inflation announcements and social dynamics this paper investigates the eectiveness of central bank communication when rms have heterogeneous ination expectations that are updated through social dynamics the bank s credibility evolves with these dynamics and determines how well its announcements anchor expectations we show that trying to eliminate high ination by abruptly introducing a low ination target can lead to short term overshooting

information acquisition dissemination and transparency of monetary policy this paper examines the role of transparency in a benevolent monetary author ity s policies each firm s payoff depends on unobservable macroeconomic conditions and firms may incur a cost to acquire private information about macroeconomic conditions the policy authority attempts to infer the underlying macroeconomic conditions from a noisy measure of aggregate actions and makes a public announcement to inform firms of this inference high quality announcements provide firms the incentive not to gather private information and base actions solely on information contained in policy announce ments however this makes the observed actions of firms less informative to the policy authority jel classification e52 e58

growth forecasts belief manipulation and capital markets abstract we analyze how a benevolent privately informed government agency would optimally release information about the economy s growth rate when the agents hold heterogeneous beliefs we model two types of agent conforming and dissenting the former has a prior that is identical to that of the government agency whereas the latter has a prior that differs from that of the government agency we identify both informative and uninformative equilibria informative equilibria are equilibria in which the government agency s equilibrium signal leads to a revision of beliefs we demonstrate that the uninformative equilibria can in fact dominate the informative ones in terms of ex post social welfare

labor flows across firm size age and economic sector in colombia vs the united states this paper compares labor market flows between a developing economy colombia and a developed one the united states us in a comparative framework we explore measures of labor market flows across dimensions such as firm size age and economic sector this comparison allows us testing for both countries a series of interesting hypothesis suggested in the literature namely the negative systematic relationship between firm size age and employment growth rate we find that labor market fluidity in the us labor market is substantially higher than in colombia and that the churning rate is twice as high for the us market as it is for the colombian one we argue that this fluidity gap between the two economies can be explained by among other factors the rigid nature of colombian labour market institutions

law and employment lessons from latin america and the caribbean analyzing the effects of regulation and deregulation on latin american labor markets law and employment joins the ongoing debate about the virtues and costs of legislating mandatory benefits for workers of the numerous labor regulations that were altered or created in latin america during the last thirty years many have had unintended and far reaching results nobel prize winning economist james j heckman and carmen pages document the behavior of firms attempting to stay in business and be competitive while facing the high costs of complying with these labor laws they challenge the prevailing view that labor market regulations affect only the distribution of labor incomes and have little or no impact on efficiency or the performance of labor markets this volume shows that mandated benefits reduce employment have a disruptive impact on turnover rates and labor market flexibility promote inequality and discriminate against marginal workers along with in depth studies of colombia peru brazil argentina chile and uruguay law and employment provides comparative analysis from a range of european countries and the united states while also covering important changes in reg

foreign exchange intervention how to signal policy objectives and stabilise the economy abstract within a simple model of monetary policy for an open economy we study how foreign exchange intervention may be used as a costly signal of the policy makers objectives our analysis indicates that i foreign exchange intervention typically stabilises the national economy reducing the fluctuations of employment and output ii this result is sensitive to the institutional structure of decision making in that a larger stability gain is obtained when foreign exchange intervention and monetary policy are kept under the jurisdiction of different governmental agencies

the case for open market purchases in a liquidity trap prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short term nominal interest rate renders open market operations ineffective for achieving macroeconomic stabilization goals we show that even were this the case there remains a powerful argument for large scale open market operations as a fiscal policy tool as we also demonstrate however this same reasoning implies that open market operations will be beneficial for stabilization as well even when the economy is expected to remain mired in a liquidity trap for some time thus the microeconomic fiscal benefits of open market operations in a liquidity trap go hand in hand with standard macroeconomic objectives motivated by japan s recent economic experience we use a dynamic general equilibrium model to assess the welfare impact of open market operations for an economy in japan s predicament we argue japan can achieve a substantial welfare improvement through large open market purchases of domestic government debt

monetary mystique secrecy and central banking abstract the paper contains a discussion of the role of secrecy in the implementation of monetary policy it documents the federal reserve s defense of secrecy as argued in a recent freedom of information act suit the federal reserve s arguments are evaluated on the basis of economic theory theoretical papers related to the secrecy issue are reviewed the discussion highlights a number of potential benefits and costs of central bank secrecy and identifies some conditions under which secrecy could be socially beneficial

comment on forward guidance communication commitment or both by marco bassetto forward guidance can be cheap talk in an infinitely repeated game with the public asymmetric information is necessary for cheap talk to be useful the central bank can build credibility over time to make cheap talk credible when to use forward guidance instead of general transparency remains unclear adding a lower bound on interest rates does not change the main conclusions

the equilibrium degree of transparency and control in monetary policy we examine a central bank s endogenous choice of degree of control and degree of transparency under both commitment and discretion we argue that discretion is the more realistic assumption for the choice of control and that commitment is more realistic for the choice of transparency for the choice of control under discretion maximum degree of control is the only equilibrium for the choice of transparency under commitment a su ciently patient bank with su ciently low average in ation bias will always choose minimum transparency thus a maximum feasible degree of control with a minimum degree of transparency is a likely outcome the bundesbank and the federal reserve system are arguably examples of this jel classi cation e52 e58

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

when and how much to talk credibility and flexibility in monetary policy with private information abstract this paper analyzes the role of noisy or imprecise announcements in mitigating the basic credibility problem in monetary policy based on a model where the monetary authority s private information gives rise to an unavoidable trade off between flexibility and credibility the analysis finds that noisy announcements can serve as a meaningful form of communication to make that trade off more favorable however such talk is not cheap the analysis predicts that those central banks who can speak more precisely are those who are less likely to speak at all

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

do countries falsify economic data strategically some evidence that they might we find evidence supporting the hypothesis that countries at times misreport their economic data in a strategic manner among those suspected are countries with fixed exchange rate regimes high negative net foreign asset positions or negative current account balances which corroborates the intuition developed with a simple economic model we also find that countries with bad institutional quality rankings and those in africa middle east eastern europe and latin america release economic data of questionable veracity our evidence calls for models with public signals to consider strategic misinformation and for establishing independent statistical agencies to assure the delivery of high quality economic data

an empirical analysis of alcohol addiction results from the monitoring the future panels in a panel of young adults we find that alcohol consumption is addictive in the sense that increases in past or future consumption cause current consumption to rise the positive and significant future consumption effect is consistent with the hypothesis of rational addiction the long run price elasticity is approximately 60 larger than the short run price elasticity and twice as large as the elasticity that ignores addiction thus a tax hike policy to curtail consumption or abuse may not have a favorable cost benefit ratio unless it is based on the long run price elasticity jel 110

central bank secrecy in the foreign exchange market abstract this paper argues that with sticky goods prices and a forward looking exchange rate the central bank will only want a partial dissemination of its information about shocks to the economy it is shown that in such a model the central bank may prefer to intervene secretly in the foreign exchange markets when responding in anticipation of future shocks but openly when reacting to current shocks the model thus provides a rationale for secrecy in central bank foreign exchange operations the model also elucidates the relationship between the signaling and portfolio balance channels of sterilized intervention

optimal policy intervention and the social value of public information svensson 2006 argues that morris and shin s 2002 analysis is contrary to what is claimed actually pro transparency this paper re examines the issue but with an important modification to the original morris and shin framework recognizing that central banks impact on the economy not only indirectly via their public announcements but also directly through their policy actions we consider the social value of public information in the presence of active policy intervention our results strengthen morris and shin s conclusions considerably in particular we find that public disclosure of the central bank s information is always undesirable

forward guidance communication commitment or both abstract forward guidance has been suggested as a form of commitment odyssean by the policymaker or as a way of conveying information delphic i analyze the interaction between households and the central bank as a game in which the central bank sends messages without private information the set of equilibrium payoffs is independent of any announcements pure odyssean forward guidance is redundant with private information communication can have social value forward guidance is well suited to leverage preexisting credibility to communicate a central bank s private information about its own preferences or beliefs

cigarette smoking and self control this paper empirically studies time inconsistent preferences in the context of cigarette smoking behavior with hyperbolic discounting an individual has time inconsistent preferences which give rise to a lack of self control i e she may perpetually postpone the execution of a plan this implies that a smoker who wants to quit has a demand for control devices e g a smoking ban in public areas or a hike in cigarette excise taxes this paper empirically tests this implication using a sample that is based on survey data from taiwan the estimation results indicate that a smoker s intention to quit has a positive effect on the smoker s support for smoking bans and a cigarette excise tax increase these results lend support to the validity of the time inconsistent preferences in the context of cigarette smoking behavior this casts doubt on the validity of the assumption that individuals have time consistent preferences in becker and murphy s becker g s murphy k m 1988 a theory of rational addiction journal of political economy 96 4 675 700 rational addiction model

learning the ramsey outcome in a kydland prescott economy abstract we study if adaptive learning by a central bank cb in the kydland and prescott environment can steer the economy to the pareto optimal outcome our cb evaluates its potential strategies regarding the announced and the actual inflation rate through expectations of the performance of these strategies formed thanks to its mental model of the economy this model is forward looking and adaptive at the same time as a starting point we follow arifovic et al 2010 and initially assume that there are two types of agents believers who set their inflation forecast equal to the announced inflation and non believers who form static optimal forecast coupled with a forecast error correction mechanism our results show that the economy can reach near ramsey outcomes most of the time in the absence of believers the economies almost always converge to the ramsey outcome in their experiments with human subjects arifovic and sargent 2003 showed that experimental economies reach and stay close to the ramsey outcome most of the time giving support to the just do it policy recommendation in light of the experimental findings our model is of particular interest as it is the only agent based or adaptive learning model that consistently selects the ramsey outcome in this context

on the long term effectiveness of exchange rate communication and interventions abstract exchange rate communication has come to play an increasingly important role as a policy tool for monetary authorities over the past decade the paper assesses the strategies and the long term effectiveness of communication as well as actual interventions the empirical results for the g3 economies indicate that communication has not only exhibited a significant contemporaneous effect on exchange rates but also has moved forward exchange rates up to a horizon of 6 months in the desired direction moreover communication is found to reduce exchange rate volatility and uncertainty whereas actual interventions tend to raise it overall this underlines a key difference between these two policy tools and suggests that communication tends to be a fairly effective policy tool over the medium term

monetary economics a review essay in this essay i define money to be whatever objects serve as generally acceptable media of exchange and i define monetary economics to be the study of the causes and economic consequences of the monetization of exchange that is of the use of media of exchange these definitions lead me to specify the distinctive objectives of monetary economics to be to understand 1 the monetization of exchange and its relation to the technologies of production and of exchange 2 the form that money takes and especially the viability of fiat money 3 the determination and significance of the real value of units of money and 4 the relation between the nominal quantity of money and aggregate economic activity the essay tries to acquaint the reader with the contents of the recently published handbook of monetary economic as they relate to these objectives of monetary economics and offer some critical thoughts on selected unsettled issues in monetary economics that my reading of the handbook suggested this abstract was borrowed from another version of this item

coherence and the credibility of convertibility announcements abstract the recent devaluation crisis in mexico and its tequila effect elsewhere illustrate that two credibility problems associated with convertibility policies currency boards are announcements that violate truth telling and a non zero probability of policy failure we derive the trade off between these problems when announcements resemble cheap talk the strategic uncertainty created by this trade off implies that both the government and investors should recognize the presence of fed watchers who exploit any policy inconsistency for their own gain in this context credibility can be restored if the policy is coherent if it eliminates the marginal benefits for fed watching jel e63 e58 f40 1997 published by elsevier science ltd

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

government intervention and strategic trading in the u s treasury market we study the impact of permanent open market operations pomos by the federal reserve on u s treasury market liquidity using a parsimonious model of speculative trading we conjecture that i this form of government intervention improves market liquidity contrary to conclusions drawn by existing literature and ii the extent of this improvement depends on the market s information environment evidence from a novel sample of federal reserve pomos during the 2000s indicates that bid ask spreads of on the run treasury securities decline when pomos are executed by an amount increasing in proxies for information heterogeneity among speculators fundamental volatility and pomo policy uncertainty consistent with our model

addiction and cue triggered decision processes we propose a model of addiction based on three premises 1 use among addicts is frequently a mistake 2 experience sensitizes an individual to environmental cues that trigger mistaken usage 3 addicts understand and manage their susceptibilities we argue that these premises find support in evidence from psychology neuroscience and clinical practice the model is tractable and generates a plausible mapping between behavior and the characteristics of the user substance and environment it accounts for a number of important patterns associated with addiction gives rise to a clear welfare standard and has novel implications for policy

switching from payroll taxes to corporate income taxes firms employment and wages after the 2012 colombian tax reform the 2012 colombian tax reform reduced payroll taxes and employer contributions to health insurance by 13 5 percent while also increasing corporate income taxes and leaving untouched the benefits to workers financed through these taxes shifting taxation from formal employment to other business activities is a policy recipe under heated discussion in latin america the reform offers an ideal laboratory for studying empirically the potential distortions against formal employment associated with payroll taxes in contrast to other taxes on firms we analyze the impact of the reform on employment and wages using monthly firm level data on all formal employment in nonpublic firms in the country and a difference in differences approach that takes advantage of the fact that a few sectors were exempt from the 2012 tax reform we find a positive average effect of 4 3 percent on employment and 2 7 percent on average firm wages for the average firm the employment effect is found only for micro and small firms whereas the bulk of the employment is concentrated in medium and large firms which show no significant effect according to these estimates about 145 000 new jobs were created between january and may of 2015 by virtue of the reform these results are generally supportive of efforts to reduce payroll taxes though our findings on employment are less robust than those on wages and large firms do not seem to have benefitted the apparent lack of effect for medium and large employers is also a source of concern we speculate that it may be due to these firms being more sensitive to the increase in corporate taxation that financed the reduction in payroll taxes but lack of access to the relevant data prevents us from offering solid evidence regarding this hypothesis

warning labels as cheap talk why regulators ban drugs abstract one explanation for drug bans is that regulators know more than consumers about product quality but why not just communicate the information in their ban perhaps via a would have banned label because product labeling is cheap talk any small market failure tempts regulators to lie about quality inducing consumers who suspect such lies to not believe everything they are told in fact when regulators expect market failures to result in under consumption of a drug and so would not ban it for informed consumers regulators ex ante prefer to commit to not banning this drug for uninformed consumers

cheap talk with two audiences these problems have in common a simple structure an informed sender says something to two interested but uninformed receivers who then take actions based on their beliefs these actions affect the sender as well as the receivers in this paper we study how costless nonverifiable claims cheap talk can affect these beliefs and hence the actions and how the incentives for truthful revelation to one receiver are affected by the presence of the other we then ask how welfare is affected by whether claims are made in public or in private as some of the above examples suggest public messages may be more credible than private messages addressed to either audience one possibility is that the presence of one audience can discipline the sender s relationship with the other we call this one sided

preliminary evidence on the determinants of federal reserve open market operations in the absence of a fixed policy rule the federal reserve bank fed has significant discretion in setting monetary policy the existence of professional fedwatchers attests to the fact that fed policy actions are difficult to interpret recent literature has focused on the motivations behind fed policy making and the need for secrecy and ambiguity we investigate one aspect of fed behavior the propensity of the fed to buy and sell government securities beyond that required to implement stated policies milton friedman 1982 26 called attention to this issue when he wrote

a dual self model of impulse control we propose that a simple dual self model gives a unified explanation for several empirical regularities including the apparent time inconsistency that has motivated models of quasi hyperbolic discounting and rabin s paradox of risk aversion in the large and small the model also implies that self control costs imply excess delay as in the o donoghue and rabin models of quasi hyperbolic utility and it explains experimental evidence that increased cognitive load makes temptations harder to resist the base version of our model is consistent with the gul pesendorfer axioms but we argue that these axioms must be relaxed to account for the effect of cognitive load

the advantage to hiding one s hand speculation and central bank intervention in the foreign exchange market abstract we analyze an asymmetric information model of sterilized intervention in the foreign exchange market we characterize an equilibrium in which a central bank with inside information about its exchange rate target trades with risk averse speculators who have private information about future spot rates the model identifies circumstances in which perverse responses to intervention will be observed i e the domestic currency depreciates when the central bank purchases it and it provides conditions under which the exchange rate will be highly sensitive to intervention the model also provides an explanation for two forms of policy secrecy i secrecy about the scale of an intervention operation is always desirable ii secrecy about the target is sometimes desirable

competence implies credibility the credibility of monetary policy under discretion has been traditionally linked to the central bank s conservatism we show that another trait of the central bank cb her competence at doing her job or reputation thereof can be just as important to make her policy credible and transparent we analyze a static barro and gordon 1983 s game where the effects of monetary policy depend on an unknown state of the economy the cb forms her own private and imprecise view of this state that she may announce to p in a cheap talk game to explain and motivate her policy intentions the precision of the noise in the cb s view measures her competence the more accurate her assessment the clearer an idea she has about what to do the fineness of the equilibrium message space measures monetary policy s transparency in any equilibrium of the cheap talk game the cb credibly announces one of finite inflation targets that differ by at least a multiple of the inflation bias competence ratio if this ratio is too large the cb can credibly communicate only the direction of monetary policy as the cb s competence rises and this ratio falls p knows that the cb puts increasing weight on pursuing her objective targets relative to surprising expectations to stimulate output therefore the equilibrium message space becomes finer a more competent cb is also less likely to erroneously observe extreme realizations of the shocks so she is more able tofine tune expectations at times of business as usual

experimental evidence on the evolution of the meaning of messages in sender receiver games an experiment this paper experimentally investigates the evolution of message meanings when talk is cheap we consider communication between a privately informed sender and a receiver when the sender s message does not affect payoffs directly sender receiver games introduced by jerry green and nancy stokey 1980 and vincent p crawford and joel sobel 1982 provide the simplest stylized environment in which communication is essential communication is the only way to link the receiver s action to the sender s private information in addition sender receiver games have been widely used to study communication in accounting economics finance and political science intuition strongly suggests that effective communication will evolve when the players interests are closely aligned however there is always a nash equilibrium in which the sender randomizes uniformly across all messages such babbling equilibria are proper roger b myerson 1978 blume 1994 and even strategic stability elon kohlberg and jeanfrancois mertens 1986 does not rule out uninformative equilibria in general in response a literature developed that formulates equilibrium selection criteria by appealing to the existence of a commonly understood language matthew rabin 1990 steven a matthews et al 1991 joseph farrell 1993 that can be used to formulate credible deviations from equilibrium unfortunately the selection criteria from this literature are frequently strong enough to remove all equilibria from consideration in addition these arguments are vulnerable to stiglitz s observation in koo cho and david m kreps 1987 that successful deviations from equilibrium may induce further deviations which in turn may undermine the credibility of the original deviations both problems can be avoided by a dynamic approach as in rabin and sobel 1996 we also adopt a dynamic perspective but do not require messages to have a priori meanings instead distinct meanings may emerge endogenously this is important for communication across cultures and for language change 2 we are guided by recent results of blume department of economics university of iowa iowa city ia 52242 dejong department of accounting university of iowa iowa city ia 52242 kim department of economics sung kyun kwan university seoul 110 745 korea sprinkle department of accounting university of wisconsin madison wi 53706 we thank joyce berg vince crawford robert forsythe joel horowitz deirdre mccloskey forrest nelson larry samuelson gene savin joel sobel and especially two anonymous referees for their advice and suggestions we benefitted from comments and discussions resulting from presentations at the 1994 summer meetings of the econometric society the 1996 social learning workshop at suny stony brook the io me gt workshop at the university of iowa the university of bonn the university of bielefeld the center for economic research at tilburg university ohio state university seoul national university and texas a m university we are grateful for financial support from the college of business administration at the university of iowa the ira b mcgladrey institute and the national science foundation

information sharing and central bank intervention in the foreign exchange market abstract this paper develops a model of information sharing among heterogeneously informed agents and it uses the model to examine a rationale for intervention in the foreign exchange market the model shows that in a partially revealing rational expectations equilibrium some agents can gain by sharing among themselves private information about transitory exchange rate disturbances in this setting a central bank can affect the exchange rate by aggregating and disseminating agents information the paper also illustrates the usefulness of intervention as a way to transmit that information

discretion wage indexation and inflation it is now well understood that discretionary policy making frequently leads to socially sub optimal outcomes this point was first made by kydland and prescott 12 using an example of a monetary policy game they argued that in the presence of output distortions in the economy the monetary authority has an incentive to renege on earlier promises to maintain price stability by expanding the money supply in order to create unexpected inflation thereby increasing output and employment since private wage setters form expectations rationally this policy action is anticipated and in equilibrium leads to excessive inflation without any resulting change in output or employment consequently in the absence of enforceable policy rules the time consistent discretionary monetary path produces a socially sub optimal inflation rate this form of policy behavior has important implications for the decisions of private agents such as their choice of the degree of wage indexation however most work in the literature on endogenous wage indexation stemming from the seminal paper by gray 10 has analyzed the equilibrium indexation choice assuming either a constant money growth rule 1 or a monetary rule involving lagged or contemporaneous feedback 8 17 only the recent papers by devereux 5 6 have attempted to examine the implications of time consistent discretionary monetary policy for endogenous wage indexation the informational structure he considers has the monetary authority setting the money stock prior to the realization of shocks so that the authority has no information regarding current period disturbances when determining its course of action this assumption precludes any contemporaneous attempt by the monetary authority to stabilize output or the price level devereux reaches the conclusion that wage setters who are aware of the authority s policy decision will find it optimal to index positively to unanticipated price level surprises since none of the aggregate shocks are offset directly by the monetary authority thus the informational environment confronting the authority influences the degree of indexation and subsequently the manner in which aggregate demand and supply variability impinge upon social welfare

cheap talk and the fed a theory of imprecise policy announcments this paper examines the problem faced by the federal reserve in announcing its private information about its future policies because it would like to manipulate expectations and pursue a time inconsistent policy the fed cannot reveal its policy objectives precisely and credibly it can however communicate some information about its goals through the cheap talk mechanism of vincent crawford and joel sobel making announcements that are imprecise and only giving ranges within which these goals may lie copyright 1989 by american economic association

when does coordination require centralization this paper compares centralized and decentralized coordination when manag ers are privately informed and communicate strategically we consider a multi divisional organization in which decisions must be adapted to local conditions but also coordinated with each other information about local conditions is dispersed and held by self interested division managers who communicate via cheap talk the only available formal mechanism is the allocation of decision rights we show that a higher need for coordination improves horizontal com

market distortions and government transparency in this paper we investigate how government transparency depends on economic distortions we first consider an abstract class of economies in which a benevolent policy maker is privately informed about the exogenous state of the economy and contemplates whether to release this information our key result is that distortions limit communication even if transparency is ex ante pareto superior to opaqueness it cannot constitute an equilibrium when distortions are sufficiently high we next confirm this broad insight in two applied contexts in which monopoly power and income taxes are the specific sources of distortions jel d82 e61

optimal accommodation by strong policymakers under incomplete information abstract this paper examines the optimal behavior of a policymaker who is able to precommit labelled strong when the public entertains the possibility that he is either strong or weak unable to precommit the main result is that in the presence of doubts about their type it is optimal even for strong policymakers to partially accommodate inflationary expectations this contrasts with vickers 1986 who finds that when strength is conceived in terms of the relative concern for employment the strong policymaker inflates less under incomplete than under full information the paper also provides a theory of endogenous announcements

learning and communication in sender receiver games an econometric investigation this paper compares the performance of stimulus response sr and belief based learning bbl using data from game theory experiments the environment extensive form games played in a population setting is novel in the empirical literature on learning in games both the sr and bbl models fit the data reasonably well in common interest games with history while the test results accept sr and reject bbl in games with no history and in all but one of the divergent interest games estimation is challenging since the likelihood function is not globally concave and the results may be subject to convergence bias

the incidence of payroll taxation evidence from chile i provide new evidence on the incidence of payroll taxation by examining the experience of chile before and after the privatization of its social security system this policy change led to a sharp exogenous reduction in the payroll tax burden on chilean firms on average payroll tax rates fell by 25 over 6 years using data from a census of manufacturing firms i estimate that the incidence of payroll taxation is fully on wages with no effect on employment this finding is robust to a variety of empirical approaches to the problem of measurement error in firm level measures of taxes worker

reputation and credibility in the european monetary system ems credibility axel weber this article provides a quantitative assessment of the credibility of the european monetary system during the disinflation period of the 1980s the results contradict the widely held view that the ems has operated as a dm zone it is shown that after a brief early phase the ems has functioned as a bipolar system with a hard currency option supplied by the german bundesbank and a soft currency option offered by the banque de france whilst from the onset the netherlands have chosen the hard currency option at least in a first stage the remaining smaller economies belgium denmark and ireland adopted the soft currency alternative at a later stage of the ems however the soft currency block has disintegrated and some countries most noticeably ireland and to a lesser extent france have shifted towards the hard currency standard it is argued that this increased tightening of the ems provides a favourable starting condition for the transition to economic and monetary union

learning benevolent leadership in a heterogenous agents economy abstract this paper studies the potential commitment value of cheap talk announcements in an agent based dynamic extension of the kydland prescott model in every period the policy maker makes a non binding inflation announcement before setting the actual inflation rate it updates its decisions using individual evolutionary learning the private agents can choose between two different forecasting strategies they can either set their forecast equal to the announcement or use an adaptive learning scheme to potentially forecast the true inflation they switch between these two strategies as a function of information about the associated payoffs they obtain through word of mouth choosing always the currently most favorable one while all agents using the first strategy make the same forecast those using the second strategy may generate different individual forecasts in spite of the complexity of the environment the boundedly rational policy maker learns to sustain a situation with a positive but fluctuating fraction of believers this outcome is pareto superior to the outcome predicted by standard theory interestingly enough the actions taken by the policy maker undergo marked qualitative changes as a function of the prevailing heterogeneity among and learning characteristics of the private agents

talk is cheap although friedrich a von hayek leonid hurwicz and others stressed how the price system communicates private information on preferences technology and endowments our main means of communication is surely words but it is unclear whether mere words can be trusted absent outside sanctions for lying such as perjury law or a valuable reputation for honesty talk is cheap the perspective of the standard theory of signaling seems to suggest that cheap talk should be uninformative but this is misleading cheap talk can sometimes convey information and affect real payoffrelevant actions yet cheap talk s power is limited for example even given an unlimited chance to talk rational people may not reach an equilibrium or may not escape a bad one a growing literature in game theory political science and economics which i cannot survey here studies what cheap talk can and cannot do here i merely sketch some themes

bargaining over agricultural property rights discretion are malleable shifting as collective values and policies evolve over time the costs of resolving conflicts over property rights in water quality air quality wildlife habitat scenic vistas and other commons resources have the potential to be enormous innes policies to address these disputes determine which costs will be borne by whom and have broad ramifications for agriculture and environmental quality in this article i explore the process of bargaining over disputed rights to natural resources emphasizing the role of costs and delays in signaling information so that expectations may converge and voluntary settlements may be achieved economists traditionally focus on the economics of alternative outcomes resource allocations not on the processes for achieving those outcomes property rights disputes present a challenge for economists whose efficiency oriented tools do not indicate which interests ought to be favored or which starting point to use in evaluating the impacts of a change in entitlements nevertheless economic expertise is needed to devise effective institutional incentives for resolving disputes and to identify the distributional consequences of alternative dispute resolution processes the article concludes with observations on a constructive role for economists in this arena perceived fairness and property rights conflicts

strategic discipline in monetary policy with private information optimal targeting periods this paper analyzes a multiperiod monetary targeting procedure as a possible resolution to the credibility problem in pol icy when the monetary authority has some private information by limitin g the degree of flexibility permitted in policy this procedure mitiga tes the credibility problem as the length of the targeting horizon decreases the severity of the credibility problem falls but at the expense of weakening the monetary authority s ability to pursue its stabilization goals based on model simulations the analysis studi es the determinants of the optimal targeting horizon that balances the benefits of flexibility and discipline in policy copyright 1993 by american economic association

labor market effects of payroll taxes in developing countries evidence from colombia abstract we use a panel of manufacturing plants from colombia to analyze how the rise in payroll tax rates over the 1980s and 1990s affected the labor market our estimates indicate that formal wages fall by between 1 4 and 2 3 as a result of a 10 rise in payroll taxes this less than full shifting is likely to be the result of weak linkages between benefits and taxes and the presence of downward wage rigidities in colombia because the costs of taxation are only partly shifted from employers to employees employment also falls our results indicate that a 10 increase in payroll taxes lowered formal employment by between 4 and 5 in addition we find some evidence of less shifting and larger disemployment effects for production than for nonproduction workers these results suggest that policies aimed at boosting the relative demand of less skilled workers by reducing social security taxes may be effective in latin american countries where minimum wages bind and benefits are often not directly lin

does traditional price policy work for achieving low smoking rate empirical and theoretical evaluation based on the united states aggregate data in the united states smoking has been strictly restricted by both federal and state governments almost all the policies have imposed high tax on cigarettes for decreasing the number of smokers i

the advantage of hiding both hands foreign exchange intervention ambiguity and private information this paper analyzes a dynamic exchange rate policy game in which the central bank has private information about its short term exchange rate target on the one hand and in which the market is faced with a certain degree of ambiguity concerning the actual intervention volume on the other sterilized interventions are shown to derive their effectiveness from the fact that they transmit information about the short term exchange rate target to the market in this respect we provide an explanation for the presumed inconsistency between intervention secrecy and the effectiveness of the signalling channel since our model predicts that interventions will be more effective on average if the central bank retains some degree of ambiguity moreover it is also shown that sterilized interventions will not exert a lasting effect on the exchange rate finally we have also investigated the extent to which some political and economic parameters determine the size of the intervention bias

strategic central bank communication discourse analysis of the bank of japan s monthly report abstract we conduct a discourse analysis of the bank of japan s monthly report and examine its characteristics in relation to business cycles we find that ambiguous expressions tend to appear more frequently with negative expressions and this tendency is more pronounced in recessions this suggests that the central bank communicates strategically by obfuscating the reports when their private information is unfavorable

international macroeconomic policy coordination when policymakers do not agree on the true model the authors relax the assumption of the literature on international coordination that policymakers know the true model t wo countries will still be able to agree on a cooperative policy pack age that each believes will improve the objective function relative t o the nash noncooperative solution however the bargaining solution may move the target variables in the wrong direction these points ar e illustrated with monetary and fiscal multipliers taken from simulat ions of ten leading econometric models out of 1 000 possible combina tions of models that could represent u s beliefs non u s beliefs and the true model monetary coordination improves u s welfare in on ly 546 cases copyright 1988 by american economic association

can the government talk cheap communication announcements and cheap talk a great deal of attention has recently been focused on communication in economic contexts while some models of credible announcements have been based on reputational forces or penalties imposed by third parties as in sobel 21 and cothren 4 several recent papers have addressed the possibility of communication through cheap talk that is talk in situations with no explicit penalties for deception perhaps the most prominent application of cheap talk in the literature is the recent model of federal reserve announcements by stein 22 this paper will show that cheap talk equilibria of the sort modeled by stein and others often depend in a fundamental way on implausible discontinuities in public responses to government announcements that is cheap talk equilibria are frequently only possible if certain infinitesimally small changes in government announcements are capable of causing large discontinuous changes in public expectations and behavior intuitively if public expectations are a continuous function of government announcements then the government can fine tune these expectations the government will therefore often be tempted to deviate from the cheap talk equilibrium announcements in order to manipulate expectations this causes the equilibrium to unravel discontinuous public reactions sometimes prevent these equilibria from unraveling because they convert continuous choice problems which allow manipulative fine tuning into discrete choice problems where such fine tuning is impossible these discontinuities are implausible however and this may often rule out cheap talk as a realistic model of governmental policy announcements 2

what matters when the impact of ecb communication on financial market expectations this article analyses financial markets reaction to european central bank s ecb communication we apply a novel indicator that quantifies the contents of the ecb s introductory statements and allows disentangling ecb statements on prices the real and the monetary sector we provide evidence that it matters what issue the ecb is speaking about especially the ecb s statements on price developments represent important news to financial markets it also matters when the ecb affects markets communication drives maturities above 4 months