism and independence the results show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism the results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker

designing domestic institutions for international monetary policy cooperation a utopia abstract in a wide variety of international macroeconomic models monetary policy cooperation is optimal non cooperative policies are inefficient but optimal policies can be attained non cooperatively by optimal design of domestic institutions contracts we show that given endogenous institutional design inefficiencies of non cooperation cannot and will not be eliminated we model the delegation stage explicitly and show that subgame perfect credible contracts chosen by governments based on individual rationality are non zero but are different from optimal contracts and hence lead to inefficient equilibria optimal contracts require cooperation at the delegation stage which is inconsistent with the advocated non cooperative nature of the solution a general solution method for credible contracts and an example from international monetary policy cooperation are considered our results feature delegation as an equilibrium phenomenon explain inefficiencies of existing delegation schemes and hint to a potentially stronger role for supranational authorities in international policy coordination

the political economy of inflation labour market distortions and central bank independence using the citizen candidate model we study the government s choice of institutions for the labour market and the central bank and derive the implications for inflation and employment we derive conditions for the existence of equilibria in which the labour market is distorted and the central bank is dependent or independent under a range of conditions affecting central bank dependence the post election cycle in inflation and employment and inflation bias our results imply that average inflation and inflation variability are lower under an independent central bank whereas employment variability can be lower or higher consistent with evidence for oecd countries many democratic societies delegate key tasks to non elected and independent institutions a prominent example being independent central banks the belief in the advantage of central bank independence is nursed by the cross country evi

the optimality of a monetary union without a fiscal union the paper explores the case for monetary and fiscal unification monetary policy suffers from an inflation bias because the monetary authorities are not able to commit with international risk sharing fiscal discipline suffers from moral hazard an inflation target alleviates the inflation bias but weakens fiscal discipline in a monetary union however this adverse effect on fiscal discipline is weaker this advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilise country specific shocks while monetary unification may thus be optimal international risk sharing may be undesirable because it weakens fiscal discipline

why money talks and wealth whispers monetary uncertainty and mystique we demonstrate that in important cases propositions 3 and 4 in eijffinger hoeberichts and schaling journal of money credit and banking may 2000 may fail moreover their monetary policy delegation arrangement which advocates that central banker preference uncertainty may be desirable is dominated by other arrangements without any such uncertainty finally their way of modelling preference uncertainty leads to arbitrary effects on average monetary policy without these preference uncertainty is never desirable

is the walsh contract really optimal the purpose of this paper is to show thatthe linear penalization to inflation foundin walsh 1995 is not the government soptimal choice when the fixed part of thetransfer scheme is any given constant and thepayment to the central bank represents acost for the government

liquidity and insurance for the unemployed we study the optimal design of unemployment insurance for workers sampling job opportunities over time we focus on the optimal timing of benefits and the desirability of allowing workers to freely access a riskless asset when workers have constant absolute risk aversion preferences it is optimal to use a very simple policy a constant benefit during unemployment a constant tax during employment that does not depend on the duration of the spell and free access to savings using a riskless asset away from this benchmark for constant relative risk aversion preferences the welfare gains of more elaborate policies are minuscule our results highlight two largely distinct roles for policy toward the unemployed a ensuring workers have sufficient liquidity to smooth their consumption and b providing unemployment benefits that serve as insurance against the uncertain duration of unemployment spells

multiplicative uncertainty in a model without inflationary bias abstract this paper shows that an increase in the degree of multiplicative uncertainty regarding the effectiveness of monetary policy will reduce social loss when policymaker s preferences are highly uncertain this result is still valid even when there is no distortion in the market

optimal unemployment insurance this paper considers the design of an optimal unemployment insurance system the problem is modeled as a repeated principalagent problem involving a risk averse agent the unemployed worker and a risk neutral principal which cannot monitor the agent s search effort the optimal long term contract subject to the associated incentive constraints is characterized this contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that under some mild regularity conditions increases with the lenght of the unemployment spell some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large the performance of this optimal contract is also compared to alternative liquidity provision mechanisms

debt contingent inflation contracts and targets abstract this paper analyzes fiscal and monetary policy interaction in a simple policy game with debt and output shocks seigniorage provides revenue for the government but results in an inflation bias we analyze three mechanisms designed to eliminate some or all of the biases in monetary policy an inflation performance contract inflation target both contingent on the stock of debt and a zero inflation rule the performance contract and inflation target result in higher interest rate remove all biases in monetary policy and achieve the pre commitment policy hence they are equivalent the first two solutions also yield a higher expected welfare than a zero inflation policy

optimal unemployment insurance with heterogeneous agents the framework of a general equilibrium heterogeneous agent model is used to study the optimal design of an unemployment insurance ui scheme and preferences for unemployment policy reforms in a first step the optimal defined benefit and defined replacement ratio ui systems are obtained in simulations then the question whether switching to such an optimal system from the status quo would be approved by a majority of the population is explored finally the transitional dynamics following a policy change are analysed accounting for this transition has an important influence on the support for a policy change

conservative central bankers in a two country world abstract in a closed economy framework rogoff has developed the argument that it can be beneficial for society to appoint a conservative central banker we extend this analysis to a two country world in order to take into account the game between the monetary authorities of the two countries we show that conservative central bankers may now deteriorate the situations of both countries and that the distinction between symmetric and asymmetric shocks becomes crucial while symmetric shocks weaken the case for conservative central bankers asymmetric shocks strengthen it the paper also considers the case where central bankers are nominated noncooperatively by the countries

central banker contracts incomplete information and monetary policy surprises in search of a selfish central banker approaching monetary policy as a principal agent problemprovides a useful framework for interpreting alternativedelegation schemes in this paper we consider theeffectiveness of central banker incentive schemes when theprincipal delegates monetary policy through contracts butremains uncertain about the central banker s responsiveness tosuch schemes we adopt a simple principal agent model andassume that the central banker s trade off between socialwelfare and the incentive scheme is private information weconsider two types of central bankers one who responds to theincentive scheme selfish and one who does not and onlycares about social welfare benevolent we demonstratethat when a benevolent central banker accepts a contractdesigned for a selfish central banker positive inflationsurprises occur and output exceeds its natural rate wefurther show that a benevolent central banker with aninflation bias has an incentive to masquerade as selfish mechanisms exist that solve that problem by achievingpreference revelation we consider a simple mechanism indominant strategies that induces the benevolent type eithernot to breach or not to accept the appointment contract inthe first place this multi period mechanism works with eitherinflation targets or the appointment of a conservativecentral banker our results suggest that more complicatedincentive schemes embedded within broader constitutionalarrangements are required in the presence of privateinformation for them to work effectively

inflation forecast contracts we introduce a new type of incentive contract for central bankers inflation forecast contracts which make central bankers remunerations contingent on the precision of their inflation forecasts we show that such contracts enable central bankers to influence inflation expectations more eectively thus facilitating more successful stabilization of current inflation inflation forecast contracts improve the accuracy of inflation forecasts but have adverse consequences for output on balance paying central bankers according to their forecasting performance improves welfare

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

the welfare case for the european monetary system abstract this paper argues that the european monetary system can be interpreted as a cooperative game yielding benefits to its members a simple model is set up in which it is shown that the ems solution is superior to nash if the menber countries differ this superiority to nash may require an occasional realignment it will also then require that there be no sterilization of foreign exchange interventions since otherwise the system would collpase the ems is interpreted in this paper as an arrangement manner and not o bretton woods type of arrangement when there is a leader follower relationship inside

the redistributive role of unemployment benefits abstract this paper evaluates the role of unemployment benefits as a tool for redistribution in a setting with worker heterogeneity the provision of unemployment benefits achieves two goals it provides insurance to workers in the event of job loss and it redistributes wealth from individuals with more to those with fewer economic opportunities our model features a frictional labour market and an incomplete financial market when calibrated to match stylised facts of the us economy the optimal level of unemployment benefits is broadly similar regardless of whether workers differ in economic opportunities this suggests that taking into consideration the redistributive nature of unemployment benefits has only a limited role in altering the optimal level of unemployment benefits

consumption versus expenditure previous authors have documented a dramatic decline in food expenditures at the time of retirement we show that this is matched by an equally dramatic rise in time spent shopping for and preparing meals using a novel data set that collects detailed food diaries for a large cross section of u s households we show that neither the quality nor the quantity of food intake deteriorates with retirement status we also show that unemployed households experience a decline in food expenditure and food consumption commensurate with the impact of job displacement on permanent income these results highlight how direct measures of consumption distinguish between anticipated and unanticipated shocks to income whereas measures of expenditures obscure the distinction

optimal linear contracts under common agency and uncertain central bank preferences we analyze the effects of imperfectly known central banker s preferences on optimal linear contracts offered by the government and an interest group these effects depend on the type of uncertainty faced by the principals when the central bank s output target is uncertain the results by campoy and negrete public choice 137 197 206 2008 under perfectly known preferences obtain uncertainty about the central banker s degree of conservatism or about its degree of selfishness has a multiplicative impact on the principals instruments in the agent s best response function this may generate an inflation bias independently of the type of contract offered by the interest group

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target