the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

the hidden persuaders institutions and individuals in economic theory in his classic book the hidden persuaders vance packard claimed that large corporations manipulated consumers using advertising techniques john kenneth galbraith and others have repeated a similar view against this gary becker and george stigler have claimed that advertising is essentially informative rather than manipulative in contrast it is argued here that both of these opposed accounts of human agency neglect the more subtle and undesigned processes by which institutions bear upon and mould individuals this paper proposes a concept of reconstitutive downward causation in which institutions act upon individual habits and dispositions the mechanisms involved do not fall foul of past critiques of holism or methodological collectivism this argument involves a rehabilitation of the concept of habit in social science with far reaching implications

learning theory and the logic of critical mass the oliver marwell theory of critical mass is a prominent solution to the free rider problem that plagues collective action in large groups i reformulate the theory as a stochastic learning model in which cooperative responses are shaped by the social sanctions and cues generated by the responses of others this relaxes four assumptions in the original formulation that the actors are rational decisions are isolated events outcomes are deterministic and public goods have pure jointness of supply and collective profit computer simulations then show how adaptive actors become trapped in a suboptimal equilibrium and how they escape through attainment of critical mass start up problems arise from accommodation to social costs and not from low returns to early contributors as previously believed simulations also identify a new dilemma of group size and show why solidarity tends to emerge in response to crisis finally normative solidarity appears to be a consequence rather than cause of critical mass but may promote recovery from random deviance

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

do institutions promote rationality an experimental study of the three door anomaly the three door problem is an example of a systematic violation of a key rationality postulate that has attracted much attention in this seemingly simple individual decision task most people initially fail to apply correctly bayes law and to make the payoff maximizing choice previous experimental studies have shown that individual learning reduces the incidence of irrational choices somewhat but is far from eliminating it we experimentally study the roles of communication and competition as institutions to mitigate the choice anomaly we show that the three door anomaly can be entirely eliminated by these institutions

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

optimal horizons for inflation targeting abstract in this paper we investigate the problem of selecting an optimal horizon for inflation targeting in the united kingdom since there are two key ways of thinking about an optimal horizon we look at optimal horizons for both of these interpretations in addition to see whether our results are robust in the face of model uncertainty we compute optimal horizons for two different models with divergent structural and dynamic characteristics

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

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

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

introduction funding gaps theoretical and empirical foundations of government policies to plug alleged business funding gaps are highly controversial but rarely subject to wide ranging in depth debate this symposium from major scholars in the field provides a counterbalance topics addressed cover the theory of lending under asymmetric information its implications for overlending relationship lending as a market solution to information asymmetries government emulation of private sector decision making to eliminate underprovision of high tech equity and theoretically based empirical work testing for funding deficiencies in the high tech sector despite the very different and potentially contradictory contributions the result is surprisingly a set of mutually agreed policy conclusions

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

urban spatial development in the land policy reform era evidence from beijing this paper examines the characteristics of urban spatial development in beijing and identifies the extent to which these characteristics can be attributed to the emerging land market in beijing as

the global and local dimensions of place making remaking shanghai as a world city shanghai the largest socialist industrial city in china is now experiencing dramatic restructuring under global and local forces this paper provides a preliminary account of remaking this city into a world city the case study suggests the tremendous and pervasive impact of globalisation on the city in transitional economies although it is still not comparable with a truly global city the growth of inward investment particularly its penetration into real estate development has exerted direct impacts on the urban structure it is argued that however that this global influence can only be realised through the coincidence of indigenous changes in the political economy system specifically the willingness of the central government to give more autonomy to local governments the new policy to set up a window for china s open policy the incentive for making money from selling the space the injection of public money into infrastructure and fierce promotional development strategies all contributed to the process of urban restructuring the effect of combined global and local changes has led to an extremely optimistic growth atmosphere and a building boom since the mid 1990s shanghai highlights the local as well as the global dimensions of urban change in the post socialist economies

federalism as a commitment to reserving market incentives the authors advance a new perspective in the study of federalism their approach views federalism as a governance solution of the state to credibly preserving market incentives market incentives are preserved if the state is credibly prevented from compromising on future economic success and from bailing out future failures the salient features of federalism decentralization of information and authority and interjurisdictional competition help provide credible commitment or these purposes in addition the authors suggest that some federalism are self sustaining

stochastic equilibria with incomplete financial markets abstract we demonstrate the existence of equilibria with incomplete financial markets for stochastic economies whose information structure is given by an event tree restricting attention to purely financial securities those paying in units of account e g dollars financial markets may be incomplete some consumption streams may be impossible to obtain by any trading strategy securities may be individually precluded from trade at arbitrary states and dates sufficient conditions for the existence of stochastic equilibria are continuous convex strictly monotonic preferences and strictly positive aggregate endowments these conditions are weakened a corollary states that any regime of security prices precluding arbitrage can be embedded in an equilibrium

the standard error of regressions statistical significance as used in economics has weak theoretical justification in particular it merges statistical and substantive significance the 182 papers using regression analysis in the american economic review in the 1980s were tested against 19 criteria for the accepted use of statistical significance most some three quarters of the papers did poorly likewise textbooks in econometrics do not distinguish statistical and economic significance statistical significance should not be the focus of empirical economics

equilibrium in economies with incomplete financial markets abstract this paper analyses an exchange economy in the absence of arrow debreu complete markets it is assumed that trading takes place in the sequence of spot markets and futures markets for securities payable in units of account unlimited short selling in securities is allowed a general equilibrium in such an economy is a set of current and future prices contingent on uncertain events and a set of individual plans such that all markets are cleared the existence of such an equilibrium is proved under usual assumptions this is in contrast to the case of futures markets for contingent futures commodities where an equilibrium may not exist the optimality of equilibrium allocations is also discussed

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

decoding urban land governance state reconstruction in contemporary chinese cities in the rapidly growing literature on urban development in china many authors have emphasised the salient features of economic decentralisation and the increasingly significant role of the local state however such arguments neglect a counter trend in which the central state has deterritorialised and rehierarchised some key functions using the case of land governance this paper argues that facing the complication of changing urban conditions there is a resurgence of the state s regulatory power the decentralisation of economic governance is now counter balanced by the rise of state strategies to control the articulation of scales through which a more centrally consolidated power can be achieved the central government still serves as an important level of economic regulation in this sense new interpretations of commoditised urban transformation especially commoditised production of the built environment should be understood by underscoring the interplay between trends of decentralisation and terr

optimal interest rate smoothing this paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions it shows in the context of a simple model of optimizing private sector behaviour that assignment of an interest rate smoothing objective to the central bank may be desirable even when reduction of the magnitude of interest rate changes is not a social objective in itself this is because a response of policy to irrelevant lagged variables may be desirable owing to the way it steers private sector expectations of future policy

rationality of self and others in an economic system in this paper i want to disentangle some of the senses in which the hypothesis of rationality is used in economic theory in particular i want to stress that rationality is not a property of the individual alone although it is usually presented that way rather it gathers not only its force but also its very meaning from the social context in which it is embedded it is most plausible under very ideal conditions when these conditions cease to hold the rationality assumptions become strained and possibly even self contradictory they certainly imply an ability at information processing and calculation that is far beyond the feasible and that cannot well be justified as the result of learning and adaptation let me dismiss a point of view that is perhaps not always articulated but seems implicit in many writings it seems to be asserted that a theory of the economy must be based on rationality as a matter of principle otherwise there can be no theory this position has even been maintained by some who accept that economic behavior is not completely rational john stuart mill 1909 bk 2 ch 4 argued that custom not competition governs much of the economic world but he adds that the only possible theory is that standard economic doctrine makes assumptions of rationality that have very strong implications for the complexity of individuals decision processes the most complete assumptions of competitive general equilibrium theory require that all future and contingent prices exist and be known in fact of course not all these markets exist the incompleteness of markets has several side consequences for rationality for one thing each decision maker has to have a model that predicts the future spot prices this is an informational burden of an entirely different magnitude than simply optimizing at known prices it involves all the complexity of rational analysis of data and contradicts the much praised informational economy of the price system it is also the case that equilibria become much less well defined similar problems occur with imperfect competition this research was supported by the office of naval research grant onr n00014 79 c 0685 at the center for research in organizational efficiency institute for mathematical studies in the social sciences stanford university stanford california

china s changing urban governance in the transition towards a more market oriented economy china s changing urban development processes and urban landscapes in the transition towards a more market oriented economy have received extensive research attention in recent years relatively the governing of chinese cities is still underresearched this article aims to analyse the forces released both inside and outside the formal socialist state system and the impacts on phenomenal restructuring of urban governance especially at local levels marketisation has created new elements beyond the reach of state work units that represent the state s hierarchical control the pillars of the socialist governing structure the party state the work units system and household registration are shaken by these forces the changes in the organisation of people capital production materials infrastructure and space fundamentally demand new urban governance territorial organisations such as the municipality urban districts street office and residents committees are reinvented and consolidated to restore a governable society the devolution towards the base level and the reinvention of local communities reflect the state s attempt to reconsolidate its power to create a governable society as well as to cope with practical pressures such as the provision of social assistance to poor and aged residents re employment of laid off workers and the management of floating immigrants the combination of new market elements and decentralised state apparatus has given rise to the entrepreneurial endeavour of china s governance this research highlights the micro foundation of the new urban governance in addition to the globalisation capital mobility city competitiveness thesis

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

stochastic technology production organization and costs abstract using a model including patients physicians insurers and uncertain diagnostic technology the optimal cesarean rate is derived from preferences technology and the incidence rate when the choice of insured patients is constrained only by technology uncertain diagnosis produces unnecessary cesareans and unsafe vaginal births technical progress can lead to more cesareans and higher costs joint production of goods and bads and collective payments require incentive compatible pricing schemes different from rbrvs equilibrium outcomes of hmos and fee for service organizations are identical however implementable incentive schemes involve additional costs efficiency requires insurers and not providers to be liable for malpractice claims

targeting inflation by forecast feedback rules in small open economies abstract we argue that in practice the inflation targeting strategy can be approximated by the interest rate responding to the unchanged interest rate forecast of inflation a method is developed to derive unchanged interest rate forecasts in forward looking models and evaluate the performance of the policy rule in an optimizing new keynesian model due to monacelli european central bank working paper series 227 estimated on uk data we find that the policy rule is less prone to generate a determinate rational expectations equilibrium if based on an unchanged interest rate compared to the rule consistent forecast both rules approximate the optimal commitment policy if the central bank attaches sufficient weight to inflation as opposed to output gap stabilization the optimal forecast feedback horizon is close to a year and a half and is largely independent of how much the central bank prefers inflation to output gap stability

monetary policy in a low pass through environment in a dynamic new keynesian optimizing model we introduce incomplete exchange rate pass through on import prices three results stand out first unlike canonical models with perfect pass through which emphasize a type of isomorphism incomplete pass through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy second productivity driven deviations from the law of one price assume the interpretation of endogenous cost push shocks third the optimal commitment policy relative to discretion entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates

local governments as industrial firms an organizational analysis of china s transitional economy despite widespread skepticism about government ownership in transitional economies china s rapid industrial growth has been led by public enterprises kornai s theory of soft budbet constraints born of the failure of earlier hungarian reforms fosters such skepticism but it assumes as fixed organizational characteristics that in fact vary widely across government jurisdictions local governments with smaller industrial bases have clearer financial incentives and constraints fewer nonfinancial interests in enterprises and a greater capacity to monitor them in china s vast public sector the fastest growth in output and productivity has occurred where government ownership rights are clearest and most easily enforced which enables officials to manage public industry as a diversified market oriented firm

federalism chinese style the political basis for economic success in china china s remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets this reform reflects a special type of institutionalized decentralization that the authors call federalism chinese style this form of decentralization has three consequences first it fosters competition not only in product markets but also among local governments for labor and foreign capital this competition in turn encourages local government experimentation and learning with new forms of enterprises regulation and economic relationships second it provides incentives for local governments to promote local economic prosperity finally it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government

the performance of forecast based monetary policy rules under model uncertainty we investigate the performance of forecast based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics we identify the key characteristics of rules that are robust to model uncertainty such rules respond to the one year ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia in contrast rules with longer forecast horizons are less robust and are prone to generating indeterminacy in light of these results we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences

the origin of predictable dynamic behavior abstract nonlinear dynamic theory implies optimal decisions often behave like random chaos such random target motion is impossible for imperfect agents to follow without error however they can still gradually approach the optimal target if and only if they partially adjust toward its perceived location so as to induce their behavior to converge to an equilibrium reducing dynamic errors through partial adjustment thereby induces a stable regularity in behavior that otherwise may never evolve this result agrees with the stability properties observed in experimental markets including cobweb auction and asset markets whose dynamics before reaching equilibrium exhibit adaptive rather than rational expectations