trade s dynamic solutions to transboundary pollution abstract this study develops a differential game to examine the effects of trade liberalization on transboundary water pollution water pollution is due to wastewater emissions from countries in a shared waterway along the u s mexico border with available data of pollution abatement costs public health damages and trade benefits noncooperative and cooperative games are examined with changes in trade policy and public health damages results show trade liberalization leads mexico to curtail pollution in both games cooperation and trade liberalization limit emissions from both countries and curtail strategic behavior of the united states from mexico s pollution control efforts in the noncooperative game

german dominance in the ems evidence from interest rates abstract the paper presents an empirical analysis of german dominance and asymmetries in the ems based on a dynamic system of equations explaining national money market interest rates the hypothesis of strict german dominance of the ems is rejected however there are some noticeable asymmetries in the ems germany is a relatively strong player and has been the least dependent country in the early phase of the system since 1983 german independence has diminished in contrast france throughout and italy in the early phase of the ems have been relatively weak players in the system

conservative central banks and nominal growth exchange rate and inflation targets a framework is developed in which inflation biases with different target variables are compared a nominal growth target measured in consumer prices may yield less stabilization bias than a nominal income growth target exchange rate and inflation targets result in less stabilization bias than an income growth target the more important the terms of trade stabilization persistence in output causes excessive stabilization of productivity shocks and of shocks to the terms of trade under discretion an inflation weight conservative central bank is more likely under an inflation target than under an exchange rate target and less likely under a nominal income growth target

estimating local welfare generated by an nfl team under credible threat of relocation this study offers the opportunity to examine the welfare contribution of the minnesota vikings to minnesota households in the context of a credible threat of team relocation we find the credibility of the threat of relocation is essential to providing unbiased estimates of welfare this study utilizes contingent valuation methodology cvm and a random utility model rum to analyze minnesotans decision making mechanisms for supporting a new stadium initiative while previous studies have attempted to measure the welfare associated with a sports franchise we develop and discuss bias that may be imparted to estimates when the researcher fails to calculate a choke price further we develop an unbiased approach to identify welfare when respondents perceive a risk of losing the franchise the range of welfare contribution by the vikings to households in minnesota is 445 3 million to 1 571 3 million according to a 95 confidence interval based on our study

unemployment labor market reform and monetary union monetary union such as the economic and monetary union in europe emu may affect incentives for labor market reform and thus equilibrium unemployment through several mechanisms if an inflation bias exists there is usually a stronger incentive to reduce equilibrium unemployment through national reform outside rather than inside the emu absent such a bias emu membership could lead to more reform one reason is that reform may increase wage flexibility which can substitute for monetary policy in the emu another reason could be a precautionary motive for low equilibrium unemployment to reduce the utility cost of increased macroeconomic variability in the emu

exchange rate behaviour under the ems regime was there any systematic change abstract most empirical studies fail to detect any systematic effects of the ems regime on the economic performance of member countries this reveals the difficulty of constructing controlled experiments which can distinguish what is due to the ems from that due to common external pressures we argue that the crucial step is to examine the exchange rates distribution since no performance improvements will appear if exchange rate behaviour does not change within the ems we find that there are changes in the third and fourth moments which imply that ems currencies have become more fragile and susceptible to shocks particularly negative shocks relative to non ems currencies

pegged exchange rate regimes a trap this paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime we confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises the cost of which increases with the duration of the peg before the crisis we explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability but multiple equilibria are possible we show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well known time inconsistency problem but also to steer the economy away from the high inflation equilibria these gains however come at a cost in the form of the monetary authority s lesser responsiveness to output shocks in these circumstances using a pegged exchange rate as an anti inflation commitment device can create a trap whereby the regime initially confers gains in anti inflation credibility but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy we also show that the more conservative is the regime in place and the larger is the cost of regime change the longer will be the average spell of the fixed exchange rate regime and the greater the output contraction at the time of a regime change

monetary union and the assignment problem proposals for the creation of an independent central bank in a european monetary union do not always take into account the interactions between monetary and fiscal policy this analysis describes a system of two similar economies forming either a joint fiscal and monetary union or a simple monetary union policy authorities aim to achieve target values for inflation and the budget balance if the monetary and fiscal authorities pursue their targets independently of each other there is a risk that unstable interactions will be set up the results indicate a hazard of the separation of monetary and fiscal management

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

on becoming more flexible exchange rate regimes in latin america and the caribbean abstract this paper examines the shift from fixed to more flexible exchange rate regimes among countries in latin america and the caribbean in contrast to most traditional approaches the one followed here recognizes that fixed rates can be and often are adjusted but argues that policy makers incur a political cost from devaluation at the same time flexible exchange rates even managed ones may be very volatile with persistent misalignment a stylized model of regime choice is developed based on the perceived losses from exchange rate misalignment incurred under fixed versus more flexible regimes the model is estimated for a sample of 24 countries over the period 1978 1992 and empirical results are quite supportive misalignments proxied by current account deficits and moderate to high rates of inflation were associated with a move to more flexible rates during 1978 1986 misalignment indicators appear to have mattered less during 1987 1992 however there appears to have been a major reduction in the perceived difficulty of managing flexible rates during this period the paper then cautions against attributing differences in economic growth between groups of countries to their exchange regime the central point here is that the endogeneity of regime choice introduces selection biases into the samples of countries with fixed and with more flexible exchange regimes

capital market imperfections and the theory of optimum currency areas this paper studies how within and cross country capital market imperfections affect the welfare effects of forming a currency union the analysis considers a bank only world where intermediaries compete in cournot fashion and monitoring and state verification are costly the first part determines the credit market equilibrium and the optimal number of banks prior to joining the union the second part discusses the benefits from joining a currency union a competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country through an argument akin to the brander krugman reciprocal dumping model of bilateral trade however in our framework whether joining a union raises welfare of the home country is ambiguous it depends on the relative strength of investment creation and intermediation diversion effects

capital controls and balance of payments crises abstract the theory of balance of payments crises shows that under perfect foresight a system of fixed exchange rate is not sustainable in the presence of diverging economic policies in this paper it is shown how and why capital controls succeed in maintaining the principle of a fixed but adjustable parity both cases of a devaluation and a revaluation are considered and a condition for a parity change to be credible is presented

delegation in international monetary policy games abstract in this paper we show that delegation of monetary policy to an independent and more conservative central banker is an optimal policy in a multi country framework with monetary spillovers among countries even in the absence of time inconsistency credibility issues we also study the welfare implications of delegating monetary policy and extend our analysis to the case of coordination of monetary policies

monetary policy cooperation may not be counterproductive this paper qualifies rogoff s famous 1985 result that international monetary policy cooperation is counterproductive in a model similar to his it is shown that if wage setters are non atomistic and inflation averse as policymakers are cooperation leads to higher employment and possibly lower inflation

how will emu affect inflation and unemployment in europe this paper explores how european monetary union will change the wage setting behavior of national labor unions we derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements a common central bank raises inflation and unemployment if it acts as conservatively as national central banks however unemployment falls in countries that previously tied their monetary policy to the bundesbank we also examine the composition of emu and the influence of national labor market legislation jel classification e24 f02 f33

monetary institutions monopolistic competition unionized labor markets and economic performance recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy but not both this leads to two opposing views about the effects of central bank conservativeness we evaluate the relative merits of those conflicting views by developing a unified framework we find that i the effect of conservativeness on employment depends on unions relative aversion to unemployment versus inflation and ii for plausible values of this relative aversion and more than one union social welfare is maximized under a highly conservative central bank we also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation

food stamps as money the macroeconomics of a transfer program food stamps represent nearly 11 billion of personal income in the united states the coupons that are issued to provide purchasing power to recipients are also reserves for the commercial banking system this study asks at what rate these coupons are substitutable for what is usually considered money the results based on estimates for 1959 81 suggest that food stamp coupons are substitutable for m1 on a one for one basis and a revised money supply series including food stamp money is included together with other estimates showing that the marginal propensity to consume out of food stamps is higher than that out of ordinary income the results suggest that the food stamp program is an automatic fiscal and monetary stabilizer under its provisions both the money stock and disposable income are increased during a recession

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

monetary conservatism and fiscal coordination in a monetary union abstract in monetary unions time inconsistency provides the rationale for monetary conservativeness and against fiscal coordination however this depends on the assumption of exogenous labor markets once wage setting behavior is explicitly modeled fiscal coordination and less conservative central bankers improve the performance

credibility and disinflation in the european monetary system analysis of interest differentials in the european monetary system has suggested a widespread lack of credibility of the exchange rate mechanism in the sense that in most countries the implicit expected rate of devaluation was significant and not far short of inflation differentials vis a vis the deutschmark we present and test a model in which prices reflect expectations of exchange rate behaviour the results provide mixed evidence that price setting in countries which participated in the erm was influenced by the exchange rate discipline

who wants the euro and why economic explanations of public attitudes towards a single european currency the paper looks at whether public attitudes towards a single european currency held in the european union member states reflect a rational evaluation of the involved benefits and costs it finds that they do the looser monetary and fiscal policy was in the past and the more time a country spent in the ems the more citizens welcome the euro attitudes towards the euro do not seem consistent with attitudes towards a european central bank however upon closer scrutiny opponents of a single currency appear to be less consistent and less rational in their responses than proponents

exploring different views of exchange rate regime choice the empirical distinction between de facto and de jure exchange rate regimes raises a number of interesting questions which factors may induce a de facto peg why do countries enforce a peg but do not announce it why do countries break their promises we show that a stable socio political environment and an efficient political decision making process are a necessary prerequisite for choosing a peg and sticking to it challenging the view that sees the exchange rate as a commitment device policymakers seem rather concerned with regime sustainability in the face of adverse economic and socio political fundamentals

delegation in a general equilibrium model of customs unions abstract a difference in the objectives of members of a customs union may be a unifying rather than a divisive force if countries outside the union behave strategically one union member may want to delegate to its partner the ability to set the common external tariff we demonstrate these results in the context of a pure exchange general equilibrium trade model we show that if tariffs are strategic substitutes the union country which is relatively less well endowed in the exported good may be willing to delegate to its partner which behaves more aggressively in setting the union s policy the delegation decision is reversed if tariffs are strategic complements the model extends the standard results on the appropriate level of the union policy by adding another dimension that of the optimal decision making agent

the effectiveness of monetary policy anchors firm level evidence analyses of monetary policy posit that exchange rate pegs inflation targets and central bank independence can help anchor private sector inflation expec tations yet there are few direct tests of this argument we offer cross national micro level evidence on the effectiveness of monetary anchors in controlling private sector inflation concerns using firm level data from eighty one countries approximately 10 000 firms we find evidence that international anchors exchange rate commit ments correlate significantly with a substantial reduction in private sector concerns about inflation while domestic anchors inflation targeting and central bank inde pendence do not our conjecture is that private sector inflation expectations are more responsive to exchange rate anchors because they are more transparent more con straining and more costly than domestic anchoring arrangements the literature on monetary policy highlights the role of monetary institutions in stabilizing private sector inflation expectations central bank independence cbi inflation targeting it and fixed exchange rates pegs are widely viewed as insti tutions that have the capacity to mitigate private sector concerns that policymak ers will exploit them after they have locked in their price wage and investment decisions while other empirical research explores the institutional correlates of inflation and its variability yielding mixed results we use firm level data in our study to directly assess the impact of monetary anchors on private sector inflation concerns we find evidence that pegs mitigate firm owners concerns with infla tion but that domestic anchors such as it and cbi are uncorrelated with our micro indicators of inflation expectations considerable research has investigated the use of it cbi and pegs as institu tions that establish monetary policy credibility whereas these anchors are expected

large labour unions and terms of trade externality this paper shows that large labour unions reduce the incentive for uncoordinated monetary policies to improve the terms of trade this finding implies that concentrated labour markets significantly affect the optimal policy prescription in an open economy

multiple wage bargaining systems in the single european currency area little attention in the emu literature has been paid to the interaction between central bank monetary rules and systems of collective wage bargaining analytically and empirically coordinated wage bargaining systems respond with real wage restraint to non accommodating monetary policy since wage determination is dominated by collective bargaining in all the emu member states and wage coordination within the member states has grown since 1980 this is a topic of potential importance in particular the replacement of the bundesbank directly targeting german inflation by an ecb targeting european inflation has removed a major institutional support of wage restraint in germany the consequences of this for emu are worked out under two scenarios that inflation expectations will be generated by ecb monetary policy and that they will reflect german inflation outcomes possible institutional developments are discussed including government union bargains the bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in germany again its replacement by the ecb targeting if at all european rather than german fiscal policy loosens fiscal constraints for underlying structural reasons therefore it is possible that germany and other emu countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations

business cycle convergence in emu a first look at the second moment we analyse the dynamics of the standard deviation of demand and supply shocks as well as of the demand component of gdp across countries in the european monetary union emu this analysis allows us to evaluate the patterns of cyclical comovement in emu and compare them the cyclical performance of the new members of the eu and other oecd countries we make use of sigma convergence methods to identify synchronization patterns in business cycles the eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s the new eu members have also experienced a strong pattern of convergence from 1998 to 2005 when a strong divergence trend appears an enlargement of the emu to 22 members would not significantly decrease its optimality as a currency area there is evidence for some europe specific characteristics as compared to global comovements in business cycles authors abstract

credibility and exchange rate management in developing countries abstract the paper discusses the role of credibility factors in the conduct of exchange rate policy in developing countries the analysis is based on a simple framework in which policymakers are concerned about inflation and external competitiveness price setters in the nontradable sector of the economy engage in a strategic game against the authorities the model generates a devaluation bias which undermines the credibility of a fixed exchange rate the role of reputational factors signaling considerations and joining a currency union as possible solutions to this bias is examined

seigniorage and the case for national money in countries with high rates of inflation there is typically movement away from the use of the local currency the paper analyzes the costs and benefits of using a local currency with emphasis on the seigniorage foregone by using a foreign money even if it should be desirable for a country to fix its exchange rate it still loses seigniorage if it does not use its own money the case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply alternative methods of imposing discipline are discussed estimates of the amount of seigniorage raised by different governments are presented seigniorage amounts in some cases to about 10 percent of government revenue estimates are also presented of both the annual flow and one time stock costs of giving up use of domestic currencies and instead using the dollar the flow cost is typically about 1 percent of gnp and the stock cost is around 10 percent of gnp

labour markets and monetary union a strategic analysis this paper shows that the effects of a monetary union depend on several labour market features in particular the switch from national monetary policies to a common monetary policy usually affects both inflation and unemployment even when all structural parameters of the economy and of unions and policymakers preferences remain the same the benchmark case of a monetary union between identical countries suggests that the switch to a monetary union is likely to make labour unions more aggressive increasing unemployment qualifications to this result are provided under alternative institutional scenarios like cross country asymmetries pre union erm membership and wage leadership

are there asymmetries in the response of bank interest rates to monetary shocks this article examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks using an asymmetric vector error correction model it analyses the pass through of changes in money market rates to retail bank interest rates in italy in the period 1985 2002 the main results of the article are 1 the speed of adjustment of bank interest rates to monetary policy changes increased significantly after the introduction of the 1993 consolidated law on banking 2 interest rate adjustment in response to positive and negative shocks is asymmetric in the short run but not in the long run 3 banks adjust their loan deposit rate faster during periods of monetary tightening easing 4 this asymmetry almost vanished since the 1990s

is there a european wage leader wage spillovers in the european monetary union the introduction of the euro had been accompanied by expectations of increased inflationary pressures due to a de coordination shock to national wage bargaining systems though if anything systematically happened after the introduction of the euro wage restraint increased this paper argues that an interdependency of wage setting under german dominance has emerged in europe which fuelled the transmission of mutual wage restraint we will investigate wage and nominal unit labour cost spillovers in the european monetary union emu exploring a panel of 13 manufacturing sectors from 1992 to 2005 and quantify the effects of different countries strong interdependencies across emu member countries with regard to nominal wage growth are found a leading role accrues to germany which is responsible for a cumulative reduction of trans european wage growth rates of 0 62 by conservative estimates remarkably the influence of germany is strongest on southern europe with regard to wage growth interdependencies however the situation is inverted with regard to the development of nominal unit labour costs where the german influence on southern europe is substantially weaker than on neighbouring economies copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

systemic conflict and regional monetary integration the case of europe existing explanations of european monetary integration emphasizing economic interdependence issue linkage institutions and domestic politics take a predominantly regional approach in the international monetary thesis developed here i argue that u s policy disturbances transmitted through the international monetary system created compelling incentives for european states to cooperate on exchange rate and monetary policy i develop a general theory of macroeconomic power based on open economy macroeconomics and show how the exercise of such influence can drive regional monetary integration this article then tests the international thesis with reference to monetary integration within the european union by examining four periods in which the united states acted to stabilize the international monetary system and seven episodes in which it disrupted the system european governments and central banks reduced regional monetary cooperation when the united states supported system stability and strengthened it after each episode of disruption the evidence thus strongly supports the inference that the link is causal

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

the limits of independence and the policy of the ecb it is argued that the european central bank s independence is not as secure as it seems and that as a result it has appreciable institutional incentives to protect and enhance its position it follows that its behaviour should not be understood as being solely determined by the pursuit of price stability one consequence is that certain points on which it has been criticised on the basis that its approach makes for ineffective monetary policy might be better understood as often effective attempts to protect its position another is that making a central bank or any other institution completely independent may be much harder than it seems and failed attempts which come close are not necessarily to be preferred even by the advocates of independence to less ambitious designs

monetary union and pegging in the presence of labor unions as the european economic and monetary union grows power over monetary policy is shifting away from the original founders previously researchers have analyzed the impact of replacing an exchange rate peg with a monetary union in the presence of labor unions in these studies the authors have consistently concluded that unemployment in the country that originally controlled monetary policy will rise although they cite very different reasons in this paper we present a more general model that reproduces the previous results in special cases and clarifies the relations across the results in addition the more general model shows that the results are reversed in certain conditions

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

public debt indexation and denomination with an independent central bank abstract this paper examines the interaction between public debt management and the design of monetary institutions the analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation indexed debt if delegation of monetary policy is viable the optimal policy is to issue nominal debt this increases the sensitivity of taxes and output to unexpected inflation thus minimizing the inflation needed to offset supply shocks evidence on central bank independence debt composition and output variability suggests that the normative argument has some positive content

purchasing power parity under the european monetary system abstract using reduced rank cointegration analysis this study examines whether exchange rate realignments are effective in extenuating the deviations from purchasing power parity ppp under the european monetary system ems in contrast to previous studies more positive evidence for the ppp hypothesis is found the difference in findings can be attributed partly to the statistical technique used the correction of the finite sample bias and the adjustment for realignment effects in general the results of this study support that currency realignments of the ems have been effective in maintaining ppp among its member countries

the role of policymakers reputation in the ems disinflations abstract it is frequently argued that the ems itself in connection with the high anti inflation reputation of the german bundesbank is responsible for the inflation reduction and convergence which member countries have experienced based on the game theoretical model of backus and driffill 1985 american economic review 75 530 538 an empirical measure of the government s reputation for fighting inflation is derived by using a bayesian learning approach time varying estimates of these counterinflation reputation measures are computed for the original ems member countries and for a control group of major non ems countries the paper finds that only the smaller ems participants have gained anti inflation reputation during the ems period

winners and losers in a world with global warming noncooperation altruism and social welfare abstract in this paper global warming is an asymmetric transboundary externality which benefits some countries or regions and harms others we use a simple two country model to analyze the effects of global warming on resource allocations the global warming stock and national and global welfare

cooperation on climate change mitigation abstract we analyze conditions under which it is possible to achieve efficient mitigation of greenhouse gas emissions with a self enforcing international agreement in which all countries find it in their self interest to abide by the agreement we model the choice of emissions by countries as a dynamic game we use a two part punishment scheme for deviations from an agreement that is renegotiation proof and show when this scheme supports the efficient outcome as a subgame perfect equilibrium using numerical examples we show that an efficient subgame perfect equilibrium exists for a range of reasonable parameter values the existence of such equilibrium may be non monotonic in the discount rate and the ratio of slope of marginal abatement cost and marginal damages

credibility may require discretion not rules abstract we reexamine the common argument that rules produce greater credibility than discretion rules limit the actions of agents restricting observations of the agents preferences or types in a second best world where rules cannot be everlasting a regime of discretion in some periods may produce superior credibility and dominate a regime of rules

open economy macroeconomics developments in theory and policy this paper views developments in open economy macroeconomics through the lens of the debate over european monetary unification the empirical tendency for nominal exchange rate regimes to affect the variability of nominal and real exchange rates alike can be rationalized by sticky price theories or models of asset market liquidity effects but plausible liquidity models have difficulty generating enough persistence to match the data thus the macroeconomic stabilization costs of forgoing the exchange rate realignment option seem pertinent it is argued that our theories of efficiencies due to a common currency remain unsatisfactory despite recent advances the paper concludes by reviewing theories of currency crisis

exchange rate regimes and inflation only hard pegs make a difference abstract using data from a large sample of developing countries from 1985 to 2001 we confirm that hard pegs currency boards or a shared currency reduce inflation and money growth there is no evidence that soft pegs confer any monetary discipline after other factors are controlled for inflation triggers regime switches under hard pegs monetary growth is unaffected by fiscal deficits or by inflation shocks under soft pegs as under floats increased fiscal deficits and positive inflation shocks are associated with higher monetary growth the apparently slower per capita output growth under hard pegs is explained by their geographical distribution jel classification f41

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

partisan and electoral motivations and the choice of monetary institutions under fully mobile capital central bank independence and pegged exchange rates have each been viewed as solutions to the inflationary bias resulting from the time inconsistency of discretionary monetary policy while it is obvious that a benevolent social planner would opt for such an institutional solution it is less obvious that a real world incumbent facing short term partisan or electoral pressures would do so in this article i model the choice of monetary institutions from the standpoint of a survival maximizing incumbent it turns out that a wide range of survival maximizing incumbents do best by forfeiting control over monetary policy while political pressures do not in general discourage monetary commitments they can influence the choice between fixed exchange rates and central bank independence i highlight the importance of viewing fiscal policy and monetary policy as substitutes and identify the conditions under which survival maximizing incumbents will view fixed exchange rates and central bank independence as substitutes in so doing i provide a framework for integrating other contributions to this volume

time consistent shapley value allocation of pollution cost reduction we study the problem of allocation over time of total cost incurred by countries in a cooperative game of pollution reduction we compute the characteristic function for all possible coalitions and apply the shapley value to determine a fair distribution of the total cooperative cost among players we design a mechanism for allocation over time of total individual cost so that the initial agreement remains valid for the whole duration of the game

to be or not to be in monetary union a synthesis article i nfo monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks but it also carries costs as some stabilization may be feasible even in the absence of credibility and this may be more than what an individual country can hope for in a monetary union in this paper we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements we produce examples where monetary union may be welfare improving even for low modest levels of inflation bias 2 3 as long as business cycles are not too a synchronized across countries

transparency reputation and credibility under floating and pegged exchange rates this paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg under which credibility is higher and inflation is lower than under a float this holds true although devaluations of the pegged rate are assumed to be costless the reason is that as realized inflation is not perfectly controllable planned inflation under a float is private information in contrast since the exchange rate can be perfectly controlled pegging resolves the private information problem is more transparent and makes reputation more effective

cash equivalence welfare stigma and food stamps the food stamp program fsp is one of the largest domestic redistributive transfer programs with approximately 22 million participants at a cost of 12 billion in 1983 the stated objective of the fsp is to raise the levels of nutrition among low income households by providing such households with an opportunity to obtain a low cost nutritionally adequate diet 29 5 for program evaluation and cost forecasting accurate estimates of the determinants of eligible households program participation and food expenditure decisions are of particular concern in light of the elimination of the purchase requirement epr and other recent structural changes in the program the problem of obtaining these estimates has three dimensions first observations on the behavior of eligible households under the post epr institutional setting are required second the roles of welfare stigma and the cash equivalence of the in kind food stamps must be clarified finally because program participation is a household choice that affects food expenditures the interdependence of eligible households fsp participation and food expenditure decisions must be accommodated emphasizing an important component of this interdependence the connection between cash equivalence of stamps in the participation decision and in expenditures for food this paper tackles all three dimensions the purpose of this study is to determine the extent to which food stamps are cash equivalent and to determine which program and household characteristics including the degree of cash equivalence and stigma affect post epr food stamp program participation

food stamps and the market demand for food this article compares estimates of disaggregated market food demand responses to the supplemental nutrition assistance program benefits based on exact nonlinear aggregation to responses based on linear aggregation by accounting for income inequality nonlinear aggregation implies that only the households that receive benefits contribute to market demand responses in contrast linear aggregation presumes all households receive benefits and thus contribute to the market demand response the consequence is that nonlinear market estimates are smaller than the linear estimates by roughly the fraction of households that receive benefits

a dynamic game of a transboundary pollutant with asymmetric players abstract modeling transboundary pollutants in a dynamic game framework provides a foundation for analyzing the impact of various policy options the focus of this analysis is on the results of a tax subsidy scheme used to address the transboundary problem of global climate change a nonzero sum dynamic game with asymmetric players is used to evaluate the policy impact of the tax subsidy scheme on the respective player s value functions and strategies as determined by a nash equilibrium feedback solution the asymmetry of the players is reflected in their respective attitudes toward global climate change with one player benefiting from the change and the other losing

decentralization and inflation commitment collective action or continuity do political and fiscal decentralization make it easier or harder to control inflation statistical analysis of average annual inflation rates in a panel of 87 countries in the 1970s and 1980s found no clear relationship between decentralization and the level of inflation political decentralization however does appear to reduce change in countries relative inflation rates over time by creating additional veto players federal structure may lock in existing patterns of monetary policy whether inflationary or strict among the mostly developed countries that started with low inflation inflation tended to increase more slowly in federations than in unitary states among the mostly developing countries that started with high inflation inflation tended to increase faster in the federations there is evidence that political decentralization locks in a country s degree of practical central bank independence whether high or low and the relative hardness or softness of budget constraints on subnational governments

monetary regimes and the co ordination of wage setting abstract a recent literature argues that a strict monetary regime may reduce equilibrium unemployment by disciplining wage setters as wage setters abstain from raising wages to avoid a monetary contraction however in this literature the wage setters are assumed not to co ordinate their wage setting the present paper argues that precisely because a strict monetary regime may discipline the unco ordinated wage setting thus lowering unemployment in the unco ordinated outcome it also reduces wage setters incentives to co ordinate it is shown that an accommodating monetary regime may reduce equilibrium unemployment via the strengthening of the wage setters incentives to co ordinate

can equilibrium models explain nominal exchange regime non neutrality evidence from the european monetary system abstract in a recent paper alan stockman argues that the finding that real exchange rate variability id higher under flexible nominal exchange rate systems than under fixed nominal exchange rate systems typically interpreted as evidencee of price stickiness is consistent with equilibriu models stockman s theory we argue predicts that the formation of the european monetary system should have had no effect on the real exchange rate variability of its members we test this prediction and interpret our findings as evidence in support of stockman s theory although not as evidence that equilibrium models can account for nominal exchange regime non neutrality jel f31

international pollution problems unilateral initiatives by environmental groups in one country abstract international pollution involving two groups of countries is modelled as a two player game each country is characterized by specific preferences for consumption goods and the environment both countries produce a single consumption good with a given technology that determines pollution per unit output each country is economically isolated except for the presence of a global pollutant within a static framework m hoel j environ econom management 20 55 70 1991 shows that unilateral actions to reduce harmful emissions advocated by environmental groups in one country may result in higher total emissions i characterize cooperative and noncooperative emission strategies for the two countries using welfare functions that within a static framework yield total emissions without cooperation always higher than those with cooperation when both governments choose linear closed loop strategies and one country is not sensitive to the environmental condition the unique equilibrium exhibits less pollution than the cooperative equilibrium only if the other country cares a great deal about the well being of future generations and has relatively low bargaining power in the negotiations equilibria that result from nonlinear closed loop strategies are also characterized

on the imperfect substitutability of policy regimes exchange rate targetting vs policy coordination abstract exchange rate targetting is always an imperfect substitute for explicit policy coordination but succeeds when economies are either structurally dissimilar with symmetric shocks or structurally symmetric with dissimilar shocks a joint commitment then generates economies of scale in interventions

time consistent side payments in a dynamic game of downstream pollution abstract this note determines a rule to share a surplus gained when two countries or regions agree to coordinate their policies to reduce downstream pollution an intertemporal decomposition scheme for the total side payment is proposed this scheme has the following individual rationality property in each subgame that starts along the cooperative trajectory one country is guaranteed to receive a higher payoff in the cooperative solution than in the disagreement solution for this country another notion of individual rationality obtains this country will at any instant of time during the play of the game receive a higher payoff in the cooperative solution than in the disagreement solution

policy watch the food stamp program and welfare reform major changes have been proposed for the food stamp program including replacing the program with block grants to the states cashing out the benefits and reducing program funding from baseline levels this paper will explore the impacts of food stamp reform on food spending income support welfare reform agriculture and the rest of the economy a comprehensive set of scenarios is used to examine the potential economic consequences the analysis shows that the effect of cashing out the food stamp program can be as much as four times larger than the effects of program reduction alone

managing the international commons resource use and pollution control the simultaneous management in an international context of free access renewable resources and transboundary pollution is examined in a dynamic game framework first best outcomes under international cooperation are determined and compared to noncooperative outcomes when countries follow linear markov strategies an international policy consisting of taxes on emissions and harvesting with international redistribution of tax receipts is used to achieve the cooperative solution in addition side payments may be required to prevent free riding and thus make the international policy implementable

wage setting under different monetary regimes in an economy with large wage setters like industry unions the monetary regime affects the trade off between consumer real wages and employment and profits faced by the wage setters this paper shows that an exchange rate target including participation in a monetary union is likely to involve lower wages in the traded sector and higher wages in the non traded sector than does a price target an exchange rate target also involves higher prices on non traded goods relative to on traded goods overall welfare is likely to be higher under a price target

the interaction of monetary policy and wages this paper focuses on the interaction of monetary policy and wage formation in economies with strong labor unions government and unions are viewed as endogenous utility maximizers and the macroeconomic consequences of their strategic interaction are explored with the aid of some elements of simple game theory specifically it is shown a how labor unions adjust wages to prices so as to maximize their utility following changes in monetary policy b how the effectiveness of monetary policy is circumscribed without necessarily being nullified by the utility maximizing reactions of unions and c how the interplay of government and unions can create a persistent tendency towards inflation and unemployment simultaneously

a test of the hotelling valuation principle time series tests of the hotelling r percent rule for natural resource prices have not been strongly supportive but the tests and the data are subject to serious difficulties we propose here an alternative testing strategy based on another but less widely known implication of the hotelling model we test this implication which we call the hotelling valuation principle by regressing the market values of the reserves of a sample of u s domestic oiland gas producing companies on their estimated hotelling values we find that the estimated hotelling values account for a significant portion of the observed variations in market values and that the hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals

is monetary union necessarily counterproductive abstract this paper analyses the case of a monetary union between identical countries characterised by oligopolistic competition in their labour market it suggests that the switch to a common currency may improve their macroeconomic performances depending on labour market features

the rise and fall of centralized wage bargaining during the three decades spanning the early 1950s to the early 1980s the wage setting process in most northern european countries was dominated by centralized bargaining i e peak level labor and employer associations set wages nationwide in the early 1980s centralized wage bargaining began to collapse in this paper we assess a novel explanation for both the initial establishment of a centralized wage setting process and its subsequent collapse according to our theory centralized wage bargaining was set up as a response to the spillovers created by the unemployment benefit program its collapse was the result of the increase in the productivity gap across workers brought about by equipment specific technological progress and equipment skill complementarity

a long run view of the european monetary system abstract this papaer analyzes the exchange rates and consumer price indices of six countries participating in the european monetary system ems during the entire period of floating exchange rates the analysis shows that most of these real exchange rates have unit roots even when one allows for the possibility of a structural break at the time of the advent of the ems further proces and exchange rates are not co integrated during the ems period the data suggest that the 12 realignments of the ems have not served fully too offset the member countries inflation differentials

fiscal rules and government borrowing costs international evidence we find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985 2010 we apply a variety of propensity score matching methods to address the self selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets the results are robust to changes in country sample and alternative estimation methodology and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the risk premium on government debt that compensates lenders for this possibility jel e43 g12 h60

the food stamp program welfare reform and the aggregate economy the passage of the personal responsibility and work opportunity and reconciliation act prwora of 1996 swept away nearly six decades of federal welfare policy the act eliminated the aid to families with dependent children afdc entitlement program replacing it with a fixed block grant giving states a fundamental role in assisting poor families and added significant new work requirements for recipients although often overlooked in the extensive media coverage the food stamp program was changed fundamentally by the prwora the size of the food stamp program is expected to decrease by about 22 billion from 1997 to 2002 this is over half the

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

fixed versus flexible exchange rates which provides more fiscal discipline abstract conventional wisdom holds that fixed rates provide more fiscal discipline than do flexible rates in this paper we show that this wisdom need not hold in a standard model in which fiscal policy is endogenously determined by a maximizing fiscal authority the claim that fixed rates induce more discipline stresses that sustained adoption of lax fiscal policies must eventually lead to an exhaustion of reserves and thus to a politically costly collapse of the peg hence under fixed rates bad behavior today leads to punishment tomorrow under flexible rates bad behavior has costs as well the difference is in the intertemporal distribution of these costs flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in the exchange rate hence bad behavior today leads to punishment today if fiscal authorities are impatient flexible rates by forcing the costs to be paid up front provide more fiscal discipline and higher welfare for the representative private agent the recent experience of sub saharan countries supplies evidence that matches the predictions of the model

a long run view of german dominance and the degree of policy convergence in the ems i introduction when the european monetary system ems was established in march 1979 the member countries agreed to gradually move to a european monetary union emu at the maastricht summit on december 9 10 1991 the member nations signed an agreement outlining the requirements and a timetable for monetary union building upon the framework specified in the 1989 delors report the maastricht agreement outlines a three stage transition to a common european monetary policy 1 the achievement of a high degree of monetary policy convergence among the member countries is crucial if a common monetary policy is to be initiated the ems already provides a framework in which monetary policy actions can be coordinated but have member nations actually coordinated their actions or have they conducted independent policies some have claimed that the bundesbank has dominated monetary policy in the ems one explanation is that by tying domestic monetary policy to that of germany other countries policymakers enhance their own credibility for instance giavazzi and pagano 1988 have argued that because the bundesbank is known to follow a consistent credible anti inflation policy tying policy to that of germany should enhance one s reputation a natural question to ask therefore is to what degree have monetary policies in the ems converged to that conducted by germany a finding of complete convergence among ems monetary policies would imply that the member countries have converged to one common monetary policy in studies examining the credibility hypothesis which clearly is linked to the notion of monetary policy convergence fratianni and von hagen 1990c and burdekin westbrook and willett 1993 rejected this hypothesis 2 to consider the prospects for the success of emu one must know whether and to what degree there has been a transmission of policy actions within the ems the question of whether germany has set the direction of monetary policy for the ems is a natural focus and has been the subject of recent study fratianni and von hagen 1990a 1990b 1990c von hagen and fratianni 1990 and kutan 1991 1992 all reject the hypothesis that german monetary policy actions dominate the monetary policy decisions of other ems countries 3 while germany is found to be an important player in setting monetary policy its actions are not independent of other members in contrast to this conclusion karfakis and moschos 1990 and macdonald and taylor 1991 argue that non german ems members policies are related closely to german policy changes and that german policy actions do not respond to those taken by the central banks of other ems countries this study tests for policy convergence among ems countries within a long run framework using cointegration procedures using both short term interest rates and the monetary base as measures of monetary policy our aim is to determine the number of shared common stochastic trends among ems monetary policies and test whether a complete convergence of policies has been achieved in the ems rejection of complete convergence a finding of two or more shared common trends indicates that some countries policies are set independently at least in the long run if this is true then the notion that the bundesbank dominates ems policy is rejected such a result also suggests that any credibility gain from tying policy to that of germany is probably outweighed by other considerations such as domestic growth or international competitiveness looking ahead our results indicate that ems monetary policies have not converged we also investigate the short run connection among policy measures using a longer sample than in previous work our results from this analysis indicate that while german policy actions influence monetary policy in other ems countries in the short run there is substantial policy interaction among ems members the format of the paper is as follows section ii discusses some methodological issues concerning the use of interest rates and the monetary base as indicators of policy actions

fewer monies better monies in the aftermath of emerging market crises from russia to asia and latin america there is a quest for better monetary arrangements that are more crisis proof fixed rates are out flexible rates are in with a policy focus on inflation targeting but there is of course the alternative of abolishing exchange rates all together this paper revisits the issue of dollarization or currency boards to review what arguments in the debate stand up the case for flexible exchange rates emphasizes the need for a tool to accomplish relative price adjustment this paper argues that in an intertemporal perspective most shocks require financing in the capital market rather than adjustment moreover countries frequently do not use their flexible rate to play a cyclical role and as a result only a pay a premium for the option to depreciate but do not take advantage of the flexibility on the contrary they engineer systematic overvaluation in the context of inflation targeting