does monetary unification lead to excessive debt accumulation abstract if discretionary monetary policy gives rise to an inflation bias monetary unification boosts the accumulation of public debt the additional debt accumulation harms welfare if governments are sufficiently myopic in the presence of myopic governments debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allowing a conservative independent central bank to focus on price stability with supply shocks monetary unification results in excessive variability of public debt a debt target that constrains stabilization policy helps to prevent this

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

political instability and debt maturity i introduction political instability has been blamed for many poor macroeconomic outcomes such as high inflation unemployment low growth and large debts for example alesina 1989 shows that political instability is positively related to okun s misery index inflation plus unemployment for twenty industrialized countries grilli masciandaro and tabellini 1991 find that the oecd countries with the highest debt gdp ratios also tend to be those with the most unstable political systems barro 1991 shows for a sample of ninety eight industrialized and developing countries that political instability is inversely related to growth 1 kwasi fosu 1992 shows that political instability adversely affects economic growth by reducing the availability of factors of production in sub saharan african countries 2 finally cukierman edwards and tabellini 1992 illustrate a positive relationship between political instability and seigniorage for a sample of seventy nine countries 3 4 i examine yet another negative consequence of political instability because political instability generates inflation uncertainty that causes the yield curve to steepen such instability increases the cost and reduces the average maturity of debt a relatively short average debt maturity may be undesirable as the cost of future debt service becomes highly uncertain when debt is refinanced frequently 5 this paper examines the relationship between political instability i e uncertainty about who will be in power next period and polarization i e the difference between the orientations of the active political parties and the maturity composition of the public debt the analysis borrows from the partisan theory of economic policy first popularized by hibbs 1977 1987 and then extended to incorporate rational expectations by alesina 1987 and alesina and sachs 1988 partisan theorists argue that as different political parties have different preferences over trade offs between inflation and tin employment these two variables tend to be systematically related to the political orientation of the party in power 6 the consequence of such partisan effects is that electoral uncertainty generates inflation uncertainty which will be greater the more polarized the political system i illustrate that as inflation uncertainty makes it difficult to predict inflation in the future risk averse lenders require greater compensation to lend for long periods the more uncertain inflation is thus since political instability and polarization together translate into inflation uncertainty we should observe steeper term structures in countries with more unstable and polarized political systems as a steep term structure implies a high marginal cost of financing debt with long maturity bonds a cost minimizing fiscal authority in a highly unstable and polarized political system should find it optimal to have a relatively low average debt maturity in other words political instability and polarization should be inversely related to average debt maturity however in spite of a shorter average debt maturity the minimum expected cost of servicing debt will still be greater the more unstable and polarized the political system to my knowledge there has been no study of the relationship between political instability polarization and debt maturity in the academic literature yet the relationship is worthy of analysis for if political instability and polarization can be shown to reduce average debt maturity and increase the cost of debt finance then yet another argument can be made for insulating monetary policy from the political process 7 by credibly separating monetary and fiscal decisions policymakers can prevent such partisan effects from adversely affecting the expected cost and maturity of debt finally the real costs of inflation uncertainty in terms of lost output are by now well documented 8 it is therefore important to identify the causes of such uncertainty in order to abate it

monetary union in west africa who might gain who might lose and why we develop a model in which governments financing needs exceed the socially optimal level because public resources are diverted to serve the narrow interests of the group in power from a social welfare perspective this results in undue pressure on the central bank to extract seigniorage monetary policy also suffers from an expansive bias owing to the authorities inability to precommit to price stability such a conjecture about the fiscal monetary policy mix appears quite relevant in africa with deep implications for the incentives of fiscally heterogeneous countries to form a currency union we calibrate the model to data for west africa and use it to assess proposed ecowas monetary unions fiscal heterogeneity indeed appears crit ical in shaping regional currency blocs that would be mutually beneficial for all their members in particular nigeria s membership in the configurations currently envisaged would not be in the interests of other ecowas countries unless it were accompanied by effective containment on nigeria s financing needs jel classification e58 e61 e62 f33 union monetaire en afrique de l ouest qui pourrait gagner qui pourrait perdre et pourquoi les auteurs developpent un modele dans lequel les besoins financiers des gouvernements depassent le niveau socialement optimal parce que des ressources pub liques sont detournees de maniere aservir les interets etroits du groupe au pouvoir dans une perspective de bien etre social cela entraine des pressions indues sur la banque centrale pour qu elle extraie du seigneuriage la politique monetaire souffre

the incentives to make commitments in wage bargains it is commonly believed that a workforce of identical workers will be better off organised in a single union rather than separate unions that bargain independently with an employer for this will prevent the employer playing off one union against another in this paper i show that there are circumstances where this need not be the case if it is impossible for the firm and workers to sign long term binding contracts on wages and employment then the firm will wish to invest in a capital stock below the efficient level by organising in separate unions the firm will be induced to raise its level of investment to ensure it has enough capacity with each union to make a threat to switch production to another union credible the effect on workers payoffs from a higher capital stock can outweigh the loss of bargaining power as a result of the workforce being in separate unions there will also be circumstances where the firm will invest in a capital stock that exceeds the efficient level

structural convergence under reversible and irreversible monetary unification abstract we explore endogenous monetary unification in the context of a model in which a country with serious structural distortions and hence high inflation is admitted into a monetary union once its economic structure has converged sufficiently towards that of the existing participants if unification is reversible so that the new entrant can always be forced to leave the union again later convergence stops for a while after the high inflation country has joined with irreversible unification in contrast temporary divergence occurs and unification will be delayed

central bank independence and public debt policy the various proposals for the institutional design of the european monetary union have drawn fresh attention to the link between monetary and public debt policies this paper explores the strategic interaction between fiscal authorities setting public debt and the central bank controlling monetary policy in the absence of political distortions an optimally designed conservative independent central bank is sufficient to establish the second best in the presence of political distortions or with coordination of monetary and fiscal policy however also a debt target is needed

who wants an independent central bank monetary policy making and politics the costs and benefits of cooperative monetary and fiscal policy are analysed in the framework of a partisan business cycles model it is shown that political parties with different ideologies prefer to choose different arrangements for macroeconomic policy making more specifically right wing parties favour independent central banks more than left wing parties an independent central bank is also the generally preferred option from a social welfare point of view in addition the form of policy making arrangements between the fiscal and monetary authorities is shown to influence the extent of partisan cycles

centralized wage setting and monetary policy in a reputational equilibrium this paper analyzes a repeated game between the central bank and a centralized trade union the central bank would be better off if it could commit to a noninflationary strategy when this commitment is not enforceable a noninflationary equilibrium can still be sustained by a reputational mechanism if the central bank has superior information about its own objective function the qualitative properties of this reputational equilibrium are shown to differ from the cases considered in the existing literature where the central bank was modeled as playing a game against competitive labor markets copyright 1988 by ohio state university press

can reputation resolve the monetary policy credibility problem abstract this paper addresses three problems with reputational equilibria in the barro gordon monetary policy game the multiplicity of equilibria the coordination problem and a chisel prone credibility problem a chisel proof credibility condition ensures that in response to a small deviation from the low inflation rate by the central bank it never pays for the private sector to acquiesce if the private sector can coordinate then a low but nonzero inflation outcome can be supported as a subgameperfect and chisel proof credible noncooperative equilibrium for an atomistic private sector the result can still hold in a game between successive monetary administrations

who s afraid of atmospheric stabilisation making the link between energy resources and climate change abstract the distribution of fossil fuel reserves and resources between different regions and deposits has strong implications for climate change economics and policy the task of stabilising the atmosphere is intimately linked to the question of long term energy supplies as conventional petroleum reserves deplete notwithstanding debates about the scope for reserve extension through continued exploration and development it suggests a supply side component to complement the consumption orientation of existing climate policies the task is to ensure that investment and innovation moves towards the low carbon frontier instead of the high carbon frontier this also implies that the opec countries have little to fear about the long run impact of climate change policy the priority is to deter development of more carbon intensive unconventional petroleum deposits and technologies and to ensure that the existing trends to diversify power generation sources continue and extend more widely over time supply side constraints will not solve the climate problem in themselves but they make the task a lot easier if the opportunities are taken

major oil exporters may profit rather than lose in a carbon constrained world the organization of petroleum exporting countries opec claims compensation for losses in expected oil export revenues due to co2 mitigation measures in developing countries these losses are expected for two primary reasons a reduction in the consumption of oil in importing countries and a reduction in the producer price of oil taxation in an importing country implies a transfer of rents from producers to consumers so far most studies have focused on these two mechanisms and corroborated that revenue losses for opec are to be expected however there are also mechanisms that may be expected to raise the price of oil products in a cost effective regime for dealing with climate change i e a regime in which all or most countries participate and in which the same carbon price is applied on all carbon emitting activities the cost of using unconventional oil or synthetic diesel from coal will increase even more than the cost of using conventional oil given that reserves of conventional oil are expected to dwindle over time heavy oils and coal to liquids might set the long run price for liquid fuels which means that the price of oil would increase beyond the carbon fee i e the rent on conventional oil would increase we use an energy economic optimization model to analyze these three mechanisms we find that the net present value of opec revenue from conventional oil increases slightly at most by 4 percent with a global co2 restriction regime we also consider conditions under which this result does not hold

structural distortions and decentralized fiscal policies in emu the combination of discretionary monetary policy labor market distortions and nominal wage rigidity yields excessive inflation as monetary policy tries to exploit nominal wage contracts to address labor market distortions an inflation target reduces inflation but creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are preventing the associated excessive accumulation of public debt calls for debt ceilings if countries differ substantially in terms of structural distortions uniform debt ceilings must be complemented by country specific debt targets in order to prevent decentralized fiscal authorities from employing debt policy strategically

some macro implications of risk using the capital asset pricing model as the financial sector of a conventional rational expectations macro model an increase in expected inflation reduces the long run capital stock contrary to the usual result this occurs because the induced fall in real balances increases equity s share in the market raises equity s beta and discount rate and reduces investment increases in the variance of disturbances to aggregate demand reduce the capital stock while increases in the variance of inflation raise the stock a proportionate increase in both variances reduces the captial stock copyright 1987 by ohio state university press

crucial issues concerning central bank independence abstract this paper argues first that it is inappropriate to presume that central banks will in the absence of any tangible precommitment technology inevitably behave in a discretionary fashion that implies an inflationary bias furthermore there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it several implications are discussed

global oil gas depletion an overview abstract the world s production of conventional hydrocarbons will soon decline hydrocarbon shortages are inevitable unless radical changes occur in demand or in the supply of non conventional hydrocarbons the details are as follows global conventional oil supply is currently at political risk this is because the sum of conventional oil production from all countries in the world except the five main middle east suppliers is near the maximum set by physical resource limits should middle east suppliers decide to substantially curtail supply the shortfall cannot be replaced by conventional oil from other sources world conventional oil supply will soon be at physical risk the middle east countries have only little spare operational capacity and this will be increasingly called upon as oil production declines elsewhere large investments in middle east production if they occur could raise output but only to a limited extent a partial exception is iraq but even here there would be significant delays before prospects are confirmed and infrastructure is in place if demand is maintained and if large investments in middle east capacity are not made the world will face the prospect of oil shortages in the near term even with large investments resource limits will force middle east production to decline fairly soon and hence also global conventional oil production the date of this resource limited global peak depends on the size of middle east reserves which are poorly known and unreliably reported best estimates put the physical peak of global conventional oil production between 5 and 10 years from now the world contains large quantities of non conventional oil and various oil substitutes but the rapidity of the decline in the production of conventional oil makes it probable that these non conventional sources cannot come on stream fast enough to fully compensate the result will be a sustained global oil shortage for conventional gas the world s original endowment is probably about the same in energy terms as its endowment of conventional oil since less gas has been used so far compared to oil the world will turn increasingly to gas as oil declines but the global peak in conventional gas production is already in sight in perhaps 20 years and hence the global peak of all hydrocarbons oil plus gas is likely to be in about 10 or so years

independent monetary policies and social equity monetary policy is formulated as a game between the government and the central bank we show that when fiscal policy has a redistributional component there is a conflict between optimally configured monetary policies and equality consequently inflation averse governments interested in social equity will need to limit their use of fiscal policy

the macroeconomics of social pacts in this paper we analyze macroeconomic interactions between trade unions the central bank and the fiscal policymaker we explicitly model unions concern for public expenditure paving the way for an analysis of the potential gains from cooperation between the fiscal policymaker and the unions i e the so called corporatist or social pacts that have characterized economic policies in a number of european countries in the last few decades we also highlight the profoundly different incentives generated by institutional arrangements such as the maastricht criteria and the stability and growth pact the former has unambiguously induced more efficient outcomes the latter is likely to backfire

what will happen to the producer prices for fossil fuels if kyoto is implemented implementation of the kyoto commitments will result in lesser global fossil fuel consumption in 2010 than would occur in the absence of climate policy the paper explores how the consumption change resulting from climate policy implementation could affect the producer prices of fossil fuels the conclusion is that the price impact will be insignificant if the climate policy goals are established credibly and in the near future for that will give rationally behaving fossil fuel producers ample time to adjust production capacity to the changed outlook for future demand it is argued that as long as capacity develops in line with demand prices should remain the same irrespective of the speed and direction of demand change

the grey paradox how fossil fuel owners can benefit from carbon taxation abstract this paper considers the distributional impact of optimal carbon taxation on fossil fuel owners a carbon emitting exhaustible resource competes with a dirtier abundant resource and a clean backstop a time dependent carbon tax is set to optimally use these resources under a cap constraint over co 2 atmospheric concentration as the cap is tightened the dirtier resource becomes less competitive compared to the exhaustible resource the competition effect but the timing and duration of extraction of the exhaustible resource is modified the timing effect we provide analytical expressions of these effects and determine conditions over size of reserves pollution contents extraction costs and demand elasticity such that the exhaustible resource owners profits increase as the ceiling is tightened calibrations for the transport and power sectors suggest that the profits of conventional oil and natural gas owners increase compared to a baseline without regulation for plausible carbon ceiling values

loss of monetary discretion in a simple dynamic policy game abstract we analyze a simple policy game featuring monetary credibility problems and argue that loss of monetary discretion is not advantageous two elements form the basis of our analysis firstly we endogenize the source of credibility problems and secondly we consider a dynamic framework where credibility problems are not time invariant by doing this we are able to demonstrate that credibility problems are temporary and in steady state the government has removed these through sound policies a binding policy rule will only serve as an obstacle towards this steady state

deforestation and seigniorage in developing countries a tradeoff abstract most of countries covered by natural forests are developing countries with limited ability to levy taxes and restrained access to international credit markets consequently they are amenable to draw heavily on two sources of government financing namely seigniorage and deforestation revenues first we develop a theoretical model emphasizing a substitution effect between seigniorage and deforestation revenues second a panel data econometric analysis over the 1990 2010 period confirms our findings consequently a tighter monetary policy hastens deforestation third we extend the theoretical model and show that international transfers dedicated to forest protection can upturn the positive link between tighter monetary policies and deforestation and then discuss the relevance of this finding with respect to recent institutional arrangements

grand corruption instead of commitment reconsidering time inconsistency of monetary policy abstract this paper suggests that inflation may be affected differently by grand corruption compared to its positive nexus with petty corruption in an extended barro and gordon 1983a model grand corruption may serve as a quasi commitment device a cheating expropriating government may actually deter a monetary authority from cheating reneging furthermore rogoff s 1985 conservative central banker has an unambiguously beneficial effect she reduces the inflationary bias even more while also rendering fiscal policy more effective the model nests the standard fiscal monetary interaction logic with and without expropriation as well as the diametrical symbiosis result obtained by dixit and lambertini 2003a

on the consequences of sudden stops our analysis shows a number of interesting empirical regularities first when we apply a simple definition of sudden stops we find that they have been a fairly common occurrence at least since the late 1970s second economic performance after a sudden stop can differ dramatically across countries depending on certain country characteristics we show that open economies and those that choose a floating exchange rate regime after a crisis recover fairly quickly from the output contraction that usually comes with the sudden stop whereas countries with liability dollarization recover more slowly these characteristics relate to how the economies adjust exports and imports during the aftermath of a sudden stop open economies that do not show much liability dollarization tend to show higher export growth and less import contraction than highly dollarized economies the paper is organized as follows the next section discusses our definition of sudden stops we then examine the stylized facts associated with sudden stops including their regional coverage and evolution over time a subsequent section proceeds to identify the key factors that explain the nature of the aftermath of a sudden stop in capital flows if sudden stops remain a recurrent feature of emerging market economies in years to come the issue of how to ensure a quick return of growth in the aftermath of a crisis will require attention policy recommendations focused on improving such ex post performance should go hand in hand with traditional prevention measures designed to avoid the crises we elaborate on these conclusions in the final section

fiscal policy labor market structure and macroeconomic performance recent work on monetary policy design has investigated the interactions between labor market institutions and monetary policies and their implications for macroeconomic performance this paper argues that this link is not independent of the fiscal policymaking structure

fiscal policy when monetary policy is tied to the mast the paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy the equilibrium under discretion is characterised by inflation and a deficit comm

inflation targeting fiscal rules and the policy mix cross effects and interactions we examine how inflation targeting it and fiscal rules fr affect inflation and fiscal performance in a large panel of countries during 1990 2009 in line with theory both fr and it appear to shape monetary and fiscal outcomes significant cross effects seem to exist as it strengthens fiscal performance whereas the combination of fr and it tends to be associated with more disciplined macroeconomic policies than if only one of these institutions operates our findings suggest that it and fr affect the coordination of the policy mix and point to potential benefits of reforming macroeconomic frameworks in a holistic fashion

inflationary finance under discrepion and rules inflationary finance involves first the tax on cash balances from expected inflation and second a capital levy from unexpected inflation from the standpoint of minimizing distortions these capital levies are attractive ex post to the policymaker in a full equilibrium two conditions hold 1 the monetary authority optimizes subject to people s expectations mechanisms and 2 people form expectations rationally given their knowledge of the policymaker s objectives the outcomes under discretionary policy are contrasted with those generated under rules in a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices under an enforced rule it becomes possible to make some guarantees hence the links between monetary actions and inflationary expectations can be internalized there is a distinction between fully contingent rules and rules of simple form a simple rule allows the internalization of some connections between policy act ion and inflationary expectations but discretion permits some desirable flexibility of monetary growth this abstract was borrowed from another version of this item

interactions of commitment and discretion in monetary and fiscal policies we consider monetary scal interactions when the monetary authority is more conservative than the scal with both policies discretionary 1 nash equilibrium yields lower output and higher price than the ideal points of both authorities 2 of the two leadership possibilities scal leadership is generally better with scal discretion monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks but scal commitment is not similarly negated by monetary discretion second best outcomes require either joint commitment or identical targets for both authorities output socially optimal and price level appropriately conservative or complete separation of tasks jel e61 e63

fiscal leadership and central bank design this article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government that has both redistributional and stabilization objectives it is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared with a regime in which monetary and fiscal policy are determined simultaneously further it is shown that government leadership benefits both the fiscal and monetary authorities through the enhanced coordination that this arrangement implies jel classification e52 e61 f42

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

political macroeconomics a survey of recent developments the paper surveys political macroeconomics covering its development from rogoff s conservative central banker to the most recent discussions of monetary policy and institutional design topics include the inflation stabilization trade off central bank independence with escape clauses and overruling with costs inflation targets performance contracts for monetary authorities and the consequences of output persistence for these issues further topics are the political business cycle when output is persistent the political macroeconomics of fiscal policy the government spending bias and the game theoretic interaction between fiscal and monetary policy all work is discussed within a coherent analytical framework

brown backstops versus the green paradox abstract anticipated climate policies are ineffective when fossil fuel owners respond by shifting supply intertemporally the green paradox this mechanism relies crucially on the exhaustibility of fossil fuels we analyze the effect of anticipated climate policies on emissions in a simple model with two fossil fuels one scarce and dirty e g oil the other abundant and dirtier e g coal we derive conditions for a green orthodox anticipated climate policies may reduce current emissions the model can also be used to analyze spatial carbon leakage calibrations suggest that intertemporal carbon leakage from 0 to 8 is a relatively minor concern

fiscal activism under inflation targeting and non atomistic wage setting this paper presents a game between a fiscal authority an independent central bank and non atomistic wage setters the effects of fiscal activism and inflation targeting on labour market outcomes are analysed the results suggest that inflation targeting provides incentive for wage restraint moreover real wages are increasing in the degree of fiscal activism as wage setters exploit the response of a fiscal authority seeking to promote employment numerical results suggest that the benefits of targeting inflation are larger when the government pursues an activist policy and therefore that there is some substitutability between fiscal and monetary rules

bashing and coercion in monetary policy bashing and coercion in monetary policy i introduction we ve got excess plant capacity i don t think that growth is excessive i have not been overly concerned with inflation president bush in a february 14 1989 interview with the wall street journal p a8 with the economy running close to potential the risks seem to be on the side of a further strengthening of price pressure chairman greenspan in testimony before congress on february 21 1989 reprinted from the wall street journal february 22 1989 p a2 many investors appeared to be confused by conflicting statements by bush greenspan and other u s officials wall street journal february 22 1989 p a1 if the fed pushes interest rates significantly higher bush may go public with critism wall street journal march 24 1989 p a1 recent research in macroeconomic policy games by rogoff 1985 alesina 1988 tabellini 1987 and waller 1989a has concentrated on the importance of an independent central bank in a discretionary policymaking environment in the original work on policy games by barro and gordon 1983a 1983b no distinction was made between the monetary authority and the fiscal authority but these researchers argue that because the fiscal authority may have incentives to create excessive inflation giving the powers of money creation to an independent monetary authority whose inflation preferences differ from the current fiscal authority may enable society to reduce the equilibrium inflation rate this results holds even though monetary policy is still chosen in a discretionary fashion therefore backus and driffill 1985a 537 conclude autonomous central banks thus act as a precommitment device which may help to make noninflationary policies more credible and less costly implicit in the term independent is the belief that the central bank is free to choose monetary policy without interference from the fiscal authority administration however this is not generally the case the appointment of central bankers by the legislative or executive branch of the government governmental oversight of policy decisions or political pressure on the central bank by these branches will tend to influence the setting of monetary policy and subsequently the extent to which the central bank is truly independent 1 kane 1984 argues that even if it is not able to directly choose monetary policy the current administration still may be able to achieve its preferred monetary growth path by putting pressure on the monetary authority to do its bidding restricting the powers of the central bank public criticism of central bank performance here after referred to as bashing 2 exclusion from fiscal policy planning which hurts the egos of central bankers or undertaking actions which damage the post central bank income or opportunities of the central bankers are ways he suggests in which the administration can coerce cooperation from the central bank in creating excessive money growth such arguments have given rise to the view that the administration is engaged in a reputation building game with the central bank although the central bank has control of the money supply the administration can threaten to impose a welfare loss by bashing the central bank if it does not generate the monetary policy preferred by the administration the success of this strategy depends on the size of the bashing costs imposed on the central bank and also on the extent to which these threats are credible credibility in turn depends on the benefits and costs incurred by the administration in carrying out its threats as a result the administration may choose to bash the central bank if it does not produce the administration s preferred money inflation outcome by establishing a reputation for bashing the administration may be able to obtain its desired policy outcome in the future

inflation government transfers and optimal central bank independence abstract the problem of monetary policy delegation is formulated as a two stage non cooperative game between the government and the central bank the solution to this policy game determines the optimal combination of central bank conservatism and independence the results show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism the results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker

does central bank independence lower inflation this paper provides a potential explanation for the recent findings of no significant relationship between central bank independence cbi and lower inflation we argue that although cbi delivers lower inflation in the short term it may reduce the scope for productivity enhancing public investment and so harm future growth potential we also argue that the effects on growth make cbi less likely to achieve lower inflation in the long term

cooperative monetary and fiscal policies in the euro area this article discusses the interaction of fiscal and monetary policy in the euro area though many observers suggest a fiscal union as the next step of euro area constitutional reform a federal fiscal union does not appear politically feasible in the short run we suggest moving forward with cooperative monetary and fiscal institutions and policies that allow for decentralized fiscal decisions while taking federal stabilization policies into account this approach will increase the probability of survival of the euro area compared with the current fiscal arrangements using a dynamic macro model counterfactual simulation paths of our cooperative solution are contrasted with time series data for the euro area

monetary policies for developing countries the role of institutional quality abstract weak public institutions including high levels of corruption characterize many developing countries we demonstrate that this feature has important implications for the design of monetary policymaking institutions we find that a pegged exchange rate or dollarization while sometimes prescribed as a solution to the credibility problem is typically not appropriate for countries with poor institutions such an arrangement is inferior to a rogoff style conservative central banker whose optimal degree of conservatism is proportional to the quality of institutions finally we cast doubt on the notion that a low inflationary framework can induce governments to improve public institutions

the optimality of a monetary union without a fiscal union the paper explores the case for monetary and fiscal unification monetary policy suffers from an inflation bias because the monetary authorities are not able to commit with international risk sharing fiscal discipline suffers from moral hazard an inflation target alleviates the inflation bias but weakens fiscal discipline in a monetary union however this adverse effect on fiscal discipline is weaker this advantage of monetary unification may outweigh the disadvantage of not being able to employ monetary policy to stabilise country specific shocks while monetary unification may thus be optimal international risk sharing may be undesirable because it weakens fiscal discipline

monetary compensations in climate policy through the lens of a general equilibrium assessment the case of oil exporting countries this paper investigates the compensations that major oil producers have claimed for since the kyoto protocol in order to alleviate the adverse impacts of climate policy on their economies the amount of these adverse impacts is assessed through a general equilibrium model which endogenizes both the reduction of oil exportation revenues under international climate policy and the macroeconomic effect of carbon pricing on middle east s economy we show that compensating the drop of exportation revenues does not offset gdp and welfare losses because of the time profile of the general equilibrium effects when considering instead compensation based on gdp losses the effectiveness of monetary transfers proves to be drastically limited by general equilibrium effects in opened economies the main channels of this efficiency gap are investigated and its magnitude proves to be conditional upon strategic and policy choices of the middle east this leads us to suggest that other means than direct monetary compensating transfers should be discussed to engage the middle east in climate policies

money debt and deficits in a dynamic game this paper analyzes a dynamic linear quadratic game between the fiscal and monetary authorities the equilibrium outcome of the game determines the time path of money creation fiscal deficits and public debt the game is solved for different equilibrium concepts the equilibria are then compared and interpreted with reference to alternative institutional arrangements the main results are i coordination increases the speed of adjustment towards the steady state and takes the steady state value of public debt closer to the desired target ii precommitments take the non cooperative equilibrium closer to the coordinated outcome iii increasing the weight that each policymaker assigns to his own private objectives slows down the adjustment process places more burden on the opponent but has ambiguous effects on the steady state value of public debt

a new keynesian model of policy irrelevance of the developments in macro theory of the last thirty years few have been as far reaching as the introduction of rational expectations in particular to the study of how discretionary use of monetary policy by central bankers affects output and employment by ascribing rational expectations to private agents lucas 11 kydland and prescott 10 barro and gordon 6 alesina and tabellini 1 rogoff 16 and a host of others have demonstrated examples in which agents who understand the motives of the monetary authority will correctly anticipate the monetary authority s actions and render them ineffective in affecting any real variables in these models it is only the innovations in monetary policy which private agents could not forecast that had any real effects systematic use of the tools of monetary policy to achieve an end were ineffective typically these models represented the economy as a reduced form game in which the payoffs to private agents depended on the realizations of actions of the monetary authority agents forecasts of those actions and random shocks imposed by nature it was understood if not always explicitly stated that some general equilibrium model existed whose equilibrium outcomes generated the payoff functions of the game the goal of the monetary authority was to alter the outcome of the game away from the non cooperative equilibrium towards some other outcome which was not consistent with autarkic payoff maximization but superior to the non cooperative outcome each individual agent would maximize his payoff by correctly anticipating the monetary authority s move in the aggregate the result would be that the monetary authority s action would be rendered ineffective

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

a distributional argument for supply side climate policies this paper presents a distributional argument for the use of supply side climate policies whereby carbon emissions are controlled through i depletion quotas or ii permanent confiscation of a fraction of the in situ carbon stocks the modeling considers intertemporal competitive equilibria in the cobb douglas version of the dasgupta heal solow stiglitz model of capital accumulation and costless resource extraction it is shown how policies i and ii preserve the functional distribution of income between capital owners and resource owners compared to the case where no climate policy is needed while suggested demand side policies do not such observations are of interest as avoiding functional redistribution may facilitate climate change negotiations the paper discusses policy implications of the analysis outside the simplified setting of the stylized model

political shocks and public debt the case for a conservative central bank revisited abstract we explore the dynamics of public debt and optimal institutions in the presence of political shocks arising from electoral uncertainty under commitment optimal stabilization is established by combining an inflation target with a debt target the inflation target should be contingent on the political shocks while the debt target forces the government to fully absorb the political shocks in the period in which it occurs in the absence of such inflation and debt targets but with monetary commitment a conservative central bank enhances stabilization an even more conservative central bank is optimal if monetary policy cannot commit

debt contingent inflation contracts and targets abstract this paper analyzes fiscal and monetary policy interaction in a simple policy game with debt and output shocks seigniorage provides revenue for the government but results in an inflation bias we analyze three mechanisms designed to eliminate some or all of the biases in monetary policy an inflation performance contract inflation target both contingent on the stock of debt and a zero inflation rule the performance contract and inflation target result in higher interest rate remove all biases in monetary policy and achieve the pre commitment policy hence they are equivalent the first two solutions also yield a higher expected welfare than a zero inflation policy

allocation of co2 emission permits economic incentives for emission reductions in developing countries the economic impacts on developing regions following a global cap and trade system for carbon dioxide are assessed through the use of an energy economy systems model both an equal per capita allocation and a contraction and convergence allocation with convergence of the per capita emissions by 2050 are shown to offer economic incentive for africa india and probably also latin america to accept binding emissions commitments under a 450 ppm carbon dioxide stabilization scenario the gain for latin america is mainly a result of increased export revenues from sales of bio fuels as a result of the climate policy it is on the other hand unlikely that these allocation approaches would offer an economic incentive for china to join the regime because of its high economic growth present higher per capita emissions than india and africa and more costly mitigation options than latin america a more stringent allocation for developing countries such as contraction with convergence of the per capita emissions by the end of this century is estimated to generate reduced net gains or increased net losses for the developing regions though africa is still expected to gain

mobile capital domestic institutions and electorally induced monetary and fiscal policy the literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible similarly examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether we develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence we test the model using data from oecd countries we find evidence that preelectoral monetary expansions occur only when the exchange rate is flexible and central bank independence is low preelectoral fiscal expansions occur when the exchange rate is fixed we then explore the implications of our model for arguments that emphasize the partisan sources of macroeconomic policy and for the conduct of fiscal policy after economic and monetary union in europe

monetary union without fiscal coordination may discipline policymakers abstract with benevolent policymakers and fiscal leadership monetary unification reduces inflation taxes and public spending these disciplining effects of a monetary union which become stronger if the number of participants in the union increases are likely to raise welfare two types of arrangements are considered for the union s common central bank ccb making the ccb more conservative and imposing an inflation target on the ccb in contrast to the results of svensson 1997 svensson l e o 1997 optimal inflation targets conservative central banks and linear inflation contracts american economic review 87 98 114 an optimally designed conservative ccb may outperform inflation targeting finally we find that fiscal coordination offsets the disciplining effects of monetary unification hence subsidiarity in fiscal policymaking may enhance welfare

do we really want an independent central bank the issue of an independent central bank is assessed in the context of experience in the u k economy the historical role of the bank of england is examined revealing that the success of anti inflation policy depends on the exchange rate regime as well as on the institutional arrangements holding between the bank and government inflation targets are discussed but independence is also addressed by seeing how other targets such as nominal gdp might perform the theoretical arguments for and against an independent central bank are discussed in detail it is argued that partial independence where the central bank enjoys autonomy in relatively good states and is overridden in bad states is the preferred form of independence attention is drawn to the costs arising owing to a lack of coordination of policy when the finance ministry may compete against the central bank in the case where the latter is independent copyright 1994 by oxford university press

designing fiscal and monetary institutions for a european monetary union this paper explores the conditions under which aeuropean monetary union emu is an optimum currencyarea the scope for an emu increases with theconvergence of structural and fiscal policies smallmoney holdings a conservative european central bank and dependent national central banks how nationalpolicies affect the rest of the union once the emu hasbeen established is also investigated the case forsurveillance of national structural and fiscalpolicies appears to depend mainly on the monetaryarrangements in the union

note on loss of monetary discretion in a simple dynamic policy game jensen 1994a finds that loss of monetary discretion leads to lower welfare however by extending his model we show that if real base money holdings are relatively low as is likely to be the case for modern economics a zero inflation rule may well be preferable to monetary discretion if the emphasis on achieving the output and public spending targets falls a zero inflation rule is more likely to be preferred the increased support for binding policy rules thus conforms with a less tolerant attitude towards inflation

seigniorage inflation and reputation abstract this paper derives a reputational equilibrium for inflation in a model in which the sovereign obtains valuable seigniorage by issuing fiat money in exchange for real resources with contemporaneous perception of actual sovereign behavior and immediate adjustment of real cash balances to new information the friedman elasticity solution for maximal seigniorage is a reputational equilibrium more generally the objective of maximal seigniorage produces an equilibrium inflation rate equal either to a generalization of the friedman elasticity solution or to the rate at which the sovereign discounts future seigniorage adjusted for the growth rate whichever is larger the model formalizes the conjecture that inflation rates in excess of the friedman solution are attributable to high discount rates for future seigniorage

monetary conservatism and fiscal policy abstract does an inflation conservative central bank a la rogoff 1985 remain desirable in a setting with endogenous fiscal policy to provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility we find that lack of fiscal commitment gives rise to excessive public spending the optimal inflation rate internalizing this distortion is positive but lack of monetary commitment generates too much inflation a conservative monetary authority thus remains desirable when fiscal policy is determined before monetary policy each period the monetary authority should focus exclusively on stabilizing inflation monetary conservatism then eliminates the steady state biases associated with lack of monetary and fiscal commitment and leads to stabilization policy that is close to optimal

will opec lose from the kyoto protocol a range of energy economy models forecast losses to members of the organisation of petroleum exporting countries opec should the kyoto protocol come into force these forecasts are a powerful influence in the united nations framework convention on climate change negotiations they are used by opec to advance the agenda on the impacts of response measures covertly arguing for compensation for lost oil revenues arising from implementation of the protocol this paper discusses this issue and explores the key assumptions of these models and their uncertainties assumptions about carbon leakage future availability of oil reserves substitution innovation and capital turnover are considered the paper suggests that losses will not affect opec countries equally and that these losses are not likely to be as substantial as the models forecast a range of policy measures are proposed to lessen any impact the protocol may have on opec