common agency with rational expectations theory and application to a monetary union we extend the theory of common agency to the situation where the principals payoffs are affected by their ex ante expectations of the agent s ex post choice we show how the usual truthful schedules must be modified to account for the rational expectations constraint we apply the model to a monetary union where member governments influence the policy of the common central bank using incentive contracts we examine how the outcomes depend on different delegated objectives of the bank and find that some often advocated rules create an excessive deflationary bias

rogoff s conservative central banker restored we show that delegation of monetary policy to a weight conservative central banker can be desirable although the government can also use an inflation contract an employment target an inflation target or any combination of these to control the central banker the key feature of our model is a stochastic inflation bias arising when wage setters receive some information about a supply shock prior to signing nominal wage contracts weight conservatism is found to be desirable if fully state contingent delegation is not possible and the stochastic inflation bias cannot be eliminated by optimal choice of the delegation parameters

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

monetary cohabitation in europe how can monetary policy in stage iii of european monetary union be coordinated between the ins and the outs this paper compares alternative institutional mechanisms and concludes that a generalized system of inflation targets at the european level has several merits it strengthens domestic credibility of monetary policy it rules out deliberate attempts to gain competitiveness through devaluations it forces monetary policy to respond automatically to various macroeconomic shocks which is stabilizing for the real exchange rate and it distributes these shocks symmetrically across countries on the basis of a simple theoretical model of policy coordination the paper shows that a system of inflation targets approximates an optimal policy of international cooperation preliminary empirical evidence supports these theoretical results this abstract was borrowed from another version of this item

the choice of conservative bankers in open economies monetary regime options for europe that governments should delegate the operation of monetary policy to independent central banks is widely advocated for a closed economy the optimal choice results in a banker who is more conservative than the representative government assigning a lower weight on output in her welfare function but not overconservative thereby allowing monetary policy to adjust to shocks however for open economies the exchange rate externality results in an inefficient nash equilibrium to this delegation game monetary union or cooperation in the optimal choice of banker can internalize the externality these options are assessed under symmetric and asymmetric shocks assuming different levels of fiscal transfers copyright 1996 by royal economic society

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

application of the translog model of energy substitution to developing countries the case of korea abstract while studies exist on the applications of the translog energy model in developed countries little is known about its application in developing countries to this end this paper investigates the long run sensitivities of energy demand to price changes and the degree of interfactor and interfuel substitution in the korean industrial sector we also uniquely disaggregate the industrial sector into nine manufacturing and three non manufacturing subsectors based on time series data obtained from the korea institute of energy and resources an energy demand model has been specified and estimated according to the translog approach the conclusions provide future directions for energy demand management policies in korea

games of monetary and fiscal interactions in the emu abstract this paper constructs various models of the emu and ecb when member countries have different objectives voting in pursuit of national interest can yield moderate and stable inflation the metaphor of walsh type contracts implements a monetary policy rule that averages the member countries most preferred rules in a repeated relationship where a country suffering a large adverse shock can use political bargaining to subvert the ecb s commitment the optimal rule should incorporate some flexibility to forestall that finally freedom of national fiscal policies undermines the ecb s monetary commitment this may justify fiscal constraints like the stability and growth pact

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

a decentralized and state independent mechanism for internalizing international monetary policy spillovers abstract we propose a decentralized mechanism which internalizes international monetary policy spillovers and eliminates players incentives to deviate from the efficient outcome this institution is state independent which saves redesigning costs and implies that governments need not gather information about the shocks

mechanisms for achieving monetary stability inflation targeting versus the erm first we modify the barro gordon model so that a credibility stabilization trade off will remain even when a performance contract of the type envisaged by walsh 1995 is imposed on the central bank governor we do this by modeling a real interest rate bias along with the inflation bias then we discuss how various inflation penalties might actually be imposed on a central bank and ask whether inflation targeting supported by one or another of the penalties is likely to bring a better resolution to the credibility stabilization trade off than the erm

the role of a fixed exchange rate system when central bankers are independent abstract in a symmetric model a fixed exchange rate system allows us to reach the cooperative solution in the game between central bankers however as cooperation can be counterproductive such a property may not be beneficial here we reconsider this issue by introducing independent central bankers who need not share the social preferences we show that when countries choose their central bankers cooperatively cooperation between central bankers is neither productive nor counterproductive making fixed and flexible rates equivalent however when central bankers are chosen non cooperatively a fixed rate is better central bankers being too conservative under a flexible rate

global implications of self oriented national monetary rules author s obstfeld maurice rogoff kenneth abstract it is well known that if international linkages are relatively small the potential gains to international monetary policy coordination are typically quite limited but what if goods and financial markets are tightly linked is it then problematic if countries unilaterally design their institutions for monetary stabilization are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination we argue that under plausible assumptions the answer is no unless risk aversion is very high lack of coordination in rule setting is a second order problem compared to the overall gains from monetary policy stabilization

inflation targets and contracts with uncertain central banker preferences within a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker s preferences the optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks however variability due to shocks is enhanced by uncertain central banker preferences quadratic contracts are shown to overcome this problem partly but the advantages of delegation may still be dominated by the excess variability due to shocks hence the credibility stabilization tradeoff is restored

observable contracts strategic delegation and cooperation the role of commitments in noncooperative games is well acknowledged and documented one way to achieve commitments is by letting delegates represent the players of a game in this paper the authors study a delegation game in which the players can use agents strategically to play on their behalf and the contracts they sign with them are common knowledge they show that in such cases every pareto optimal outcome of the game can become the unique subgame perfect nash equilibrium of the delegation game the authors demonstrate this result by discussing the cournot type duopolistic game copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

optimal monetary policy cooperation through state independent contracts with targets abstract simple state independent monetary institutions are shown to secure optimal cooperative policies in a stochastic linear quadratic two country world with international policy spill overs and national credibility problems institutions characterize delegation to independent central bankers facing quadratic performance related contracts punishing or rewarding deviations from primary and intermediate policy targets

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

two fallacies concerning central bank independence this paper takes issue with two basic conclusions prevalent in the literature on central bank behavior first the paper argues that it is inappropriate to presume that central banks will in the absence of any precommitment technology necessarily behave in a discretionary fashion that implies an inflationary bias since there is no functional connection between average rates of money creation or inflation and policy responsiveness to cyclical disturbances it is entirely feasible for the bias to be avoided in other words there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any absolute precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it this abstract was borrowed from another version of this item

sustainable international monetary policy cooperation abstract we provide new insight on international monetary policy cooperation in a familiar two country setting a country facing a relatively more volatile markup shock has an incentive to deviate from an assumed cooperation regime to a non cooperation regime a similar result obtains if countries differ in size have non unitary elasticity of substitution between domestic and foreign goods and have different degrees of trade openness home bias in consumption this motivates our study of an endogenous history dependent sustainable cooperation regime its history contingent welfare redistributions are supported by incentive compatible variations in resource transfers through the terms of trade or net exports such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality

conservative central bankers in a two country world abstract in a closed economy framework rogoff has developed the argument that it can be beneficial for society to appoint a conservative central banker we extend this analysis to a two country world in order to take into account the game between the monetary authorities of the two countries we show that conservative central bankers may now deteriorate the situations of both countries and that the distinction between symmetric and asymmetric shocks becomes crucial while symmetric shocks weaken the case for conservative central bankers asymmetric shocks strengthen it the paper also considers the case where central bankers are nominated noncooperatively by the countries

central banker contracts incomplete information and monetary policy surprises in search of a selfish central banker approaching monetary policy as a principal agent problemprovides a useful framework for interpreting alternativedelegation schemes in this paper we consider theeffectiveness of central banker incentive schemes when theprincipal delegates monetary policy through contracts butremains uncertain about the central banker s responsiveness tosuch schemes we adopt a simple principal agent model andassume that the central banker s trade off between socialwelfare and the incentive scheme is private information weconsider two types of central bankers one who responds to theincentive scheme selfish and one who does not and onlycares about social welfare benevolent we demonstratethat when a benevolent central banker accepts a contractdesigned for a selfish central banker positive inflationsurprises occur and output exceeds its natural rate wefurther show that a benevolent central banker with aninflation bias has an incentive to masquerade as selfish mechanisms exist that solve that problem by achievingpreference revelation we consider a simple mechanism indominant strategies that induces the benevolent type eithernot to breach or not to accept the appointment contract inthe first place this multi period mechanism works with eitherinflation targets or the appointment of a conservativecentral banker our results suggest that more complicatedincentive schemes embedded within broader constitutionalarrangements are required in the presence of privateinformation for them to work effectively

an economic order quantity model with partial backordering and a special sale price abstract a constant unit purchase cost is one of the main assumptions in the classic economic order quantity model in practice suppliers sometimes offer special sale prices to stimulate sales or decrease inventories of certain items in this paper we develop an eoq model with a special sale price and partial backordering we prove the convexity of the cost reduction function if a special order is placed at the special sale price a solution method is proposed and numerical examples are presented