efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

almost budget balanced vcg mechanisms to assign multiple objects subsidy free vcg mechanisms assign p identical objects to n agents the efficiency loss is the largest ratio of budget surplus to efficient surplus over all profiles of non negative valuations the smallest efficiency loss l n p satisfies l n p l n n2 43n if pn is bounded away from 12 l n p converges to zero exponentially in n participation is voluntary in the optimal mechanism achieving l n p if p 1 but not if p 2 among voluntary mechanisms the optimal efficiency loss is not significantly larger than l n p if pn 12 but it does not converge to zero in n if pn 12

robust trading mechanisms we consider the problem of designing a trading institution for a single buyer and seller when their valuation of the good is private information it is shown that posted price mechanisms are essentially the only mechanisms such that each trader has a dominant strategy a posted price mechanism is one where a price is posted in advance and trade occurs if and only if all traders agree to trade

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

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

central bank independence economic behavior and optimal term lengths the authors parameterize central bank independence in terms of partisanship and term length focusing on the implications of alternative policy structures for real economic activity while long terms of office for the central banker can reduce the role of electoral surprises term lengths that are too long are costly if societal preferences are subject to permanent shifts the appointment of a conservative central banker increases the optimal term length and leads to lower average inflation but need not increase the volatility of output copyright 1996 by american economic association

information content of wages and monetary policy we examine whether it is sufficient for central banks to observe and forecast nominal variables only analyzing the interplay of wage setting unions and a central bank we show that although central banks may not gain more information by directly acquiring data about indicators of real shocks in the economy such activities are nevertheless beneficial for central banks and yield lower social losses moreover the extent of research activities by central banks should depend on the process of union formation

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

worst case optimal redistribution of vcg payments in multi unit auctions abstract for allocation problems with one or more items the well known vickrey clarke groves vcg mechanism aka clarke mechanism generalized vickrey auction is efficient strategy proof individually rational and does not incur a deficit however it is not strongly budget balanced generally the agents payments will sum to more than 0 we study mechanisms that redistribute some of the vcg payments back to the agents while maintaining the desirable properties of the vcg mechanism our objective is to come as close to budget balance as possible in the worst case for auctions with multiple indistinguishable units in which marginal values are nonincreasing we derive a mechanism that is optimal in this sense we also derive an optimal mechanism for the case where we drop the non deficit requirement finally we show that if marginal values are not required to be nonincreasing then the original vcg mechanism is worst case optimal

optimal inflation targets conservative central banks and linear inflation contracts comment inflation targeting regimes like those of new zealand canada the united kingdom and sweden are interpreted as having explicit inflation targets and implicit employment targets without employment persistence an inflation target conservative central bank eliminates the inflation bias mimics an optimal inflation contract and dominates a rogoff weight conservative central bank with employment persistence a state contingent inflation bias and a stabilization bias also arise a constant inflation target and a constant inflation contract are still equivalent a state contingent inflation target combined with a weight conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment copyright 1997 by american economic association

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

optimal allocation of an indivisible good abstract in this paper we consider the problem of allocating an indivisible good efficiently between two agents with monetary transfers we focus on allocation mechanisms that are dominant strategy incentive compatible when agents types are private information inefficiency of an allocation mechanism may come from two sources misallocation of the indivisible good and an imbalanced budget unfortunately as green and laffont 1979 demonstrate no allocation mechanism can always overcome both kinds of inefficiency we identify allocation mechanisms that maximize the expected total utilities of agents and characterize optimal mechanisms for a large class of agents type distributions for strongly regular type distributions we show that the optimal mechanisms must be budget balanced they are either fixed price mechanisms or option mechanisms the result may not hold for other type distributions for certain type distributions we show that optimal mechanisms are hybrids of vickrey clarke groves mechanisms and budget balanced mechanisms

optimal inflation contracts and inflation targets with uncertain central bank preferences accountability through independence this paper examines some problems which arise when monetary policy is delegated to an independent central bank and where the central bank s preferences are unknown two key conclusions emerge from the paper first even with optimal targets or contracts central bank independence may not always be desirable because central banks may have distorted preferences relative to society second if the delegation solution is preferable and the independent central bank responds to information about supply shocks the central bank may be made more accountable by allowing it to set its own inflation targets i e by making it goal independent

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

non optimal mechanism design the optimal allocation of resources in complex environments like allocation of dynamic wireless spectrum cloud computing services and internet advertising is computationally challenging even given the true preferences of the participants in the theory and practice of optimization in complex environments a wide variety of special and general purpose algorithms have been developed these algorithms produce outcomes that are satisfactory but not generally optimal or incentive compatible this paper develops a very simple approach for converting any potentially non optimal algorithm for optimization given the true participant preferences into a bayesian incentive compatible mechanism that weakly improves social welfare and revenue jel d82 h82 l82

state contingent inflation contracts and unemployment persistence this paper shows that if unemployment or some other real variable follows a dynamic autoregressive process the government can still achieve its precommitment outcome in monetary policy by offering the central banker a linear inflation contract where the penalty for incremental inflation depends positively on lagged unemployment this note therefore offers an extension of recent results of c walsh 1995 to the case of persistence in real economic variables such as output or unemployment copyright 1997 by ohio state university press

labor supply response to welfare programs a dynamic analysis previous static analyses of the work disincentive effects of welfare programs are extended to a dynamic context using a sample of continuous longitudinal labor market histories estimates are derived for welfare nonwelfare differences in labor market flows among the states of employment unemployment and nonparticipation the estimates are used to identify the main sources of the lower employment and labor force participation rates and higher unemployment rate of welfare recipients the findings indicate that welfare programs have substantial effects on virtually every labor market transition examined but that the primary source of the static work disincentive effect is slower entry into employment

on the equivalence of bayesian and dominant strategy implementation we consider a standard social choice environment with linear utilities and independent one dimensional private types we prove that for any bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents and the same ex ante expected social surplus the short proof is based on an extension of an elegant result due to gutmann kemperman reeds and shepp 1991 we also show that the equivalence between bayesian and dominant strategy implementation generally breaks down when the main assumptions underlying the social choice model are relaxed or when the equivalence concept is strengthened to apply to interim expected allocations

insider power unemployment dynamics and multiple inflation equilibria this paper incorporates employment dynamics due to insider power into the barro gordon theory of inflation unlike in the static barro gordon case and even though our infinitehorizon model is linear quadratic there can be two markov perfect equilibria so that the same unemployment may correspond to either low or high inflation both equilibrium inflation rates measured per unit of the gap between the insiders and government s employment targets are higher than the corresponding rate in the static case the low inflation equilibrium has intuitive comparative statics properties in that inflation is increasing in insider power and the discount factor but the high inflation equilibrium behaves in the opposite way the highinflation equilibrium can be eliminated by a future precommitment to a fixed inflation regime e g erm but only if this precommitment can be made with certainty contrary to the static model inflation may be lower when the union puts a positive weight on a wage target than when it cares only about employment even when this wage target is consistent with a lower employment level than the employment target

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

public debt indexation and denomination with an independent central bank abstract this paper examines the interaction between public debt management and the design of monetary institutions the analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation indexed debt if delegation of monetary policy is viable the optimal policy is to issue nominal debt this increases the sensitivity of taxes and output to unexpected inflation thus minimizing the inflation needed to offset supply shocks evidence on central bank independence debt composition and output variability suggests that the normative argument has some positive content

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

the clash of central bankers with labour market insiders and the persistence of inflation and unemployment this paper analyses the implications of monetary policy for the dynamic behaviour of inflation in a natural rate model characterized by endogenous unemployment persistence we present evidence for the main industrial economies that suggests that inflation displays persistence which is of the same order of magnitude as the persistence of deviations of unemployment from its natural rate we provide a theoretical explanation of this fact based on a model of the dynamic interactions between central bankers and labour market insiders the clash in the objectives of central bankers and labour market insiders is what causes both inflation and unemployment to display the same persistence in this model the analysis suggests that inflation persistence could be addressed in a welfare improving way if central banks adopted monetary policy rules that targeted unanticipated changes in unemployment rates instead of deviations of unemployment from its natural rate

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

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

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

central bank transparency and shocks according to the literature in an expectations augmented phillips curve model opacity is always preferred to transparency on central bank forecasts by modelling the private sector s behavior explicitly we show that transparency reduces the shocks consequently transparency can be preferred

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

transparency reputation and credibility under floating and pegged exchange rates this paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg under which credibility is higher and inflation is lower than under a float this holds true although devaluations of the pegged rate are assumed to be costless the reason is that as realized inflation is not perfectly controllable planned inflation under a float is private information in contrast since the exchange rate can be perfectly controlled pegging resolves the private information problem is more transparent and makes reputation more effective

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

caution and conservatism in the making of monetary policy does society benefit from the delegation of monetary policy to cautious and conservative central bankers we offer a critical view on the delegation literature and relax seemingly innocuous assumptions about uncertainty and preferences first caution improves credibility but does not obviate the need for central bank conservatism second previous models of delegation have focused on suboptimal forms of conservatism we derive optimal concepts of conservatism that mitigate or eliminate any residual problem of credibility third we rationalize why credible monetary policy may be conducive to stable inflation and output

robust collusion with private information the game theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars without resorting to either impatience symmetry restrictions inability to communicate or failure to optimize this paper introduces a new explanation that relies on none of these assumptions if the cartel s member firms have private information about their costs price wars can be optimal in the face of complexity specifically equilibria that are robust to pay off irrelevant disruptions of the information environment generically cannot attain or approximate efficiency an optimal robust equilibrium must allocate market shares inefficiently and may call for price wars under certain conditions for a two firm cartel cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium that optimal equilibria are inefficient generically applies not only to collusion games but also to the entire separable pay off environment a class that includes most typical economic models copyright 2012 oxford university press

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

might a conservative central banker reduce employment variability abstract this note identifies circumstances under which increased inflation aversion by the central bank can contrary to the conventional wisdom reduce employment variability this result reflects three key features of the model developed a monopolistically competitive goods market strategic wage setting by non atomistic unions partial anticipation of shocks by unions

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

inflation uncertainty and unemployment uncertainty why transparency about monetary policy targets matters abstract disclosure of monetary policy targets reduces unemployment uncertainty at the expense of higher inflation uncertainty thereby posing a dilemma for monetary policymakers

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

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