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

independent central banks low inflation at no costs a widely held view suggests that politically independent central banks bring about relatively low and stable inflation rates a more debated question is whether one has to pay for this good outcome with more real instability in his seminal contribution kenneth rogoff 1985 suggests that an independent and inflation averse central bank reduces average inflation but as a result increases output variability the conservative central banker reduces the inflation bias due to the time inconsistency problem but stabilizes less however alesina and summers 1993 do not find that at least within the oecd countries more independent central banks are associated with more variability of growth or unemployment thus they conclude that independent central banks bring about low inflation at no apparent real costs the point of this paper is to provide theoretical underpinnings to this finding which is in contrast to rogoff 1985 2 the basic idea is that one can isolate two sources of output variability one is the economic variability induced by standard exogenous shocks that monetary policy is supposed to stabilize for instance money demand shocks or supply shocks the second source of variability is political or more generally policy induced this is the variability introduced in the system by the uncertainty about the future course of policy for instance alesina 1987 studies the effect of uncertain electoral outcomes in a model where the two contending parties have different preferences over inflation and unemployment an inflation averse independent central banker does not stabilize as much the economic variability in order to keep inflation low and stable this is rogoff s point however by insulating monetary policy from political pressures an independent central bank can reduce the political variability the overall effect of independence on output variability is thus ambiguous this result is consistent at least prima facie with the evidence in alesina and summers 1993 on the lack of correlation between centralbank independence and output variability in fact it is possible that when the politically induced output variability is predominant a more independent central bank reduces average inflation and the variance of output

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

the anti inflationary influence of corporatist structures and central bank independence the importance of the hump shaped hypothesis many studies have found strong negative correlations between central bank independence and inflation but the casual significance of this relationship is often challenged we find that the negative relationship remains even when a number of other explanatory variables are considered special attention is given to the role of corporatism following calmfors and driffell it is argued that both high and low levels of centralization should be associated with lower inflation we present empirical support for his hump shaped hypothesis and find that the inclusion of corporatism does not diminish the significance of central bank independence

agent discretion regulatory policymaking and different institutional arrangements this paper examines agent discretion that is a result of the structure of the legislative process based on several distributions of lawmaking powers different games are analyzed in which players decide on regulatory policies the analysis shows that agent discretion increases as lawmaking powers are differentiated and assigned to specialized players particularly monopoly initiation power which allows a player to act as a gatekeeper has a substantial impact on discretion agent discretion will be even larger when these players also have heterogenous preferences the framework that is developed in this paper permits comparisons across different political systems with regard to agent discretion and legislative control on policymaking

political influence on the central bank international evidence political influence on the central bank is measured bere by looking at the probability that a central bank governor will be replaced shortly after a political change of government the governor changes about half the time witbin six months of a nonconstitutional or other radical change of government a military coup or a restoration of democracy the governor is much less likely to change within six months following a routine change in the head of government about one fourth of the time in developing countries and one tenth in industrial countries these indicators vary across countries and correlate statistically with inflation and its variability and with real growth and real interest rates differences in the vulnerability of the central bank to political instability in political instability itself and in central bank turnover in nonpolitical periods seem to be a major part of the explanation for why developing countries have on average higher and more variable inflation than industrial countries do

bureaucratic discretion or congressional control regulatory policymaking by the federal trade commission this paper extends stigler and peltzman s approach to regulation by incorporating a legislature the model yields comparative statics results and hence testable implications the paper then tests between two opposing approaches about regulatory agency behavior the first assumes agencies operate independently of the legislature and hence exercise discretion the second assumes that congress controls agency decisions the recent behavior of the federal trade commission provides the empirical setting substantial evidence is found for the specific predictions of the model including the hypothesis of systematic congressional influence over ftc decisions

did railroad deregulation lead to monopoly pricing an application of q this paper asks whether given that railroads now have almost total freedom to set their rates competition is sufficie nt to keep railroads from making supracompetitive profits previous a ttempts to measure railroads profits rely on accounting measures of the rate of return but recent work raises serious doubts about the a ccuracy of these measures therefore this paper uses tobin s q the r atio of a firm s market value to the replacement cost of its assets the values of q show that railroads are not making supracompetitive p rofits thus there is no justification for increased regulation of ra ilroad rates copyright 1987 by the university of chicago

congressional influence on u s monetary policy abstract congressional influence is generally discounted or ignored in political models of federal reserve behavior here i show that changes in the leadership of the senate banking committee are significantly correlated with monetary base growth more liberal committee leaders are associated with significantly higher base growth other factors held constant the result is shown to hold across several econometric specifications and different definitions of the congressional preference variable

variation in central bank independence across countries some provisional empirical evidence in this paper seven hypotheses to explain variation in central bank independence across countries are tested the predictions based upon the theory that delegation of authority by politicians to the central bank is used as a commitment device are not supported central bank independence is not higher the larger the employment motivated inflationary bias the higher political instability or the larger the government debt central bank independence is positively related to historical inflation experience and negatively with political instability we do only find limited support for the view that countries with a universal banking system and countries whose central banks do not regulate financial institutions have more independent central banks

credibility of optimal monetary delegation while optimal monetary policy is subject to a credibility problem it is often argued that the government should appoint a central banker whose incentives differ from the government s the author argues however that such delegation does not overcome credibility problems given that delegation is discretionary and without costs reappointment costs of delegation are shown to improve suboptimal outcomes but credibility of optimal monetary policy turns out be worsened at best delegation therefore has no effects on credibility but only if reappointment has no costs copyright 1997 by american economic association

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

the political economy of american monetary policy preface 1 introduction thomas mayer 2 studying the fed towards a broader public choice perspective thomas willett 3 the federal reserve reaction function a specification search salwa khouri 4 corporate profitability as a determinant of restrictive monetary policy estimates for the post war united states gerald epstein and juliet schor 5 federal reserve behavior since 1980 a financial market perspective william melton and v vance roley 6 the federal reserve and its institutional environment a review michael munger and brian roberts 7 the political economy of monetary policy robert hetzel 8 political monetary cycles nathaniel beck 9 congress and the fed why the dog does not bark in the night nathaniel beck 10 the federal reserve as a political power james pierce 11 monetary policy and political economy the federal reserve and the bank of japan thomas cargill and michael hutchinson 12 a positive analysis of the policymaking process at the federal reserve raymond lombra and nicholas karamouzis 13 a theory of fomc dissent voting with evidence from the time series thomas havrilesky and robert schweitzer 14 explaining fomc members votes john gildea 15 fed behaviour and x efficiency theory toward a general framework harinder singh and roger frantz 16 minimizing regret cognitive dissonance as an explanation of fomc behavior thomas mayer 17 the discount window william poole 18 leaning against the wind the behavior of the money stock in recession and recovery 1953 8 elmus wicker 19 bureaucratic self interest as an obstacle to monetary reform edward kane index

does inequality cause inflation the political economy of inflation taxation and government debt a democratic society in which the distribution of wealth is unequal elects political parties that are likely to represent the interests of poor people it is in the interests of the clientele of the resulting governments to attempt to levy inflation taxes in order to erode the real value of debt service and redistribute from the rich to the poor consequently inequality and high levels of nominal government debt sow the seeds for inflation some cross country evidence for this proposition is provided

the disadvantage of tying their hands on the political economy of policy commitments incumbents are more likely to be re elected if they have a comparative advantage in the eyes of voters on some central issue this paper argues that incumbents have an incentive to avoid reforms that reduce the government s role in deciding these issues in order to increase their chances of re election this point is illustrated in the context of the choice of an exchange rate regime in an economy characterized by an inflation bias a flexible exchange rate allows the government to use monetary policy as a stabilization tool while fixed exchange rates remove the inflation bias of the economy on the one hand it is shown that a more inflation averse government may refrain from choosing fixed exchange rates in order to capitalize on the inflationary reputation of its opponent this incentive is contrasted with the opposite incentive to tie the hands of the future government should be incumbent be defeated on the other hand it is shown that electoral considerations may reinforce the incentive of the more inflationary government to tie its own hands with fixed exchange rates

corporate control and performance in the 1930s i introduction a fundamental assumption of mainstream microeconomics holds that firms strive to maximize economic profits beginning with the work of berle and means 1932 however researchers have seriously questioned if profit maximization is the sole objective for the large modern corporation given various circumstances in particular berle and means 1932 69 contend that as the ownership of corporate wealth has become more widely dispersed ownership of that wealth and control over it have come to lie less and less in the same hands they argue that the main beneficiaries of this transfer of control ultimately have been the managers because it has put them in the position to pursue their own interests at the expense of profits modern managerialist neoclassical theory suggests that corporate managers must be exempt from a number of behavioral constraints to successfully deviate from profit maximization and pursue the five p s of increased pay prerequisites power prestige and patronage first as berle and means note the executives must be free of a stockholder constraint some slack typically exists in this constraint when stock ownership is widely dispersed because an agency problem results from the asymmetry of information regarding true managerial behavior and performance simply put when an individual holds a relatively small percentage of the firm s outstanding stocks there exists little if any willingness in terms of a financial incentive to monitor true performance and ability with regards to corporate power to either actually or potentially discipline management thus the severity of the stockholder constraint generally depends on the percentage of the firm s outstanding stock held by the dominant stockholder second according to williamson 1963 the product market constraint cannot be fully binding since discretionary expenditures require excess profits in a competitive market managers are forced to minimize costs or the firm fails to survive in the marketplace as a result the firm must possess some degree of market power for managers to successfully pursue other goals besides profit maximization third some imperfections must exist in the capital markets otherwise any inefficient behavior on the part of management increases the likelihood of a corporate takeover in some cases as marris 1964 notes the mere threat of a takeover might sufficiently discipline management smiley 1976 points out however that the transaction costs of a takeover gives management some room to exercise discretionary behavior before the risk of a takeover becomes intolerably high fourth fama 1980 argues that imperfections must also exist in the external and internal labor markets otherwise job mobility within and among firms creates an incentive for managers to behave efficiently in addition better jobs and rewards in the future mean better job performance today finally jensen and meckling 1976 show that managers must be awarded an incomplete incentive contract if executive compensation completely depends on performance less inefficient behavior results despite the fact that managers must be at least partially free of all five constraints to successfully deviate from profit maximization a surprisingly large number of researchers including larner 1970 palmer 1973 mceachern 1975 and neun and santerre 1986 has found evidence linking unconstrained managers with lower levels of corporate performance in more modern times 1 these studies typically focus on the consequence of a loosening of the stockholder constraint on profitability researchers either explicitly or implicitly control for the severity of the product market constraint and some slack is assumed in the other three constraints on managerial behavior 2 with the exception of neun and santerre 1986 however these studies use a dichotomous measure of stockholder control which is based upon arbitrary and subjective criteria

checks and balances and the supply of central bank independence abstract the paper analyzes the institutional conditions under which policymakers can credibly commit to an independent central bank and thereby mitigate the well known time consistency problem in monetary policy it is shown theoretically that granting independence via a statute is only credible for legislative systems with at least two heterogeneous decision making bodies which both have veto rights for example bicameral systems this thesis is supported by empirical evidence the legal independence of central banks is significantly higher in those oecd countries whose legislative processes are characterized by extensive checks and balances furthermore the negative relation between legal independence and inflation is larger in countries with checks and balances than in countries without checks and balances

central bank behavior a positive empirical analysis abstract the central bank is analyzed as a utility maximizing unit acting in the framework of a politico economic model it derives utility from keeping the price level stable and is constrained by government the structure of the economy and the political commitment to stable exchange rates it uses a satisficing strategy concentrating on keeping conflicts with government below a certain level in the case of serious conflict the central bank follows the policy directions undertaken by government but with a time lag the complete model comprising endogenous consumer voters government and central bank is econometrically tested for germany with good results

time consistent monetary policy under output persistence this note merges the fact that real activity is persistent with a barro gordon type model of endogenous monetary policy it shows that persistence crucially affects policy choices this applies in non cooperative games with a finite horizon and in games with an infinite horizon always enforceable inflation announcements move higher when output persistence increases policymakers who discount future utility by 10 annually produce about ten times as much inflation under near hysteresis as in a natural rate scenario a change in the policymaker s time preference may affect inflation both ways depending on present time preference and persistence

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

is new zealand s reserve bank act of 1989 an optimal central bank contract this paper evaluates the reserve bank of new zealand act of 1989 from a principal agent perspective arguing that the act represents a dismissal rule the optimal dismissal rule requires that the central banker be dismissed whenever inflation exceeds a critical level that depends on aggregate supply disturbances and measurement error in the inflation index this is essentially the structure established by the act the scope for renegotiating the target rate however creates an incentive for the government to set the critical rate too high consequently the inflation bias of discretion is reduced but not completely eliminated copyright 1995 by ohio state university press