taxes and capital structure understanding firms savings abstract the u s non financial corporate sector became a net lender to the rest of the economy in the early 2000s with close to half of all publicly traded firms holding financial assets in excess of their debt liabilities we develop a simple dynamic model of debt and equity financing where firms strive to accumulate financial assets even though debt is fiscally advantageous relative to equity moreover firms find it optimal to fund additional financial asset holdings through equity revenues the calibrated model matches well the distribution of public firms balance sheets during the 2000s and correctly predicts which firms are net savers

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

from ngos to banks does institutional transformation alter the business model of microfinance institutions microfinance which pledges to provide financial services to people without access to banking is chiefly run by non governmental organizations ngos little is known about the extent to which the transformation of these ngos into shareholder owned and most often regulated firms affects the way microfinance institutions mfis conduct their business by applying the event study methodology to 66 mfis that have transformed we quantify the effect that transformation has on the mfis business models our results suggest that portfolio yield is driven down by 3 9 percentage points due to transformation indicating that clients get more favorable interest rates at the same time mfis are able to significantly cut down their operational expenses of which 1 1 percentage points can be attributed to transformation other findings include a steep increase in commercial debt leverage and deposits a significant decrease in the fluctuation of funding costs and a sharp rise in average loan size profitability goes down in the short and medium term while return on equity is driven up in the medium to long run by exploiting within mfi data our approach goes beyond previous studies that mainly relied on between mfi data overall the results suggest that transformed mfis become an attractive environment for investors potentially encouraging a more profit seeking behavior among transformed mfis

how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

the interaction of monetary and macroprudential policies i analyze a new keynesian dynamic stochastic general equilibrium dsge model where the financing of productive investment is affected by a moral hazard problem i solve for jointly ramsey optimal monetary and macroprudential policies i find that when a financial friction is present in addition to the standard nominal friction the optimal policy can replicate the first best allocation if the social planner can conduct both monetary and macroprudential policy using monetary policy alone is not enough a policy trade off between stabilizing inflation and output gap emerges when policy follows simple rules the source of fluctuations is relevant for the choice of the appropriate policy mix

coalition and party formation in a legislative voting game we examine a legislative voting game where decisions are being made over both ideological and distributive dimensions and legislators preferences are separable over the two dimensions in equilibrium legislators prefer to make proposals for the two dimensions together rather than offering sequential proposals on the two dimensions separately the equilibria exhibit interaction between the ideological and distributive dimensions and in any equilibrium there is a positive probability that a proposal is made and approved which excludes the median legislator as defined over the ideological dimension in contrast with a game where no distributive decision is being made moreover in any stationary equilibrium there is more than one ideological decision that has a positive probability of being proposed and approved we show that legislators can gain from forming political parties and consider examples where predictions can be made about the composition of parties we discuss the impact of political parties on the outcome

bargaining power of smaller states in germany s landerfinanzausgleich 1979 90 in this paper we explore the impact of politicalfactors on redistribution across the states in thegerman landerfinanzausgleich from a public choiceperspective the smaller states are supposed to have ahigher influence on decisions in the secondlegislative chamber due to a lower shadow price oftheir votes which implies a higher bargaining power as the federal government s policy depends on amajority in the second chamber there is an incentiveto buy smaller states votes controlling for gdp percapita we find statistically significant support forour hypotheses

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

overconfidence monetary policy committees and chairman dominance abstract monetary policy decisions are typically characterized by three features i decisions are made by a committee ii the committee members often disagree and iii the chairman is almost never on the losing side in the vote we show that the combination of overconfident policymakers and a chairman with agenda setting rights can explain all these features the optimal agenda setting power to the chairman is a strictly concave function of the degree of overconfidence we also show that the quality of advice produced by the central bank staff is higher in a flat organization than in a hierarchical one

on the efficiency of equilibria in a legislative bargaining model with particularistic and collective goods this study analyzes the efficiency of equilibria in a multilateral bargaining game in which a legislature divides its budget among collective and particularistic goods in order to disentangle the causes of inefficiency we extend the model of volden and wiseman am polit sci rev 101 79 92 2007 by considering quasi linear utility functions and consensus requirements ranging from simple majority to unanimity although unanimous agreements can be reached under weaker consensus requirements we show that pareto inefficiency is associated with non unanimous consent we also study how i the endogenous selection of the legislature s size or ii a sequential choice of collective and particularistic spending eliminates or attenuates the inefficiency problem

political representation and public contracting evidence from municipal legislatures abstract this study examines how partisan representation in multiparty legislatures affects direct expenditures contract allocation design and selection of politically connected firms as suppliers in public procurement for identification i exploit quasi random variation in partisan electoral outcomes near the effective representation thresholds in czech proportional municipal elections my regression discontinuity estimates suggest that partisan representation matters for public procurement for instance if local level political parties barely enter legislatures at the expense of the national parties municipalities decrease their direct procurement spending and allocate fewer contracts to the corporate donors of the national parties fewer contracts are awarded especially in pre election years and in auctions restricting competition among procurement suppliers the results are not associated with higher government fragmentation or selection of more competent candidates but rather with reduced political power of the national parties

monetary policy committees and interest rate setting abstract this paper shows that it is preferable for monetary policy to be conducted by a committee instead of a single policy maker if there is uncertainty about potential output we examine three decision procedures an optimal procedure averaging and voting and find that the latter is the appropriate way to reach decisions if policy makers are not equally skilled finally we demonstrate that efficient decision procedures reduce the persistence of shocks

money liquidity and monetary policy in a market based financial system banking and capital market developments are inseparable and funding conditions are closely tied to fluctuations in the leverage of market based financial intermediaries offering a window on liquidity the balance sheet growth of broker dealers provides a sense of the availability of credit contractions of broker dealer balance sheets have tended to precede declines in real economic growth even before the current turmoil for this reason balance sheet quantities of market based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy

bargaining in legislatures bargaining in legislatures is conducted according to formal rules specifying who may make proposals and how they will be decided legislative outcomes depend on those rules and on the structure of the legislature although the social choice literature provides theories about voting equilibria it does not endogenize the formation of the agenda on which the voting is based and rarely takes into account the institutional structure found in legislatures in our theory members of the legislature act noncooperatively in choosing strategies to serve their own districts explicitly taking into account the strategies members adopt in response to the sequential nature of proposal making and voting the model permits the characterization of a legislative equilibrium reflecting the structure of the legislature and also allows consideration of the choice of elements of that structure in a context in which the standard institution free model of social choice theory yields no equilibrium

elections coalitions and legislative outcomes predictions of electoral behavior in a multiparty setting should be a function of the voters beliefs about how parties will perform following an election similarly party behavior in a legislature should be a function of electoral promises and rewards we develop a multistage game theoretic model of three party competition under proportional representation the final policy outcome of the game is generated by a noncooperative bargaining game between the parties in the elected legislature this game is essentially defined by the vote shares each party receives in the general election and the parties electoral policy positions at the electoral stage parties and voters are strategic in that they take account of the legislative implications of any electoral outcome we solve for equilibrium electoral positions by the parties and final policy outcomes

overconfidence as a social bias experimental evidence abstract the overconfidence bias is discussed extensively in economic studies yet fails to hold experimentally once monetary incentives and feedback are implemented we consider overconfidence as a social bias for a simple real effort task we show that individually economic conditions effectively prevent overconfidence by contrast the introduction of a very basic purely observational social setting fosters overconfident self assessments additionally observing others actions effectively eliminates underconfidence compared to the individual setting

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

the influence of fomc member characteristics on the monetary policy decision making process abstract this paper provides new empirical evidence on a monetary policy committee with heterogeneous members whose decisions affect the efficacy of monetary policy it thereby provides a link between the literature on monetary policy committees and central bank monetary policy implementation through monetary rules using a novel dataset of the idiosyncratic characteristics of fomc members over the period from august 1979 to february 2014 the empirical findings show that characteristics such as education age and to a lesser extent work experience are not important in understanding the fomc decision making process instead the results point to the importance of time spent within the federal reserve system tenure on the fomc itself and the influence of the chair in shaping the decision making process the results are expected to have implications for the capacity of economic agents as well as various markets in the economy to more readily interpret public monetary policy information that reaches them this makes the monetary policy decision process less noisy and thus enhances the capability of agents and markets to attach the correct weight to this information

electoral systems and public spending we study the effects of electoral institutions on the size and composition of public expenditure in oecd and latin american countries we emphasize the distinction between purchases of goods and services which are easier to target geographically and transfers which are easier to target across social groups we present a theoretical model in which voters anticipating government policymaking under different electoral systems have an incentive to elect representatives more prone to transfer public good spending in proportional majoritarian systems the model also predicts higher total primary spending in proportional majoritarian systems when the share of transfer spending is high low after dee ning rigorous measures of proportionality to be used in the empirical investigation we e nd considerable support for our predictions

evidence of bank market discipline in subordinated debenture yields 1983 1991 we examine debenture yields over the period 1983 1991 to evaluate the market s sensitivity to bank specific risks and conclude that investors have rationally reflected changes in the government s policy toward absorbing private losses in the event of a bank failure although this evidence does not establish that market discipline can effectively control banking firms it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major u s banking firms an increasingly important issue in the regulation of financial institutions concerns the extent to which market investors can will recognize and control the risks of banking firms although the banking act of 1933 replaced some private risk bearing with federal deposit insurance legislators were reluctant to displace market discipline very extensively flood 1992 by the early 1980s however u s regulators had come to protect virtually all bank liability holders from credit losses most visibly at large banks which were deemed too big to fail sprague 1986 o hara and shaw 1990 this extension of the government safety net largely reflects a skepticism on the part of regulators that normal market forces could adequately identify and control bank risks while u s regulators have recently shown an increased willingness to let some bank investors bear default losses an official suspicion of the efficacy of market discipline remains widespread by contrast some prominent academic economists argue that market investors in bank debentures could provide timely and effective control over banking firms risk exposures and that the social cost of supervising banks would be lower if regulators ceded greater

are two heads better than one monetary policy by committee two experiments were conducted to test the common hypothesis that groups make decisions more slowly than individuals one of these experiments imitates real life monetary policy decisions in both cases the hypothesis is found wanting groups are not slower than individuals in both experiments we also find that group decisions are on average better than individual decisions this holds regardless of whether the groups make decisions by unanimity or majority rule simple mechanical theories of group decisionmaking that the group follows its average player median player or best player do not explain the results group interactions seem to matter

credit provision and banking stability after the great financial crisis the role of bank regulation and the quality of governance abstract in response to the great financial crisis gfc bank regulatory regimes were tightened world wide to strengthen banking stability and the resilience of the banking sectors yet it is often claimed that regulatory tightening may lead banks to cut back on lending and comes at the cost of a lower loan supply the present paper uses a country panel for 50 advanced and emerging market economies to analyze how the post crisis tightening in supervision and regulation affected aggregate bank stability and aggregate credit growth we find that higher capital buffers improved aggregate bank stability after the gfc whereas a strengthening of supervisory independence helped to reduce the decline in domestic credit and improved the stability of banks both effects have been stronger for countries with relatively poor institutions thus our results suggest that bank supervision regulation and institutions tend to be substitutes rather than complements

credit market competition and capital regulation market discipline for financial institutions can be imposed not only from the liability side as has often been stressed in the literature on the use of subordinated debt but also from the asset side this will be particularly true if good lending opportunities are in short supply so that banks have to compete for projects in such a setting borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending thus creating an asset market based incentive for banks to hold capital borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans which accrue only if the loans are in fact paid off since borrowers do not fully internalize the cost of raising capital to the banks the level of capital demanded by market participants may be above the one chosen by a regulator even when capital is a relatively costly source of funds this implies that capital requirements may not be binding as recent evidence seems to indicate

the budget process and the size of the budget the new congressional budget process provides members of congress with a new set of institutional mechanisms for making budget decisions this article addresses the question of whether or under what conditions rigid application of the new budget process modeled as first selection of the size of the budget and second its division produces smaller budgets than a piecemeal appropriations process in which the size of the budget is determined residually the theoretical result is that the new process sometimes results in relatively large budgets a testable implication of the theory is that given a choice of how stringently the budget process is to be employed members of congress jointly consider preferences and the expected outcomes under available institutional arrangements and select the arrangement usually a rule that yields the most favorable outcome empirical results from the budget process in the house from 1980 to 1983 are generally supportive of the theoretically derived hypothesis of rational choice of institutional arrangements

are rules based government programs shielded from special interest politics evidence from revenue sharing transfers in brazil abstract manipulation of government finances for the benefit of narrowly defined groups is usually thought to be limited to the part of the budget over which politicians exercise discretion in the short run such as earmarks analyzing a revenue sharing program between the central and local governments in brazil that uses an allocation formula based on local population estimates i document two main results first that the population estimates entering the formula were manipulated and second that this manipulation was political in nature consistent with swing voter targeting by the right wing central government i find that municipalities with roughly equal right wing and non right wing vote shares benefited relative to opposition or conservative core support municipalities these findings suggest that the exclusive focus on discretionary transfers in the extant empirical literature on special interest politics may understate the true scope of tactical redistribution that is going on under programmatic disguise

legislative bargaining under weighted voting organizations often distribute resources through weighted voting we analyze this setting using a non cooperative bargaining game based on the baron ferejohn 1989 model unlike analyses derived from cooperative game theory we find that each voter s expected payoff is proportional to her voting weight an exception occurs when many high weight voters exist as low weight voters may expect disproportionately high payoffs due to proposal power the model also predicts that ex post the coalition formateur the party chosen to form a coalition will receive a disproportionately high payoff using data from coalition governments from 1946 to 2001 we find strong evidence ofsuch formateur effects

the dynamic in efficiency of monetary policy by committee this paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game committee members differ in their institutional power and in certain states of nature they also differ in their preferred instrument value preference heterogeneity and concern for the future interact to generate decisions that are dynamically inefficient and inertial around the previously agreed instrument value this model endogenously generates autocorrelation in the policy variable and helps explain the empirical observation that the distribution of actual interest rate changes has a mode of zero

leverage across firms banks and countries we present new stylized facts on bank and rm leverage during the period 2000 2009 using internationally comparable micro level data from many countries we document the following patterns a there was an increase in leverage for investment banks prior to the sub prime crisis b there was no visible increase in leverage for the typical commercial bank and non nancial rm c o balance sheet items constitute a big fraction of assets especially for large commercial banks in the us whereas investment banks do not report these items d the leverage ratio is procyclical for investment banks and for large commercial banks in the us e banks in emerging markets with tighter bank regulation and stronger investor protection experienced signicantly less deleveraging during the crisis the results suggest that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the quantity of assets

how do electoral systems affect fiscal policy evidence from cantonal parliaments 1890 2000 using a new data set on swiss cantons since 1890 we analyze how the adoption of proportional representation affects fiscal policy in line with economic theory we show that proportional systems shift spending toward broad goods like education and welfare benefits but decrease spending on geographically targetable goods like roads we find little evidence that proportional representation increases the overall size of government an analysis of the underlying theoretical mechanisms reveals that proportional representation increases electoral turnout left wing representation and political fragmentation these changes in political representation explain a substantial share of the rise in education spending but a small share of the rise in welfare spending or the decline in road expenditures jel h4 h11 i38

us monetary policy and the global financial cycle us monetary policy shocks induce comovements in the international financial variables that characterize the global financial cycle a single global factor that explains an important share of the variation of risky asset prices around the world decreases significantly after a us monetary tightening monetary contractions in the us lead to significant deleveraging of global financial intermediaries a decline in the provision of domestic credit globally strong retrenchments of international credit flows and tightening of foreign financial conditions countries with floating exchange rate regimes are subject to similar financial spillovers

legislative representation bargaining power and the distribution of federal funds evidence from the us congress this article investigates the relationship between representation in legislatures and the geographic distribution of federal funds in a legislative bargaining model we demonstrate that funds are concentrated in high representation areas and two channels underlie this result the proposal power channel reflects the role of representation in committee assignments and the vote cost channel reflects the role of representation in coalition formation in our empirical analysis we find that small states relative to large states receive more funding in the us senate relative to the house we also find empirical support for the two channels underlying this relationship throughout the history of federations and international organisations a key consti tutional design question involves how jurisdictions of different sizes are represented in legislative bodies and how their votes will ultimately be weighted large jurisdictions typically argue for delegation sizes or voting weights that are roughly proportional to population whereas small jurisdictions typically argue for an equal number of delegates or votes for each jurisdiction this conflict over representation is presumably driven at least in part by a belief that increased representation strengthens bargaining power in the battle over the geographic distribution of funds authorised by these legislative bodies in this article i analyse the relationship between legislative representation bar gaining power and the geographic distribution of federal funds from both a theoretical and empirical perspective in addition to investigating the existence of a relationship between representation and federal funds i also explore the underlying mechanisms that is i ask which political institutions such as agenda control provided to commit tees and the formation of coalitions under majority rule shape the bargaining power of jurisdictions in central legislatures and thus facilitate the relationship between repre sentation and the distribution of federal spending to provide a framework for analysing these issues i begin by developing a simple theoretical model of a central legislature that determines the crossjurisdiction distri bution of local public goods which are financed by a national tax base both delegation sizes and population are variable allowing me to consider a variety of institutional arrangements for jurisdictional representation legislators represent local interests and given the common pool problem associated with concentrated benefits and dis persed tax costs attempt to increase ownjurisdiction spending but to restrain spending elsewhere the model follows a recent literature on legislative bargaining in which a proposer must secure a majority of votes in order to pass legislation and due to the

children and their parents labor supply evidence from exogenous variation in family size although theoretical models of labor supply and the family are well developed there are few credible estimates of key empirical relationships in the work family nexus this study uses a new instrumental variable the sex composition of the first two births in families with at least two children to estimate the effect of additional children on parents labor supply in the united states instrumental variables estimates using the sex mix are substantial but smaller than the corresponding ordinary least squares ols estimates moreover unlike the ols estimates the female labor supply effects estimated using sex mix instruments appear to be absent among more educated women and women with high wage husbands we also find that married women who have a third child reduce their labor supply by as much as women in the full sample while there is no relationship between wives child bearing and husbands labor supply excerpt

the paradox of liquidity the more liquid a firm s assets the greater their value in a short notice liquidation it is generally thought that a firm should find it easier to raise external finance against more liquid assets this paper focuses on the dark side of liquidity greater asset liquidity reduces the firm s ability to commit to a specific course of action as a result greater asset liquidity can in some circumstances reduce the firm s capacity to raise external finance firms with excessively liquid assets are in the best position to finance illiquid projects this leads us to a theory of financial intermediation and disintermediation based on the liquidity of assets

majority rule consensus building and the power of the chairman arthur burns and the fomc this paper investigates decision making within the federal open market committee of the federal reserve focusing on the competing pressures of majority rule consensus building and the power of the chairman to undertake this analysis we have constructed an original data set recording desired federal funds rates for each member of the committee over the 1970 78 period our results confirm a disproportionate influence of the chairman in the policy process they also confirm that other voting members of the committee have an impact on policy choices estimates indicate that the chairman exercises 40 to 50 of the voting weight in committee decisions

party policy and campaign costs in a multi constituency model of electoral competition in this essay a multi constituency model of electoral competition was developed under the assumption that party candidates possessed no effective autonomy such a model describes the polar extreme opposite that of the more common single constituency framework in which candidates have complete autonomy the existence of a nash equilibrium to the multi constituency election game was established under the assumption that parties maximize the expected number of winning seats or behaved as pure independents under any other reasonable election goal e g maximize probability of winning a majority of constituencies this existence breaks down the nature of any equilibrium was investigated in some detail and the influence of campaign costs both statutory and non statutory on party behaviour analysed this was found to be qualitatively important in particular differingeconomic resources between parties is sufficient to prevent convergence inpolicy space

distributional consequences of political representation abstract we investigate both theoretically and empirically the effect of the geographic concentration of representatives on the geographic distribution of fiscal transfers our theoretical model predicts that more representatives residing in a geographic area leads to higher government funds to that area our empirical analysis uses the fact that in germany due to germany s electoral rules in state elections the number of representatives varies across electoral districts controlling for various socio economic demographic and political variables and using a variety of estimation methods we find that districts with a greater number of representatives receive more government funds

the fomc versus the staff where can monetary policymakers add value a key issue in monetary policymaking is the appropriate division of labor between the profes sional staff of the central bank and the appointed policymakers lars e o svensson 1999 argues that the appropriate role of a policymaking group such as the federal open market com mittee fomc in the united states is to make judgments about social welfare taking as given the likely outcomes of different policies as esti mated by the staff in this division the staff is relied upon to assess current and prospective economic conditions and to forecast the effects of different policies policymakers only role is to decide which of the various options should be chosen

risk taking spillovers of u s monetary policy in the global market for u s dollar corporate loans abstract we study the effects of u s interest rates and other factors on risk taking in the global market for u s dollar syndicated term loans we find that before the global financial crisis both u s and non u s lenders originated ex ante riskier loans to non u s borrowers in response to a decline in short term u s interest rates and after the crisis in response to a decline in longer term u s interest rates after the crisis this behavior was more prominent for shadow banks and less prominent for banks with relatively low capital separately before the crisis lenders originated less risky loans in response to u s dollar appreciation across the periods the responses to risk appetite and economic uncertainty varied to the extent that the federal reserve affects u s interest rates we provide evidence of global risk taking spillovers of u s monetary policy which are important but not dominant factors for risk taking in the market

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists

inflation targeting credibility and non linear taylor rules abstract in this paper we systematically evaluate how central banks respond to deviations from the inflation target we present a stylized new keynesian model in which agents inflation expectations are sensitive to deviations from the inflation target to re establish credibility monetary policy under discretion sets higher interest rates today if average inflation exceeded the target in the past moreover the central bank responds non linearly to past inflation gaps this is reflected in an additional term in the central bank s instrument rule which we refer to as the credibility loss augmenting a standard taylor 1993 rule with the latter term we provide empirical evidence for the interest rate response for a sample of five inflation targeting it economies we find first that past deviations from it feed back into the reaction function and that this influence is economically meaningful deterioration in credibility ceteris paribus forces central bankers to undertake larger interest rate steps second we detect an asymmetric reaction to positive and negative credibility losses with the latter dominating the former

financial fragility in the great moderation abstract a nascent literature explores the measurement of financial fragility this paper considers evidence for rising financial fragility during the 1984 2007 great moderation in the u s the literature suggests that macroeconomic stability combined with strong growth of credit to asset markets in asset prices and in credit relative to output are all indicators of rising financial fragility we show each of these trends in the great moderation we derive the testable implication that in the great moderation credit growth is driven more by past credit growth and less by output growth allen and gale 2000 relative to pre great moderation years results from a var model estimated on quarterly data for 1955 2007 are consistent with the hypothesis this invites a reinterpretation of the great moderation our methodology may help understand when a credit boom turns into a credit bubble and contributes to the development of methods of measuring financial fragility