budget processes and commitment to fiscal discipline abstract we present a framework of investigation into the political economy of the budget process our model suggests that institutional rules governing the budget process can be found to limit the importance of fiscal illusion empirical evidence supports that proposition the choice of rules depends on the political environment as well as the dominant source of uncertainty in the budget process

the economics of exchange rate regimes a review essay the exchange rate regime issue has taken centre stage in discussions of international economic policy much of the profession appears to have been converted to the hypothesis of the vanishing middle regime for countries well integrated into world capital markets there is little if any middle ground between floating exchange rates and monetary unification this paper considers the exchange rate regime issue in the context of recent books on the subject by w max corden and morris goldstein both authors prescribe managed floating exchange rates supplemented with inflation targeting for emerging market economies under managed floating and with a credible monetary policy the public finances in order and strengthened debt management and prudential regulation the exchange rate is free to act as a market gauge for assessing policies and as a mode of conflict resolution both authors also argue however that no exchange rate regime is a holy grail ultimately a credible exchange rate regime depends upon the trust evoked by governments there is no exchange rate regime whether of the managed floating or hard fix variety that can eradicate a history of failed stabilisation attempts

the global implications of regional exchange rate regimes abstract we examine the implications of a regional fixed exchange rate regime for global exchange rate volatility the concept of the optimum currency area turns out to play an important role the formation of a regional regime tends to decrease global volatility when countries are symmetric the effects tend to be ambiguous in the case of asymmetries the reduction in global volatility is larger when the rest of the world has more rigid labor markets than the peggers and when the exchange rate management is done mostly by countries with relatively more flexible labor markets and in the presence of a negative correlation in productivity shocks across countries

why the middle is unstable the political economy of exchange rate regimes and currency crises the contribution of sticky exchange rates to the rash of currency crises over the past decade has become a major topic of international monetary analysis and policy discussion while there is widespread agreement among economists that the middle of the exchange rate spectrum adjustable pegs is highly crisis prone in a world of substantial capital mobility jeffrey frankel has recently argued that surprisingly we lack a clear theoretical rationale for why this is so this paper attempts to fill that void it argues that frankel is correct in terms of economic analysis alone but that when political economy considerations are introduced then a satisfactory explanation is at hand key aspects of this political economy perspective are laid out and implications for exchange rate policy are considered the analysis suggests that for promoting currency stability the traditionally debated distinctions between crawling bands and managed floats are likely less important than the political environments in which they are operated

state responses to fiscal crises the effects of budgetary institutions and politics this paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits more restrictive state fiscal institutions such as no deficit carryover rules and tax and expenditure limitations are correlated with more rapid fiscal adjustment to unexpected deficits political factors are also important when a single party controls the state house and the governorship deficit adjustment is much faster than when party control is divided in gubernatorial election years tax increases and spending cuts are both significantly smaller than at other times

capital market imperfections and the theory of optimum currency areas this paper studies how within and cross country capital market imperfections affect the welfare effects of forming a currency union the analysis considers a bank only world where intermediaries compete in cournot fashion and monitoring and state verification are costly the first part determines the credit market equilibrium and the optimal number of banks prior to joining the union the second part discusses the benefits from joining a currency union a competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country through an argument akin to the brander krugman reciprocal dumping model of bilateral trade however in our framework whether joining a union raises welfare of the home country is ambiguous it depends on the relative strength of investment creation and intermediation diversion effects

the new theory of optimum currency areas highbrow opinion is like a hunted hare if you stand long enough it will come back to the place it started from dennis robertson

an inverse demand system for u s composite foods a comment in a recent article in this journal huang summarized the theoretical basis of inverse demand systems and estimated a set of price flexibilities for u s aggregate food groups following anderson attention focused on the theoretical constraints on compensated and uncompensated flexibilities these constraints are analogous to the familiar general restrictions of standard demand theory homogeneity cournot aggregation engel aggregation and slutsky relations however huang neglected to record another aspect of the dual nature of inverse and quantity dependent demand systems the property demonstrated by a number of authors including anderson and houck that the matrix of price elasticities can be derived by inverting the matrix of flexibilities this duality is important to note because it provides a link between inverse and direct demand systems and so allows all the elasticities and flexibilities to be computed given the values of budget shares once either set of parameter values has been estimated moreover the derivation of elasticities provides an additional check on whether estimates obtained from an inverse de

a political economic critique on the theory of optimum currency areas and the implications for east asia in recent years dynamic debate has arisen as to the desirability and feasibility of creating a monetary union in east asia while the debate has relied heavily on the theory of optimum currency areas this theory has weaknesses in explaining the actual formation of monetary unions at this point political economy analysis appears to demonstrate stronger explanatory power this paper provides a systematic review of the main developments in the literature on optimum currency area theory and in the political economy literature on monetary union in addition it addresses the feasibility of an east asian monetary union by applying the findings in these two academic strands to the region it finds that even though formation of an east asian monetary union may be to some extent feasible from an economic perspective the region s political situation does not appear favourable for the creation of one

inflation and the demand for money in israel abstract this paper examines the impacts of rational price expectations and foreign exchange reform in addition to adaptive price expectations on money demand in israel the regression results are used to determine the upper limit on the amount of seigniorage

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

business cycle convergence in emu a first look at the second moment we analyse the dynamics of the standard deviation of demand and supply shocks as well as of the demand component of gdp across countries in the european monetary union emu this analysis allows us to evaluate the patterns of cyclical comovement in emu and compare them the cyclical performance of the new members of the eu and other oecd countries we make use of sigma convergence methods to identify synchronization patterns in business cycles the eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s the new eu members have also experienced a strong pattern of convergence from 1998 to 2005 when a strong divergence trend appears an enlargement of the emu to 22 members would not significantly decrease its optimality as a currency area there is evidence for some europe specific characteristics as compared to global comovements in business cycles authors abstract

time consistency and the feasibility of alternative exchange rate regimes abstract in a stochastic cash in advance model of an open economy a fixed exchange rate regime is dynamically inconsistent and hence economically infeasible in a cournot nash equilibrium if there are no exogenous constraints imposed on government behaviour and nominal interest rates are strictly positive on the other hand a perfectly floating exchange rate regime is feasible but it cannot sustain any international asset trade however a noncooperative equilibrium with nonzero asset trade and a fixed exchange rate regime may become feasible when we allow policymakers to employ trigger retaliation strategies

european monetary union adjustment and exchange rate variability abstract this paper uses a three country three good factor specific model of trade with wage rigidities to investigate how european monetary union is likely to affect exchange rate variability focusing on international macroeconomic adjustment under both exogenous and optimizing monetary policies it shows that the relative variability against external currencies of the euro and a basket of predecessor currencies depends on the relative sizes and specialization patterns of countries and the relative importance of different shocks monetary union is likely to decrease increase aggregate european exchange rate variability for shocks to industries in which large small euro area countries specialize

is a monetary union feasible for east asia the empirical suitability of the east asian economies for potential monetary integration is assessed the structural vector autoregression var method is employed to identify the underlying shocks using a three variable var model across the east asian economies the estimates of the eec are used as a benchmark to compare the size of the underlying shocks and the speed of adjustment to shocks in both regions to determine the feasibility of forming an optimum currency area oca in east asia the empirical results do not display strong support for forming an oca in the east asian region the results do imply however that some small subregions are potential candidates for ocas since their disturbances are correlated and small and these economies adjust rapidly to shocks

real output co movements in east asia any evidence for a monetary union of integration in the region would greatly shape the economic structure of each individual economy an d has direct implications for the effectiveness of domestic stabilisation policy and policy coordination this paper empiricall y examines the feasibility of forming a monetary union in east asia by assessing the real output co movements among these economies as suggested by the optimum curr ency area oca theory that losing monetary independence would be the major cost for adopting

phoenix risen the resurrection of global finance of all the many changes of the world economy since world war ii few have been nearly so dramatic as the resurrection of global finance a review of five recent books suggests considerable diversity of opinion concerning both the causes and the consequences of financial globalization leaving much room for further research competing historical interpretations stressing the contrasting roles of market forces and government policies need to be reexamined for dynamic linkages among the variables they identify likewise impacts on state policy at both the macro and micro levels should be explored more systematically to understand not just whether constraints may be imposed on governments but also how and under what conditions and what policymakers can do about them finally questions are also raised about implications for the underlying paradigm conventionally used for the study of international political economy and international relations more generally

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

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

to be or not to be in monetary union a synthesis article i nfo monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks but it also carries costs as some stabilization may be feasible even in the absence of credibility and this may be more than what an individual country can hope for in a monetary union in this paper we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements we produce examples where monetary union may be welfare improving even for low modest levels of inflation bias 2 3 as long as business cycles are not too a synchronized across countries

the benefits and costs of monetary union in southern africa a critical survey of the literature with the 14 members of the southern african development community sadc having set the objective of adopting a common currency for the year 2018 an expanding empirical literature has emerged evaluating the benefits and costs of a common currency area in southern africa this paper reviews that literature focusing on two categories of studies 1 those that assume that a country s characteristics are invariant to the adoption of a common currency and 2 those that assume that a monetary union alters an economy s structure resulting in trade creation and credibility gains the literature reviewed suggests that a relatively small group of countries typically including south africa satisfies the criteria necessary for monetary unification the literature also suggests that in a monetary union comprising all sadc countries and a regional central bank that sets monetary policy to reflect the average economic conditions e g fiscal balances in the region the potential losses i e higher inflation from giving up an existing credible national central bank a relevant consideration for south africa could outweigh any potential benefits of trade creation resulting from a common currency

one money for europe lessons from the us currency union currency union barry eichengreen the creation of a monetary union in europe is often justified by the desire to reap the full benefits of economic integration the complete removal of capital controls raises a large number of issues the case for free capital mobility is strong but not overwhelming it hinges on issues of technology transport costs market structure and labour mobility and in the end is an empirical matter for which us experience may provide useful information policy making institutions differ in important respects however the us tradition of fiscal federalism for example has no ec wide counterpart yet its functions seem a desirable feature of a monetary union in particular it is shown to play an important role in absorbing regional disturbances mostly via the tax system us experience also suggests that a currency union creates pressure for fiscal policy harmonization affecting both taxes and spending although a currency union fundamentally alters the balance of payments adjustment process the potential problem of depressed regions remains a serious one given the increased tightness of the external constraint the limited extent of labour mobility and other features of european labour markets solutions based on us experience include extensive swap facilities and a european version of fiscal federalism

are cash budgets a cure for excess fiscal deficits and at what cost abstract this paper investigates the effect of recent reforms of budgetary institutions in uganda and zambia we argue that cash budgeting has brought clear benefits in terms of improved expenditure control with regard to line ministries contrary to what is often suggested however adoption of a cash budget has not provided a means for top politicians in either country to tie their hands with respect to intervention in fiscal policy decisions in uganda improved fiscal policy outcomes have in fact been achieved as a result of and not in spite of discretionary interventions by top politicians in zambia a strict rule imposing a balanced budget on a monthly basis has proven partially effective due in no small part to international monetary fund imf enforcement but costly in terms of increased volatility of expenditures

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

what do demand and supply shocks say about caribbean monetary integration this study seeks to ascertain whether the member states of the caribbean community caricom share similar supply and demand shocks if so an argument can be made for the suitability of said countries being part of a currency union the results show that no significant correlation exists for the majority of countries studied and as such no economic justification for the monetary union can be made based on the methodology used however the eastern caribbean currency union eccu whose members are a part of caricom is supported by the results

an optimum currency area odyssey abstract the theory of optimum currency areas was conceived and developed in three highly influential papers written by mundell 1961 mckinnon 1963 and kenen 1969 those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally tailored monetary policy and the adjustment of an exchange rate of a national currency we trace the development of optimum currency area theory which after a flurry of research into the subject in the 1960s was relegated to intellectual purgatory for about 20 years we then discuss factors that led to a renewed interest into the subject beginning in the early 1990s milton friedman plays a pivotal role in our narrative friedman s work on monetary integration in the early 1950s presaged subsequent optimum currency area contributions mundell s classic formulation of an optimal currency area was aimed in part at refuting friedman s strong case for floating exchange rates and friedman s work on the role of monetary policy had the effect of helping to revive interest in optimum currency area analysis the paper concludes with a discussion of recent analytical work using new keynesian models which has the promise of fulfilling the unfinished agenda set out by the original contributors to the optimum currency area literature that is providing a consistent framework in which a country s characteristics can be used to determine its optimal exchange rate regime