the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

non manipulable division rules in claim problems and generalizations abstract when resources are divided among agents the characteristics of the agents are taken into consideration a simple example is the bankruptcy problem where the liquidation value of a bankrupt firm is divided among the creditors based on their claims we characterize division rules under which no group of agents can increase the total amount they receive by transferring their characteristics within the group by allowing agents characteristics to be multi dimensional and choosing the meaning of variables appropriately our model can subsume a number of existing and new allocation problems such as cost sharing social choice with transferable utilities income redistribution bankruptcy with multiple types of assets probability updating and probability aggregation a number of existing and new results in specific problems are obtained as corollaries

learning by doing and the introduction of new goods a dynamic general equilibrium model is developed in which goods are valued according to the characteristics they contain the set of goods produced in any period is endogenously determined and learning by doing is the force behind sustained growth it is shown that the set of produced goods changes in a systematic way over time with goods of higher quality entering each period and those of lower quality dropping out the model is then used to study the effect of introducing a traditional sector in which there is no learning

a method for taking models to the data abstract this paper develops a method for combining the power of a dynamic stochastic general equilibrium model with the flexibility of a vector autoregressive time series model to obtain a hybrid that can be taken directly to the data it estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar us economy the stability of the real business cycle model s structural parameters and the performance of the hybrid model s out of sample forecasts

does schooling cause growth a number of economists find that growth and schooling are highly correlated across countries a model is examined in which the ability to build on the human capital of one s elders plays an important role in linking growth to schooling the model is calibrated to quantify the strength of the effect of schooling on growth by using evidence from the labor literature on mincerian returns to education the upshot is that the impact of schooling on growth explains less than one third of the empirical cross country relationship the ability of reverse causality to explain this empirical relationship is also investigated

designing development planning charges settlement patterns cost recovery and public facilities there is a large body of literature that discusses the control of settlement patterns using traditional planning instruments whilst there is some theoretical literature discussing the use of development charges to influence settlement patterns by addressing market failure there is limited literature examining how such charging is implemented in practice this paper presents the theoretical basis for development charging based on the pigouvian tradition and discusses how these charges can be calibrated it identifies the potential for second best approaches including hypothecation of revenues this approach is distinguished from infrastructure charging which is a cost recovery instrument the irish system of infrastructure charging is assessed as a means of exploring how current instrument design could be improved to align with policy aspirations using the lessons that theory provides

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

inflation forecast targeting an alternative approach to estimating the inflation output variability tradeoff we suggest a new way of computing the inflation output variability tradeoff under inflation forecast targeting our approach is based on dynamic stochastic simulations of the average inflation rate over a two year horizon using the moving average representation of a vector autoregressive var model using real time data over two samples we estimate the inflation output variability tradeoff for the united states and show that it has shifted favorably over time we analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

monotonic redistribution of non negative allocations a case for proportional taxation revisited we reconsider casajus forthcoming characterization of uniformly proportional taxation by three properties of redistribution efficiency symmetry and monotonicity when restricted to non negative income these properties imply proportional taxation in a weaker sense the tax rate may vary with total income but only in an economically reasonable way

pollution taxation and strategic behaviour abstract this paper proposes a pollution tax to be imposed on the victim and the injurer to discourage strategic moves by the victim to exploit the injurer an uniformed regulator induces an optimal emission of pollution by choosing an appropriate stochastic tax

output inflation and stabilization a counterfactual analysis abstract we estimate a small open economy macro model in which movements in inflation and output are driven by fiscal real monetary exchange rate and asset disturbances we use 1980 s data from bolivia and brazil each of which undertook stabilization programs though only bolivia s succeeded an important part of our analysis is counterfactual where hypothetical paths of output and inflation under alternative policymaking scenarios are investigated for bolivia there is clear evidence that deficits affect inflation largely through their effects on money growth and do not have much influence on output external shocks are important for brazilian inflation

distinguished lecture on economics in government what central bankers could learn from academics and vice versa academic writing about monetary policy has been useful to practical central bankers but more of certain aspects of the economists way of thinking could profitably be imported on the other hand academics could improve their analysis and make it more useful to policymakers if they would pay more attention to certain real world aspects of monetary policy the author draws on his experience at the federal reserve board to point out a number of specific lessons for each side

economic choice political decision and the problem of limits assesses the arguments for the use of market or political processes for making collective choices the border between what is mine and what is ours is contested but it is unguarded where should it lie how would we know when it should be adjusted i uncover an old paradox a society can never use political means to guard against incursions across the border for political ends some other mechanism such as constitutional or other extra statutory rules are required

has monetary policy become more efficient a cross country analysis over the past twenty years macroeconomic performance has improved in industrialized and developing countries alike in a broad cross section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly this increased stability can be attributed to either 1 more efficient policymaking by the monetary authority 2 a reduction in the variability of the aggregate supply shocks or 3 changes in the structure of the economy in this paper we develop a method for measuring changes in performance and allocate the source of performance changes to these two factors our technique involves estimating movements toward an inflation and output variability efficiency frontier and shifts in the frontier itself we study the change from the 1980s to the 1990s in the macroeconomic performance of 24 countries and find that for most of the analyzed countries more efficient policy has been the driving force behind improved macroeconomic performance

the religious transition a long run perspective we use factor analysis to derive a robust measure of religiosity from items reported in five waves of the world value survey our measure of religiosity is negatively correlated with per capita income development apparently causes religiosity to fall to about half its pre modern level most components of the demand for religion are reduced by development the supply of religion declines once churches lose control over the institutions providing collective goods like education health and social security these goods used to be supplied by churches jointly with religious services but tend to be supplied by the state with rising levels of development aspects of supply and demand are integrated in a ces production function framework that can explain the direction of causality in the observed negative correlation between income and religiosity

the size of human capital externalities cross country evidence human capital accumulation is usually held to generate positive externalities however the empirical evidence on human capital externalities has been scarce and inconclusive the missing evidence appears to be caused by misleading comparisons between private and social rates of return by incorrect interpretations of regression coefficients or by an inappropriate level of aggregation our own estimates point to relatively robust empirical evidence for a human capital externality that is about twice as large as a benchmark estimate which is derived from a standard parameterization of a simple growth model we ponder a possible causal link from human capital to social capital in the context of alternative views of long run development and argue that the grand transition view paldam 2002 is compatible with the existence of a large human capital externality

the rise and decline of mancur olson s view of the rise and decline of nations author affiliation j barkley rosser jr department of economics msc 0204 james madison university harrisonburg va 22807 usa rosserjb jmu edu acknowledgment the author thanks roger r betancourt and thomas c schelling for providing either useful comments or materials and dennis coates and jac c heckelman for careful editing of earlier drafts of this paper the author is responsible for any remaining errors or misinterpretations 1 introductionalthough the first book by mancur lloyd olson jr 1the logic of collective action 1965 has been cited more often and can be viewed as more fundamentally innovative at the theoretical level its successor the rise and decline of nations 1982 has been more widely translated and is arguably the magnum opus of his career the grand application of his earlier ideas to the world and history at large 2 the earlier work laid out the problems that groups have in their collective goals as they grow larger with a greater disjuncture arising between the interests of the individual and of the collective group in the final chapter of this work he suggested that his argument could lead to an overturning of the orthodox theory of pressure groups that saw them as a positive force for democracy and efficiency luce 1924 commons 1950 special interest groups representing small numbers of firms in oligopolistic industries could support monopolistic or protectionist legislation such legislation could damage the broader economy especially groups unable to organize themselves that would then have to suffer in silence although olson rarely used the term this argument can be seen as foreshadowing the later theory of rent seeking and in his later works he more openly recognized the affinity of his ideas with the public choice school of thought 3although olson added a number of arguments two crucial innovations appear in rise and decline that underlie its central thesis one is the distinction between distributional coalitions which are seen as leading to outcomes inimical to economic growth and encompassing coalitions which are seen as potentially aiding economic growth in a society because of their greater size the latter are seen as having trouble organizing themselves and achieving influence although they might have a better chance of doing so in a smaller and more homogeneous society such as sweden olson s other innovation was his argument that over time a stable democracy will tend to create more and more distributional coalitions whose political power will accumulate thus gradually impeding the economic growth of the society this becomes the key to his most famous argument in rise and decline he especially focused on the post world war ii performance of germany and japan compared with the united kingdom he argued that the defeat of germany and japan in the war led to the overthrow of the power of narrow special interest groups that impeded growth whereas in the united kingdom such groups reached a peak of power that was responsible for the relatively weak performance of the british economy he emphasized that this was not a sudden development but that after leading the world in economic growth during the industrial revolution during the long eighteenth century 1688 1834 britain began to fall behind in the mid 19th century compared with such rising powers as germany and the united states this deceleration and relative decline only worsening in the aftermath of world war ii although he discussed a variety of other examples this was the book s central inspiring case of course even as rise and decline was being published the united kingdom began to undergo a substantial political and economic transformation during the period of rule by margaret thatcher that triggered a global movement to privatization and marketization even though britain was not invaded and did not experience a violently revolutionary upheaval

understanding the city size wage gap in 2000 wages of full time full year workers were more than 30 percent higher in metropolitan areas of over 1 5 million people than rural areas the monotonic relationship between wages and city size is robust to controls for age schooling and labor market experience in this paper we decompose the city size wage gap into various components we propose an on the job search model that incorporates latent ability search frictions firm worker match quality human capital accumulation and endogenous migration between large medium and small cities counterfactual simulations of the model indicate that variation in returns to experience and differences in wage intercepts across location type are the most important mechanisms contributing to the overall city size wage premium steeper returns to experience in larger cities is more important for college graduates while differences in wage intercepts is more important for high school graduates sorting on unobserved ability within education group and differences in labor market search frictions and distributions of firm worker match quality contribute little or slightly negatively to observed city size wage premia in both samples

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

differentially monotonic redistribution of income we suggest a differential version of monotonicity for redistribution rules whenever the differential of two persons income weakly increases then the differential of their post redistribution rewards also weakly increases together with efficiency and non negativity differential monotonicity characterizes redistribution via taxation at a fixed rate and equal distribution of the total tax revenue

the efficient production of external economies does independent market adjustment always lead to a less than pareto optimal supply of goods when there are external economies the traditional pigovian conclusion that it did has recently been rejected by some eminent economists this rejection began with a contribution in this review by james buchanan and milton kafoglis who produced examples in which independent market adjustment apparently provided optimal or even supra optimal supplies of goods with external economies and thus found the orthodox pigovian conclusion unsatisfactory their finding has been accepted by many economists including william baumol who attempted in a subsequent communication in this journal to provide a formal general explanation of their result this note will show that buchanan and kafoglis failed to call attention to the major theoretical point

evaluating monetary policy options we present a procedure for evaluating ex ante the effects of alternative paths of a monetary policy tool the federal funds rate in our illustrations on output and the price level within a variant of a widely used vector autoregressive model of the u s economy this exercise is a supplement to or even an alternative to analysis that relies on a particular structural model illustrations of the method are provided by evaluating the effects of changes in the funds rate target additionally the taylor rule is used to generate target funds rates for different target inflation rates and the effects of these are evaluated one of the critical elements in the formulation of monetary policy is the evaluation of the effects of alternative paths of the policy instrument on the macroeconomy for example in federal open market committee fomc meetings estimates of the effects of alternative paths of the federal funds rate are presented to policymakers as an input into the policy process for a discussion see meulendyke 1998 the effects of the alternative paths are evaluated within the context of a structural model of the economy the latest version of the structural model used at the board of governors is described in brayton et al 1997 in this article we present a procedure for evaluating ex ante the effects of alternative paths of a monetary policy tool the federal funds rate in our illustrations on output and the price level we demonstrate this procedure employing a variant of a widely used vector autoregressive var model of the u s economy this exercise can be viewed as a supplement to or even an alternative to analysis that relies on a particular structural model given the lack of general agreement on the appropriate structural model evaluation of the effects of changes in the policy instrument within a variety of different types of models is appropriate the discussion of the proposed procedure is in the spirit of recent work by leeper and sims 1994 who following earlier work by sims 1982 1987 distinguish between normal policymaking and regime changes for purposes of illustration we employ a var model comprised of the same variables used by christiano eichenbaum and evans hereafter cee 1994 1996 and bernanke and mihov hereafter bm 1998 we show how to evaluate and compare the current policy path with normal policy alternatives such as typically sized changes in the federal funds target we stress that this model is used only for illustrative purposes our methodology applies to any generic structural model and thus can easily

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

is trust the missing root of institutions education and development we report evidence that trust is the missing root relating education institutions and economic development we observe that more trust both increases education and improves legal and bureaucratic institutions which in turn spurs economic development we substantiate this intuition with a series of regressions that provide evidence that trust determines both education and the quality of institutions and that education and institutions in turn affect gdp per capita

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

self protection strategic interactions and the relative endogeneity of disease risks self protection is a key behavior that influences infectious disease risks spillovers in disease protection create different types of strategic interactions under certain conditions multiple nash equilibria may arise with the possibility of coordination failure involving excessively low self protection in which case individuals expectations of others efforts determine which outcome arises in prior studies assumed technical relations between self protection and infection probabilities drove the strategic interactions we demonstrate that strategic relations can be endogenously determined and depend on the relative endogeneity of risk rer defined here as the degree to which individuals can take control of their own risks in a strategic setting the potential for coordination failure may arise when rer is sufficiently small whereas larger levels of rer may eliminate this possibility to ensure larger levels of self protection we find that imposing a behaviorally dependent indemnity may increase rer to eliminate the possibility of coordination failure we apply our analysis to the problem of livestock disease and illustrate the theory using a numerical example of the 2001 united kingdom foot and mouth disease epidemic

bernanke versus taylor a post mortem our analysis sheds light on the issue of whether the monetary policy contributed to the recent housing boom and bust we have estimated and analysed a model that allows a comparison between the actual policy and several alternative taylor rules when the taylor rule path was computed using revised data and the deflator for the gdp we found a notable impact on key housing market variables supporting taylor s critique of the fed policy however the bulk of our evidence suggests that the policy as it would have been conducted under our real time taylor rules would not have had any significant impact on the housing market variables this conclusion is robust with regard to the price index used as well as the relative weights used on the inflation and output gaps

the case of the negative nominal interest rates new estimates of the term structure of interest rates during the great depression throughout the 1930s and early 1940s u s treasury bonds and notes appeared to have negative nominal yields as they approached maturity but negative nominal interest rates are impossible in a world in which one can always hold cash the resolution to this puzzle is that treasury securities in addition to making coupon payments gave the owner the right to buy a new security on a future date this paper describes the institutional environment that led to the apparent negative nominal interest rates develops a method for valuing the exchange privilege and computes accurate measures of the yield to the coupon bearing component of these composite bond options these corrected bond and not yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949