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

rules and discretion with noncoordinated monetary and fiscal policies the time inconsistency of optimal monetary policy is due to the effects of tax distortions thus the issue of how to improve upon the time consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy we present a model with three players the central bark the fiscal authority and wage setters in which distortionary taxes are explicitly modelled we show that binding commitments to monetary rules are not necessarily welfare improving if monetary and fiscal policy are not coordinated we also examine the effects of different degrees of independence of the central bank

structural convergence under reversible and irreversible monetary unification abstract we explore endogenous monetary unification in the context of a model in which a country with serious structural distortions and hence high inflation is admitted into a monetary union once its economic structure has converged sufficiently towards that of the existing participants if unification is reversible so that the new entrant can always be forced to leave the union again later convergence stops for a while after the high inflation country has joined with irreversible unification in contrast temporary divergence occurs and unification will be delayed

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

who wants an independent central bank monetary policy making and politics the costs and benefits of cooperative monetary and fiscal policy are analysed in the framework of a partisan business cycles model it is shown that political parties with different ideologies prefer to choose different arrangements for macroeconomic policy making more specifically right wing parties favour independent central banks more than left wing parties an independent central bank is also the generally preferred option from a social welfare point of view in addition the form of policy making arrangements between the fiscal and monetary authorities is shown to influence the extent of partisan cycles

structural distortions and decentralized fiscal policies in emu the combination of discretionary monetary policy labor market distortions and nominal wage rigidity yields excessive inflation as monetary policy tries to exploit nominal wage contracts to address labor market distortions an inflation target reduces inflation but creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are preventing the associated excessive accumulation of public debt calls for debt ceilings if countries differ substantially in terms of structural distortions uniform debt ceilings must be complemented by country specific debt targets in order to prevent decentralized fiscal authorities from employing debt policy strategically

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

loss of monetary discretion in a simple dynamic policy game abstract we analyze a simple policy game featuring monetary credibility problems and argue that loss of monetary discretion is not advantageous two elements form the basis of our analysis firstly we endogenize the source of credibility problems and secondly we consider a dynamic framework where credibility problems are not time invariant by doing this we are able to demonstrate that credibility problems are temporary and in steady state the government has removed these through sound policies a binding policy rule will only serve as an obstacle towards this steady state

time consistency of monetary policy in the open economy abstract this paper shows that in an open economy time consistency problems are created not only by nominal government debt but also by nominal private debt to foreigners given any external nominal debt inflation redistributes wealth between domestic residents and foreigners a government that cares about the welfare of its residents will be tempted to inflate whenever it or its residents have issued nominal debt to foreigners an analysis of the u s net investment position shows that these international considerations have become increasingly relevant for the united states because the recent external deficits have largely been financed in nominal terms

fiscal policy when monetary policy is tied to the mast the paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy the equilibrium under discretion is characterised by inflation and a deficit comm

inflationary finance under discrepion and rules inflationary finance involves first the tax on cash balances from expected inflation and second a capital levy from unexpected inflation from the standpoint of minimizing distortions these capital levies are attractive ex post to the policymaker in a full equilibrium two conditions hold 1 the monetary authority optimizes subject to people s expectations mechanisms and 2 people form expectations rationally given their knowledge of the policymaker s objectives the outcomes under discretionary policy are contrasted with those generated under rules in a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices under an enforced rule it becomes possible to make some guarantees hence the links between monetary actions and inflationary expectations can be internalized there is a distinction between fully contingent rules and rules of simple form a simple rule allows the internalization of some connections between policy act ion and inflationary expectations but discretion permits some desirable flexibility of monetary growth this abstract was borrowed from another version of this item

an analysis of the stability and growth pact we use a stylised model to analyse the stability and growth pact for countries that have formed the european monetary union emu in our model shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully therefore while governments have no incentive to sign a stability pact in the absence of a monetary union they do so with monetary union to restrain this externality with uncertainty a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy with differences in initial conditions conflicts of interest arise we study the nash bargaining solution

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

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

time consistency of fiscal and monetary policy the problem of time inconsistency arises from two different sources first as shown by guillermo a calvo 1978 the re is an incentive for each government to engage in an initial unanti cipated inflation second as discussed by robert e lucas and nancy l stokey 1983 there is an incentive for each government to deviat e from the path of taxes announced by the preceding government in th is paper it is shown that these two sources of time inconsistency ca n be removed by a particular method of debt management involving bot h nominal and indexed government bonds of various maturities copyright 1987 by the econometric society

money debt and deficits in a dynamic game this paper analyzes a dynamic linear quadratic game between the fiscal and monetary authorities the equilibrium outcome of the game determines the time path of money creation fiscal deficits and public debt the game is solved for different equilibrium concepts the equilibria are then compared and interpreted with reference to alternative institutional arrangements the main results are i coordination increases the speed of adjustment towards the steady state and takes the steady state value of public debt closer to the desired target ii precommitments take the non cooperative equilibrium closer to the coordinated outcome iii increasing the weight that each policymaker assigns to his own private objectives slows down the adjustment process places more burden on the opponent but has ambiguous effects on the steady state value of public debt

monetary policy and policy credibility theories and evidence within the past decade there has been a significant shift in attitude by many western industrialized countries toward the objectives and conduct of national economic policy the events of the 1970s accelerating inflation and stagnant economic growth motivated the view that inflation had created its own stubborn self sustaining momentum that either was not amendable to the influences of conventional macroeconomic policy or else would yield to such influences only at unacceptable costs this led to the development of a program aimed at reestablishing control over prices while minimizing any adverse consequences of anti inflationary policies on output and employment seen as a new monetary experiment the essential ingredients included prudent financial management abstinence from discretionary intervention commitment to intermediate targets and above all prior announcement of these policies evidence of this program and its effects can be found oni the continents of europe north america and latin america and provide further important lessons in anti inflationary management this paper is a survey of recent theoretical developments in monetary policy which among other issues attempt to explain one rationale for this program and the likely consequences thereof to the extent that the new program of monetary and fiscal reform was deliberately made public and impressed upon citizens as an overriding commitment of governments in advance of its execution reflects a prevailing opinion that economic policies are more effective if they are credible to private economic agents this view emphasized forcefully by william fellner 1976 1979 may be seen as being mainly due to the assimilation of the rational expectations hypothesis

policy inference using var models policy inference using var models i introduction macroeconomics has a long tradition of examining the response of macroeconomic variables to shocks in alternative policy measures much recent work in this area has been based on the empirical regularities between variables found in vector autoregressive var models the var results in turn have been used to investigate the impact of changes in different policy variables var modeling procedures have been used to test the relative effects of changes in money interest rates broad credit measures and fiscal actions on economic activity 1 moreover because var analysis does not require the specification of an underlying theoretical model it also has been used to study the linkages among macroeconomic variables across national borders 2 although debate over the alleged atheoretical nature of vars continues for example see cooley and leroy 1985 leamer 1985 and braun and mittnik 1985 var models are frequently used for policy analysis how the dynamic specification of a var model is generated and how the dynamics may influence the resulting policy recommendation is the subject of this study while modeling the dynamic relationship among macro variables is a longstanding subject relatively few studies have tested for the effects of alternative lag structures on a given model to our knowledge there has been little systematic analysis of the sensitivity of policy effects to changes in the lag structure of a given var model 3 in this paper we investigate this specification problem using a simple four variable var model similar in spirit to sims s 1980b 4 this model consists of quarterly observations for money real output prices and nominal short term interest rates for the period 1960 through 1985 in selecting this model we opt to focus on the impacts of lag specification on policy inferences derived from a given var model in doing so we ignore the effects of altering the specification in terms of variables included or excluded this approach seems reasonable however since our purpose is to investigate the effects of lag structure not specification problems in general to compare the policy conclusions derived from the alternative dynamic structures we use six different lag selection criteria these criteria briefly described in section ii vary the bias efficiency tradeoff inherent in such statistical procedures section iii discusses the estimation of the var model using the alternative dynamic structures comparison of policy recommendations derived from the models is presented in section iv using variance decompositions anticipating that discussion the evidence from our model suggests that policy recommendations are very sensitive to changes in the dynamic structure conclusions close the paper in section v ii lag length selection procedures many previous researchers have chosen to impose equal lag lengths on each of the variables in their models 5 this approach produces parameter estimates that may suffer from bias or inefficiency depending on whether the model is under or over parameterized we use six different approaches to determine the lag specification five are based on statistical criteria with the exact criteria listed in table i for comparability we also employ the nonstatistical ad hoc procedure of arbitrarily fixing the maximum lag on all variables to be four quarters one of the statistical approaches used is the standard f test 6 the f test imposes zero restrictions on lags beyond some point and tests this restricted model against a more general lag structure the f statistic is calculated sequentially until adding another lag does not statistically improve the fit of the model two of the selection procedures use a mean squared error criterion these are mallows s 1973 c sub p statistic and akaike s 1970

political shocks and public debt the case for a conservative central bank revisited abstract we explore the dynamics of public debt and optimal institutions in the presence of political shocks arising from electoral uncertainty under commitment optimal stabilization is established by combining an inflation target with a debt target the inflation target should be contingent on the political shocks while the debt target forces the government to fully absorb the political shocks in the period in which it occurs in the absence of such inflation and debt targets but with monetary commitment a conservative central bank enhances stabilization an even more conservative central bank is optimal if monetary policy cannot commit

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

fiscal decentralization and intergovernmental fiscal relations a cross country analysis abstract fiscal decentralization consists primarily of devolving revenue sources and expenditure functions to lower tiers of government by bringing the government closer to the people fiscal decentralization is expected to boost public sector efficiency as well as accountability and transparency in service delivery and policy making decentralization also entails greater complexity in intergovernmental fiscal relations and coordination failures in fiscal relations are likely to have a bearing on fiscal positions nationally and subnationally evidence provided in this paper for a sample of 30 countries suggests that coordination failures in intergovernmental fiscal relations are likely to result in a deficit bias in decentralized policy making particularly in the case of developing countries which may not meet important requirements for successful decentralization

the superiority of contingent rules over fixed rules in models with rational expectations the paper investigates the robustness of the proposition that in stochastic models contingent or feddback rules dominate fiped or openloop rules four arguments in favour of fixed rules are considere 1 the presence of an incompetent op malevolent policy maker 2 a trade off between flexibility and simplicity or credibility 3 the new classical proposition that only unanticipated stabilization policy has real effects 4 the time inconsistency of optimal plans in non causal models that is models in which the current state of the economy depends on expectations of future states the main conclusion is that the rational expectations revolution represented by arguments 3 and 4 does not affect the potential superiority of time inconsistent closed loop policies over time inconsistent open loop policies the case against conditionality in the design of policy must therefore rest on argument 1 or 2 which predate the new classical macroeconomics

monetary union without fiscal coordination may discipline policymakers abstract with benevolent policymakers and fiscal leadership monetary unification reduces inflation taxes and public spending these disciplining effects of a monetary union which become stronger if the number of participants in the union increases are likely to raise welfare two types of arrangements are considered for the union s common central bank ccb making the ccb more conservative and imposing an inflation target on the ccb in contrast to the results of svensson 1997 svensson l e o 1997 optimal inflation targets conservative central banks and linear inflation contracts american economic review 87 98 114 an optimally designed conservative ccb may outperform inflation targeting finally we find that fiscal coordination offsets the disciplining effects of monetary unification hence subsidiarity in fiscal policymaking may enhance welfare

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

designing fiscal and monetary institutions for a european monetary union this paper explores the conditions under which aeuropean monetary union emu is an optimum currencyarea the scope for an emu increases with theconvergence of structural and fiscal policies smallmoney holdings a conservative european central bank and dependent national central banks how nationalpolicies affect the rest of the union once the emu hasbeen established is also investigated the case forsurveillance of national structural and fiscalpolicies appears to depend mainly on the monetaryarrangements in the union

note on loss of monetary discretion in a simple dynamic policy game jensen 1994a finds that loss of monetary discretion leads to lower welfare however by extending his model we show that if real base money holdings are relatively low as is likely to be the case for modern economics a zero inflation rule may well be preferable to monetary discretion if the emphasis on achieving the output and public spending targets falls a zero inflation rule is more likely to be preferred the increased support for binding policy rules thus conforms with a less tolerant attitude towards inflation

the relative importance of foreign and domestic disturbances for aggregate fluctuations in the open economy switzerland 1964 1981 abstract this paper studies whether the advent of floating exchange rates served to insulate switzerland from economic shocks of foreign origin it estimates a vector autoregression comprising four swiss and three world aggregate time series and interprets the results in terms of the properties of the vector moving average representation implied by the estimates the chief finding is that foreign shocks explain most of the systematic variation of the swiss variables in both regimes