target zones and interest rate variability abstract for narrow exchange rate bands and for reasonable parameter values the interest rate differential s asymptotic unconditional variability is increasing in the width of the exchange rate band whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band the interest rate differential s instantaneous conditional variability is decreasing in the width of the exchange rate band a narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential s instantaneous standard deviation is high and even increases when the zone narrows

time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

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

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

evil is the root of all money plenary talk delivered at the annual meeting of the society for economic dynamics this abstract was borrowed from another version of this item

determinants of the implied shadow exchange rates from a target zone abstract the paper provides a continuous time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments in the case of a realignment the exchange rate jumps to a shadow exchange rate the timing of realignments is modelled by a cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate we set up an approximate maximum likelihood estimation approach and provide parameter estimates for six erm target zones moreover in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short run and long run behavior of the filtered shadow exchange rates

exchange rate dynamics in a multilateral target zone this paper presents a model of exchange rate behaviour in a multilateral target zone the model produces new economic insights beyond the well known bilateral model of krugman 1991 which is obtained as a special case the paper also introduces a new class of stochastic processes in economics namely multidimensional reflected diffusion processes two main features characterize the economics of exchange rates in a multilateral target zone i the restrictions on interventions imposed by cross currency constraints when one country changes its money supply say because its exchange rate with a second country has hit its band all exchange rates involving the currency of that particular country will be affected regardless of their position within their respective bands ii cooperation in sharing the intervention burden in general the exchange rate between any two countries will depend on the fundamentals of third countries in a multilateral target zone this is because if the monetary authorities intervene together a shock in the fundamentals of any country will induce a revision of the expectation of future interventions of other countries the model reverts the counterfactual predictions of the bilateral model that the exchange rate steady state density should be u shaped and that its volatility should be a decreasing function of the distance of the exchange rate to the limits of its band thus accounting for the multilateral feature of real world target zones allows us to reconcile target zone models with the most salient empirical features of exchange rate behaviour

an arbitrage free trilateral target zone model abstract this paper proposes an arbitrage free trilateral model of a credible target zone regime with bands on each bilateral exchange rate the no arbitrage condition reduces the system to only two dimensions any two rates must obey their own boundaries but in addition the free rein for movements is restricted by the band of the redundant rate therefore target zone models defined in bilateral settings do not apply to general systems with a cobweb of bilateral bands such as the european monetary system since the model has no known analytical solution it is estimated by the method of simulated moments

the burden of intervention externalities in multilateral exchange rates arrangements abstract in this paper we consider a multilateral target zone model that generalizes krugman s model of a bilateral target zone parities are defended by manipulating money supplies in participating countries this means that interventions aimed at one given exchange rate influence other exchange rates as well as a result of these externalities shocks on each fundamental affect the whole range of exchange rates involved moreover intra marginal interventions arise endogenously and the exchange rate distribution does not exhibit the u shaped pattern which is typical of traditional target zones instead our model gives rise to intra marginal targets to which exchange rates tend to return the location of these targets is shown to depend on the intervention sterilization mix adopted by monetary authorities

investigation of production sales and inventory relationships using multicointegration and non symmetric error correction models the accumulated sum of a stationary series is called integrated if a linear combination of some of the integrated series is stationary it is said to be cointegrated this paper presents empirical results on inventories to consider the possibility of a deeper form of cointegration called multicointegration which is introduced in granger and lee 1989 a vector integrated series is multicointegrated if the accumulated sum of its stationary cointegrated linear combination is again cointegrated with itself inventory which is the accumulated sum of production minus sales is probably cointegrated with production and sales the empirical results generally support the presence of multicointegration of production and sales in many u s industries and industrial aggregates the results also favour the non symmetric error correction model providing evidence that the strength of attraction is different on both sides of the attractor a modified s s rule for inventory control is investigated in the context of a non symmetric error correction model and the results generally do not support the s s rule sufficient evidence is found to conclude that multicointegration is a useful concept in the area of inventory determination

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

a pitfall in computing exchange rate density in the ems band abstract it is not enough to look at the distance of a currency from its intervention limits against the dm to determine whether or not it is close to the edge of the ems band in practice currencies often come up against a limit with another currency before reaching a limit against the dm we show that taking account of multilateral obligations most currencies did not spend a disproportionate amount of time near the middle of the available fluctuation band especially before 1987

debt inflation and central bank independence abstract increasing the independence of a central bank from political influence although ex ante socially beneficial and initially successful in reducing inflation would ultimately fail to lower inflation permanently the smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit over time inflation would increase to accommodate a higher public debt by contrast imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions

central bank independence and the monetary instrument problem we study the monetary instrument problem in a dynamic noncooperative game between separate discretionary fiscal and monetary policy makers we show that monetary instruments are equivalent only if the policy makers objectives are perfectly aligned otherwise an instrument problem exists when the central bank is benevolent while the fiscal authority is short sighted relative to the private sector excessive public spending and debt emerge under a money growth policy but not under an interest rate policy despite this property the interest rate is not necessarily the optimal instrument

central bank independence and macroeconomic performance some comparative evidence this note uses information on a sample of sixteen oecd countries to assess the relationship between central bank independence and macroeconomic performance as previous work suggests politically controlled central banks are more likely to pursue policies that lead to high and variable inflation however the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth unemployment or the ex ante real interest rate copyright 1993 by ohio state university press

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

markov perfect capital and labor taxes abstract this paper analyzes the markov perfect equilibrium of an economy were a benevolent government that lacks the ability to commit to future policy choices uses taxes on capital and labor income to finance the provision of a public good the main finding is that the government taxes capital and subsidizes labor so that only the dynamic inefficiency of future capital taxes remains if agents preference for the public good is sufficiently high then capital is confiscated setting bounds on taxes alleviates the dynamic inefficiency inherent in capital taxation but some implementations carry a high welfare cost allowing for endogenous capital utilization makes the current capital tax distortionary and implies capital and labor tax rates that are relatively close to those measured for the u s economy

permanent and transitory shocks in the presence of asymmetric error correction this article highlights the potential importance of asymmetries in the loading vector of a set of cointegrated variables for the construction analysis and interpretation of permanent and transitory shocks using impulse response functions we derive an asymmetric version of the permanent transitory decomposition suggested by gonzalo and ng 2001 and illustrate the potential importance of such asymmetries using the cay data of lettau and ludvigson 2004

on the joint determination of fiscal and monetary policy abstract the conduct of fiscal and monetary policy absent commitment depends on the interaction between the objective of smoothing distortions intertemporally and a time consistency problem when net nominal government obligations are positive both fiscal and monetary policies are distortionary and the choice of debt depends on how the anticipated response in future monetary policy affects the current demand for money and bonds there exists a unique steady state with positive net nominal government obligations which is stable and time consistent for any initial level of debt the welfare loss due to lack of commitment is small

testing target zone models using efficient method of moments the objectives of this article are threefold 1 to test target zone models using more efficient and direct econometric methodology than previous research 2 to identify an implicit band if it exists from observed data and to test target zone models based on the estimated implicit band rather than the stated official band and 3 to examine whether the exchange rate can be modeled as a managed float system with a central parity that lacks a band we find strong evidence that a model with intramarginal intervention and a narrower implicit unofficial band can describe the dynamics of the french franc deutsche mark exchange rate from january 1 1987 july 30 1993

dynamic monetary fiscal interactions and the role of monetary conservatism assuming that macroeconomic policies are directed by distinct monetary and fiscal policy makers who cannot commit to future actions we reassess the implications of monetary conservatism and fiscal impatience in a setting with nominal government debt for environments where a non negative steady state level of government debt assets emerges in the absence of conservatism and impatience monetary conservatism induces accumulation of a higher stock of liabilities assets and has adverse positive welfare implications this result obtains irrespectively of the degree of fiscal impatience and questions the unambiguous desirability of monetary conservatism traditionally found in the literature

a systematic framework for analyzing the dynamic effects of permanent and transitory shocks this paper proposes a systematic framework for analyzing the dynamic e ects of permanent and transitory shocks on a system of n economic variables we consider a two step orthogonolization on the residuals of a vecm with r cointegrating vectors the rst step separates the permanent from the transitory shocks and the second step isolates n r mutually uncorrelated permanent shocks and r transitory shocks the decomposition is computationally straightforward and entails only a minor modi cation to the choleski decomposition commonly used in the literature we then show how impulse response functions can be constructed to trace out the propagating mechanism of shocks distinguished by their degree of persistence in an empirical example the dynamic responses to the identi ed permanent shocks have properties similar to shocks to productivity the real interest rate and money growth even though no economic

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

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

central bank independence centralization of wage bargaining inflation and unemployment theory and some evidence abstract this paper proposes a conceptual framework to investigate the effects of central bank independence of the degree of centralization of wage bargaining and of the interaction between those institutional variables on real wages unemployment and inflation in a framework in which unions are averse to inflation this aversion moderates union s wage demands as they attempt to induce the central bank to inflate at a lower rate an increase in the degree of centralization of wage bargaining a decrease in the number of unions triggers two opposite effects on real wages unemployment and inflation it reduces the substitutability between the labor of different unions and therefore the degree of effective competition between them this reduced competition effect raises real wages unemployment and inflation but the decrease in the number of unions also strengthens the moderating effect of inflationary fears on the real wage demands of each union this strategic effect lowers real wages unemployment and inflation for sufficiently inflation averse unions the interaction between those two effects produces a calmfors driffill type relation between real wages and centralization the paper analyzes the effects of central bank independence on the position and the shape of this relation as well as on inflation and unemployment the paper features two mechanisms one of which is novel through which monetary institutions have real effects the model implies that if there is a single union social welfare is maximized when the central bank attaches a zero weight to inflation but when the number of unions is larger than one this result is no longer true in general empirical evaluation of some of the theoretical implications using data from 19 developed economies is for the most part supportive of those implications

distortionary taxes and public investment when government promises are not enforceable abstract we characterize the optimal financing of productive public capital and compute the welfare loss from being unable to commit to the ramsey policy because this calculation ultimately relies on numerical approximations we contrast alternative approaches while perturbation and linear quadratic methods deliver accurate steady states the latter can yield misleading policy implications during transitions we find that moving from a regime with commitment to one with discretion implies only a small welfare loss although markov perfect consumption falls noticeably short of its ramsey counterpart in steady state consumption under discretion is higher in the short run which largely offsets this long run loss

the foreign exchange risk premium in a target zone with devaluation risk abstract the foreign exchange risk premium in an exchange rate target zone is derived when the exchange rate is heteroskedastic within the band and there is a separate devaluation risk the risk premium is then the sum of two separate risk premia arising from uncertainty about exchange rate movements within the band and from uncertainty about devaluations both real and nominal risk premia are considered real and nominal risk premia from movements within the band are very small real and nominal risk premia from devaluations are larger but still relatively small proportions of the interest rate differential