central bank constitutions for federal monetary unions abstract in a monetary union the central bank constitution must distribute the power over monetary policy between the members and the administrative center of the union we compare alternative distributions and evaluate their performance dominance of regional interests always leads to inefficient monetary stabilization policies whether or not dominance of regional interests leads to a higher long run rate of inflation depends on the union s political constitution

the effect of commute time on racial earnings inequality a case study of the houston metropolitan statistical area data from the united states census confirm a substantial increase in the racial earnings gap between 1980 and 1990 this paper examines data on whites and non white wage and salary incomes in houston tx for 1980 and 1990 data on time travelled to work is used to simulate what would be the impact of shorter commute times on earnings inequality the central finding is that a reduction in travel time from residence to work would cause a very small reduction in racial earnings and income inequality this suggests that advances in urban transportation policy alone are not sufficient to solve the problem of racial earnings inequality

monetary union with voluntary participation a monetary union is modelled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy within a fully dynamic context we show that such an arrangement may dominate a regime with independent national currencies two new results are delivered by the voluntary participation assumption first the optimal plan is shown to respond to a country s temptation to leave the union by tilting both current and future policy in its favour this yields a non linear rule according to which each country weight in policy decisions is time varying and depends on its incentive to abandon the union second we show that there might be conditions such that a break up of the union as has occurred in some historical episodes is efficient the paper thus provides a first formal analysis of the incentives behind the formation sustainability and disruption of a monetary union

on analyzing the world distribution of income consideration of world inequality should cause reexamination of the key concepts underlying the welfare approach to measuring income inequality and its relation to measuring poverty this reexamination leads to exploration of a new measure that allows poverty and inequality to be considered in the same framework incorporates different approaches to measuring inequality and allows varied expressions of the cost of inequality applied to the world distribution of income for 1820 1992 the new measure provides different perspectives on the evolution of global inequality

currency areas and voluntary transfers this paper discusses the relationship between the formation of a currency area and the use of voluntary fiscal transfers between countries we show that there is a trade off between the benefits of flexible exchange rates and the additional risk sharing benefits of voluntary transfers that can be sustained in a currency area we show that whether a currency area is beneficial or not will depend on the magnitude of economic parameter values in particular we show that in a simple two country model and for a plausible set of economic parameter values a currency area is optimal

even up maintaining relationships abstract when are economic interactions mediated by prices and transfers and when are they mediated by variations in the continuation payoffs within a relationship to address this question we examine a relationship between two players who periodically face opportunities to undertake randomly generated projects that impose a cost on one player and a benefit on the other as well as opportunities to make voluntary transfers to one another we characterize the set of equilibria with particular emphasis on the efficient frontier in the absence of transfers incentives are often created by adjusting the continuation values of the relationship sometimes increasing player 1 s continuation payoff to induce player 1 to accept a particularly costly current project and sometimes increasing player 2 s continuation payoff in contrast once transfers enter the picture continuation payoffs maximize the sum of the two players payoffs no matter how asymmetric the point on the pareto frontier under consideration however transfers can also be relatively rare and in particular can occur less often than the adjustments in continuation values that occur without transfers players thus rely on transfers to create incentives but manage to do so while rarely making transfers

one monetary policy and 18 central bankers the european monetary policy as a game of strategic delegation abstract this paper employs a multi country delegation monetary policy model and argues that a decision making mechanism based on the median voter theorem where intensity of preferences cannot play a role does not capture important aspects of policy setting in the european monetary union replacing the median voter mechanism with a less restrictive weighted mean mechanism it is shown that strategic delegation can lead to a surprising degree of central bank inflation aversion this finding supports the the twin sister hypothesis and the perception of the european central bank implementing the policy of the bundesbank rather than a more inflationary monetary policy

asymmetries in housing and financial market institutions and emu despite convergence pressures differences in housing and financial market institutions across the 15 member states of the european union are still enormous this paper argues that they have profound effects on the responsiveness of output and inflation in the different countries to changes in short term interest rates as well as to asset market shocks of external origin the economic reasoning behind this claim is set out and the institutional differences are described the paper assesses the sometimes conflicting empirical evidence on this issue barriers to convergence and implications for labour market flexibility are discussed the uk ireland finland and sweden tend to cluster at one extreme of the relevant institutional characteristics the paper concludes with a set of proposals for institutional reforms which would significantly reduce the tensions within emu and the potential for instability in these economies entailed by emu membership

monetary policy in a heterogeneous monetary union the australian experience australia is a monetary union with strong regional specialization manufacturing and service industries are located in the population centres on the south eastern seaboard and mining and pastoral activities take place in the interior and north of the continent monetary policy affects the interior and north more strongly than the south eastern seaboard because australian primary goods are mostly exported and the exchange rate provides the main transmission channel for monetary policy the reserve bank of australia must consider the economic interests of the interior and north and the south eastern seaboard since monetary policy cannot differentiate between regions there is a need for interregional macroeconomic risk sharing

production and innovation when techniques are tacit the case of education abstract the central theme of this paper is that the conventional economic theory of production does not hold even approximately in a field like education after examining the result of input output studies in education and the effect of government attempts to enhance education effectiveness we provide a sketch of a new production theory for sectors where techniques are poorly articulated and idiosyncratic

one for some or one for all taylor rules and interregional heterogeneity we document a novel empirical phenomenon the u s federal reserve appears to set interest rates partly in response to regional economic disparities this result is robust even after controlling for factors such as the central bank s forecasts and a battery of explanatory variables we argue that this likely does not reflect an explicit concern about regional differences by policymakers but instead can be explained by a model with nonlinear regional phillips curves consistent with the predictions of this model we find that the federal reserve responds disproportionately to fluctuations in low unemployment states alternative explanations cannot account for this finding

a volatility based theory of fiscal union desirability abstract heterogeneous countries may rationally choose to form a currency union first and a fiscal union later we find and illustrate empirically for the emu countries reasonable volatility conditions under which this sequencing in the deepening process is indeed rationalizable changes in the distribution of expected income shocks require a reassignment of political weights to restore unanimous support for an added fiscal dimension the bargaining space depends on countries relative income size and cross correlation of shocks

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

what does the bundesbank target abstract although its primary ultimate objective is price stability the bundesbank has drawn a distinction between its money focused strategy and the inflation targeting approach recently adopted by a number of central banks we show that holding constant the current forecast of inflation german monetary policy responds very little to changes in forecasted money growth we conclude that the bundesbank is much better described as an inflation targeter than as a money targeter an additional contribution of the paper is to apply the structural var methods of b bernanke and i mihov measuring monetary policy working paper no 5145 national bureau of economic research cambridge ma june 1995 to determine the optimal indicator of german monetary policy we find that the lombard rate has historically been a good policy indicator although the use of the call rate as an indicator cannot be statistically rejected

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

rethinking optimal currency areas the traditional mundellian criterion which implicitly assumes commitment to monetary policy is that countries with similar shocks should form unions without such commitment a new criterion emerges countries with dissimilar temptation shocks namely those that exacerbate time inconsistency problems should form unions critical to this new criterion is the idea that monetary policy is benevolent in that it takes into account the interests of all the countries in the union when countries have dissimilar temptation shocks benevolent unions can help overcome the time inconsistency problems that individual countries face existing unions can strictly gain by admitting new members with more severe time inconsistency problems because policy in the expanded union is less sensitive to the temptation shocks of members of the existing union

do asymmetries matter for european monetary policy in this paper we analyze the impact of economic and institutional ecb decision rules asymmetries on the effectiveness of monetary policy in euroland we consider a model where asymmetric shocks and divergent propagation of shocks in output and inflation are potential causes of tensions within the ecb concerning the conduct of common monetary interest rate policy welfare implications of the alternative decision procedures are discussed

a real options perspective on the future of the euro abstract a break up of the eurozone is no longer regarded as implausible this will be a costly and irreversible decision in conditions of continuing uncertainty therefore it is amenable to analysis in the real options framework we do so by solving as an n dimensional optimal stopping problem with country specific shocks and convergence of member economies we compare a complete break up with individual country departures in calibrated solutions for a symmetric case we find a non negligible but small option value furthermore we find a new theoretical result on the non monotonicity of abandonment threshold with respect to volatility

optimal monetary policy in the euro area in the presence of heterogeneity abstract this paper examines the optimal design of monetary policy in the european monetary union in the presence of structural asymmetries across union member countries it derives analytically an optimal interest rate rule under commitment and studies the dependence of its coefficients on the parameters of the structural model of each economy the central bank s preferences for inflation and output stabilization as shown in its loss function and the relative size of each country based on a two country forward looking general equilibrium model which is estimated for two euro area countries germany and france we show that there are gains to be achieved by the ecb taking into account the heterogeneity of economic structures this finding appears to be robust under alternative weights given by the central bank to the stabilization of the target variables although the implementation of the proposed rule involves difficulties relating to data and estimation constraints as well as risks of accommodating structural divergences it is important that the ecb takes into consideration national characteristics in formulating its monetary policy especially in view of more countries joining the european monetary union in the future however as monetary and financial integration advances the welfare benefits of monetary policy responding to individual countries variables may become less significant

taking two steps at a time on the optimal pattern of policy interest rates abstract most central banks change interest rates in steps of 25 50 or 75 basis points at scheduled dates this paper models the optimal step size and frequency of policy decisions in contrast to the existing literature we argue that a fixed step size facilitates policy decisions which we assume are taken by a monetary policy committee the step pattern depends on the variability of the optimal interest rate policymakers uncertainty and institutional aspects of the committee the model extends the literature by predicting that interest rates are occasionally adjusted by two or more steps

the economics of schooling production and efficiency in public schools n recent years public and professional interest in schools has been heightened by a spate of reports many of them critical of current school policy these policy documents have added to persistent and long standing concerns about the cost effectiveness and fairness of the current school structure and have made schooling once again a serious public issue as in the past however any renewed interest in education is likely to be short lived doomed to dissipate as frustration over the inability of policy to improve school practice sets in this frustration about school policy relates directly to knowledge about the educational production process and in turn to underlying research on schools although the educational process has been extensively researched clear policy prescriptions flowing from this research have been difficult to derive 2 there exists however a consistency to the research findings that does have an immediate application to school policy schools differ dramatically in quality

the value of commuting time in an empirical on the job search model an application based on moments from two samples this article estimates the value of commuting time voct among swedish males in an empirical on the job search model it uses a large sample of employee establishment linked data obtained from administrative registers the sample lacks information on mode choice for the journey to work we therefore estimate a mode choice model on another sample and use this model to link the administrative data to the relevant set of travel times costs and distances the voct is found to be 1 8 times the net hourly wage rate in the sample the relatively high estimate results from a high voct among cohabiting men

temporal aggregation of univariate and multivariate time series models a survey abstract we present a unified and up to date overview of temporal aggregation techniques for univariate and multivariate time series models explaining in detail although intuitively the technical machinery behind the results some empirical applications illustrate the main issues

sustainable international monetary policy cooperation abstract we provide new insight on international monetary policy cooperation in a familiar two country setting a country facing a relatively more volatile markup shock has an incentive to deviate from an assumed cooperation regime to a non cooperation regime a similar result obtains if countries differ in size have non unitary elasticity of substitution between domestic and foreign goods and have different degrees of trade openness home bias in consumption this motivates our study of an endogenous history dependent sustainable cooperation regime its history contingent welfare redistributions are supported by incentive compatible variations in resource transfers through the terms of trade or net exports such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality

a repeated game model of monetary union given a policy rule of the common central bank of a monetary union member countries with different preferences about inflation and facing asymmetric shocks have different incentives to secure political intervention in the bank s operation and achieve the temporary benefit of surprise inflation this is modelled as a repeated game and the most cooperative outcome subject to the countries incentive compatibility constraints is found the optimal rule responds flexibly to asymmetric shocks adjusting policy away from the full commitment level toward the discretionary level so as to maintain the worse hit country s incentive to abide by the rule

behind closed doors revealing the ecb s decision rule abstract this paper aims at discovering the decision rule the governing council of the ecb uses to set interest rates we construct a taylor rule for each member of the council and for the euro area as a whole and aggregate the interest rates they produce using several classes of decision making mechanisms chairman dominance bargaining consensus voting and voting with a chairman we test alternative scenarios in which individual members of the council pursue either a national or a federal objective we then compare the interest rate path predicted by each scenario with the observed euro area s interest rate we find that scenarios in which all members of the governing council are assumed to pursue euro area wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives the best performing scenario is the one in which individual members of the governing council follow national objectives bargain over the interest rate and their weights are based on their country s share of the zone s gdp

the labor market impact of immigration in western germany in the 1990 s in this article we estimate the wage and employment effects of recent immigration in western germany using administrative data for the period 1987 2001 and a labor market equilibrium model we find that the substantial immigration of the 1990s had very little adverse effects on native wages and on their employment levels instead it had a sizeable adverse employment effect on previous immigrants as well as a small adverse effect on their wages these asymmetric results are partly driven by a higher degree of substitution between old and new immigrants in the labor market and in part by the rigidity of wages in less than flexible labor markets in a simple counter factual experiment we show that in a world of perfect wage flexibility and no unemployment insurance the wage bill loss of old immigrants would be much smaller

the immediate challenges for the european central bank immediate challenges for the ecb issues in formulating a single monetary policy this paper discusses a number of issues that the newly constituted board of the ecb will face early on conducting a european monetary policy will be very different from living under the protective umbrella of the bundesbank we discuss voting on the ecb board and argue that the ability to communicate with the public will be critical for the success of the new institution we also ask how a single monetary policy a common change in the interest rate controlled by the ecb is transmitted to the economy of each member country we show that the monetary process differs significantly inside emu initially at least the cost of a disinflation episode could fall disproportionately on a few member countries those with both a financial structure that spreads a monetary contraction widely and a wage price structure that is relatively inflexible this process moreover is sure to evolve in part as a result of financial industry restructuring already under way but in part accentuated by the common money furthermore as the lucas principle suggests the wage price process itself will adapt to the changing focus of european monetary policy rudi dornbusch carlo favero and francesco giavazzi

monetary policy effects new evidence from the italian flow of funds new evidence on the transmission of monetary policy to the economy is provided through an analysis of the effects of a restrictive monetary policy shock on italian flow of funds over the period 1980 to 2002 firms reduce issuance of debt and decrease the acquisition of financial assets providing no support for the existence of strong financial frictions following the shock in the first quarter households increase short tem liabilities and diminish the acquisition of liquid assets and shares the public sector increases net borrowing during the first 2 years financial corporations decrease their borrowing for three quarters while in the same period the foreign sector increases borrowed funds we claim that our results shed new light on the role of the financial decisions of the economic sectors in the transmission mechanism of monetary policy

exploring the cost efficiency of basic research funding in chemistry abstract in this paper i estimate the efficiency of a federal agency s basic research support for chemistry efficiency here means output per dollar of agency investment there are two outputs citations and apprentices those being trained by work on a project i use a random sample of 93 nsf chemistry projects to find determinants of efficiency the data on each project come from recorded agency investigator transactions required by nsf s standard operating procedures differences in efficiency result from differences in resources available to the projects the characteristics of researchers and characteristics of the research environment overall statistical modeling shows that there are strong interactions between inputs purely linear additive models show poorer results than models with interaction terms some inputs such as an investigator s scientific experience and the labor intensity of projects affect citation and apprentice efficiency positively but in an interactive way for example the marginal impact of investigator experience on citation efficiency depends on the level of labor intensity however some inputs considered highly important by funding agencies and the scientific community do not turn up as consistently significant e g the quality of departments the results suggest that the input output structure of research projects is complex thus quantitative analysis needs to be sensitive to the potential importance of interactions and non linearities

common currencies vs monetary independence we study the optimal monetary policy in a two country open economy model under two monetary arrangements a multiple currencies controlled by independent policy makers b common currencies with a centralized policy maker our findings suggest that i monetary policy competition leads to higher long term inflation and interest rates with large welfare losses ii the inflation bias and the consequent losses are larger when countries are unable to commit to future policies iii the welfare losses from higher long term inflation dominates the welfare costs of losing the ability to react optimally to shocks

optimal monetary policy under low trend inflation abstract in the monetary policy literature it is common to assume that trend inflation is zero despite overwhelming evidence that zero inflation is neither empirically relevant nor a practical objective for central bank policy we therefore extend the standard new keynesian model to allow for positive trend inflation showing that even low trend inflation has strong effects on optimal monetary policy and the dynamics of inflation output and interest rates under discretion the efficient policy deteriorates and there is no guarantee of determinacy even with commitment targeting non zero trend inflation leads to substantial welfare losses our results serve as a warning against indiscriminate use of models assuming zero trend inflation

the emergence of an educational tool industry opportunities and challenges for innovation in education the paper addresses two issues one concerns the general conditions and procedures involved in the emergence of a tool industry tool industries emerge and evolve as a collection of capital goods and tool inventors and manufacturers one of our goals is to use some of the works on historical cases to build a heuristic framework concerning the main conditions for the emergence and development of tool industries the other issue is more factual and involves the question whether a tool industry is today emerging in the area of education the paper describes the emergence of a population of firms specialised in developing and commercialising educational tools and instructional technologies and discuss whether this trend can be seen as part of the solution to the innovation deficit and cost disease problems in this sector

determinants of sovereign bond yield spreads in the emu an optimal currency area perspective in the light of the recent financial crisis we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the european monetary union we find evidence for a level break in the cointegrating relationship moreover results show that i fiscal imbalances namely expected government debt to gdp differentials are the main long run drivers of sovereign spreads ii liquidity risks and cumulated inflation differentials have non negligible weights but iii all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an optimal currency area oca in particular we establish i that results are overall driven by those countries not passing the oca test and ii that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval

gradualism in trade agreements with asymmetric countries this paper uses recursive methods to characterize the payoff frontier of self enforcing trade agreements between countries of asymmetric size we show that at points on the frontier where only one country s incentive constraint binds the efficient agreement will be a non stationary one that starts with a positive trade distortion but eventually reaches free trade our analysis illustrates how i relative country size ii consumption smoothing incentives and iii sunk investments affect the form of efficient trade agreements in contrast to previous work on gradualism our results are obtained from a model in which the economic environment is stationary