factors in the adoption of industial development incentives by states the continued proliferation of state indusrial development incentive programmes in the absence of any evidence of their effectiveness raises several interesting policy questions first why do states continue to adopt new incentive programmes and secondly what factors determine the type of new incentives that are adopted these questions are investigated through the use of a set of empirical logit models of states decisions to adopt new industrial development incentive programmes in these models the decisions are hypothesized to be influenced by the states s economic and fiscal condition the state s relative advantages and disadvantages with respect to important industrial location factors and the incentive packages of the subject state and its neighbours the results provide limited support for the frequently advanced but previously untested hypothesis that a primary determinant of a state s incentive adoption decision is the recent adoption of similar incentivies in neighbouring states the dec

central bank independence a critical view from a developing country perspective abstract merely establishing an independent central bank may not bring about its professed benefits in developing countries with shallow financial markets where there is limited scope for a truly independent monetary policy the benefits of an independent central bank may be eroded by conflicts between fiscal and monetary policy and by inherent problems of central bank institutional design so that problems of dynamic inconsistency associated with monetary policy are not solved but merely transformed less developed countries wishing to establish a low inflation path should concentrate on instituting financial policy reforms that bolster opposition to inflation and institutional arrangements that force discipline on fiscal policy directly rather than indirectly through monetary policy

assessing china s exchange rate regime the imf articles of agreement forbid a country from manipulating its currency for unfair advantage the us treasury has been legally required since 1988 to report to congress biannually regarding whether individual trading partners are guilty of manipulation one part of this paper tests econometrically two competing sets of hypothesized determinants of the treasury decisions 1 legitimate economic variables consistent with the imf definition of manipulation the partners overall current account gdp its reserve changes and the real overvaluation of its currency and 2 variables suggestive of domestic american political expediency the bilateral trade balance us unemployment and an election year dummy the econometric results suggest that the treasury verdicts are driven heavily by the us bilateral deficit though other variables also turn out to be quite important in 2005 china announced a switch to a new exchange rate regime the exchange rate would be set with reference to a basket of other currencies with numerical weights unannounced allowing a movement of up to 0 3 within any given day although this step was originally accepted at face value in public policy circles scepticism is in order the second econometric part of the paper evaluates what exchange rate regime china has actually been following we use the technique introduced by frankel and wei 1994 1 one regresses changes in the value of the local currency in this case the rmb against changes in the values of the dollar euro yen and other currencies that may be in the basket we find that within 2005 the de facto regime remained a peg to a basket that put virtually all weight on the dollar subsequently there has been a modest but steady increase in flexibility with some weight shifted to a few non dollar currencies but not those one might expect in any case the weight on the dollar was still fairly heavy in 2006 the paper tests whether the decline in the implicit weight on the dollar is related to the pressure from us officials it also considers whether the increase in flexibility that we have seen small though it is has been gradually accelerating at a rate that would suggest the likelihood of some genuine flexibility in the not so distant future jeffrey a frankel and shang jin wei 1 ref 18

the mirage of floating exchange rates this note summarizes some of the highlights of my longer paper with guillermo calvo fear of floating many emerging market countries have suffered financial crises one view blames soft pegs for these crises adherents to that view suggest that countries move to corner solutions hard pegs or floating exchange rates we analyze the behavior of exchange rates reserves and interest rates to assess whether there is evidence that country practice is moving toward corner solutions we focus on whether countries that claim they are floating are indeed doing so we find that countries that say they allow their exchange rate to float mostly do not there seems to be an epidemic case of fear of floating

federal reserve independence abstract the federal reserve is always called an independent agency the term independent is rarely defined the only attempt in the literature and internal records is based on chairman martin s statement that the federal reserve is independent with the government not independent of the government martin explained several times that independence within government meant that the federal reserve helped to finance government budget because they were approved by congress and signed by the president financing budget deficits is the very opposite of the principle adopted when congress approved the federal reserve act in 1913 in fact the federal reserve has supported treasury operations many times i conclude that it is far more important to have an enforceable policy rule such as the taylor rule but any rule must have a provision that permits the rule to be set aside

game theory for central bankers a report to the governor of the bank of england you asked me to review this book for you and try to digest what lessons it might hold for you i can well understand why you delegated this exercise to me you were no doubt already aware that alex cukierman ac is an eminent theoretician who has been applying currently fashionable game theoretic modeling techniques to the study of monetary policy and you may have had some concerns whether you would find the book user friendly in the rest of this review following both your instructions and my own inclinations i shall concentrate primarily upon the lessons and light that his work provides for monetary issues in general and for the conduct of central banking in particular neither you nor i have either the interest or the mathematical competence to assess how far this book represents an advance in the application or technical procedures of game theory as such in that respect the author will no doubt regard this as only a partial and one sided review of his work nevertheless ac hopes that you and other practitioners will read at least some part of the book and he has gone to considerable lengths to try to structure the book into modules of differing levels of technical difficulty and abstraction so that you will read the easy bits thus

political business cycles 40 years after nordhaus the aim of this article is to survey the huge literature that has emerged in the last four decades following nordhaus s rev econ stud 42 2 169 190 1975 publication on political business cycles pbcs i first propose some developments in history of thought to examine the context in which this ground breaking contribution saw the light of the day i also present a simplified version of nordhaus s model to highlight his key results i detail some early critiques of this model and the fields of investigations to which they gave birth i then focus on the institutional context and examine its influence on pbcs the actual research agenda finally i derive some paths for future research

relative price variability and inflation evidence from us cities we test whether the time series positive correlation of inflation and intermarket relative price variability is also present in a cross section of u s cities we find this correlation to be a robu

forecasting and combining competing models of exchange rate determination this article investigates the out of sample forecast performance of a set of competing models of exchange rate determination we compare standard linear models with models that characterize the relationship between exchange rate and the underlying fundamentals by nonlinear dynamics linear models tend to outperform at short forecast horizons especially when deviations from long term equilibrium are small in contrast nonlinear models with more elaborate mean reverting components dominate at longer horizons especially when deviations from long term equilibrium are large the results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model

the biases of federal reserve bank presidents this paper develops statistical tests which show that in federal open market committee voting federal reserve bank presidents as a group prefer less expansionary monetary policy than federal reserve board members further tests show that a subset of federal reserve bank presidents vote in a manner which is consistent with the partisanship of the u s president during whose term they were appointed membership in this subset is highly correlated with a career as an economist these results have implications for reforms which would alter the voting power of bank presidents on the fomc

the objectives and priorities of monetary policy under different federal reserve chairmen this paper utilizes a monetary policy reaction function that relates policy intentions to forecasts of policy objectives estimates of this reaction function over the post accord period suggest that the burns period was unique while the martin and volcker periods were extremely similar the burns period was structurally distinct from both the martin and volcker periods further model specifications that allow for an independent influence on monetary policy from different presidential administrations also imply that there are significant differences in monetary policy under different fed chairmen copyright 1990 by ohio state university press

monetary policy theory and practice in respect of the theory of monetary policy i am reminded of the comment that jacob viner made many years ago at a meeting of the american economic association about alfred marshall s economics what is new is highly unlikely at this late date also to be true and significant 1 consequently i shall restrict my remarks on theory to trying to summarize what i regard as the present intellectual position

the bundesbank s path to independence evidence from the 1950s the german bundesbank is frequently called the world s most independent and conservative central bank taking account of the path dependency of this reputation both quantitative data and qualitative data on german central bank law and political conflicts are used to determine the factors that contributed to this reputation in the 1950s it is shown that quantitative analysis has its limits and that law might be a misleading indicator in this respect it is rather the analysis of policy conflicts between the bundesbank and the government that yields information on the bank s path to independence

searching for political business cycles in germany one reslt of the revitalised literature on political business cycles is that there are signs in german data that elections and ideology have an impact however using monthly data for the period 1950 1989 and standard methods of time series analysis we reject both the nordhaus hypothesis of opportunistic cycles and the partisan approaches by hibbs ans alesina we show that some results are sensitive to the assumption of stationarity there are signs of policy cycles in m1 it is hard though to bring this in line with the rogoff hypothesis of rational opportunistic cycles because of the german institutional setting

unraveling the relationship between presidential approval and the economy a multidimensional semiparametric approach summary empirical studies analyzing the determinants of us presidential popularity have delivered quite inconclusive results concerning the role of economic variables by assuming linear relationships we employ penalized spline smoothing in the context of semiparametric additive mixed models and allow for flexible functional forms and thus possible nonlinear effects for the economic determinants by controlling for the well known politically motivated covariables we find strong evidence for nonlinear and negative effects of unemployment inflation and government consumption on presidential approval additionally we present new results in favor of nonparametric trivariate interaction effects between the macroeconomic covariables copyright 2014 john wiley sons ltd

testing the satisficing version of the political business cycle 1905 1984 this paper develops a test of the satisficing version of the political business cycle previous tests have focused on maximizing models of political behavior and are not sufficiently general to test for satisficing behavior using annual u s data for the period 1905 to 1984 we find evidence supporting the satisficing version of the political business cycle model but we reject the maximizing version in accordance with the satisficing hypothesis we find that increasing inflation or unemployment and decreasing monetary base growth in the third year of a presidential term are followed typically by reversals during the election year

a further interpretation of friedman s hypothesis the cointegration of component cpi indexes abstract this study extends the friedman 1977 friedman m 1977 nobel lecture inflation and unemployment journal of economic dynamics and control 12 231 254 hypothesis regarding inflation means and variances to show that high inflation is also associated with greater divergence of component inflation indexes over time this finding follows friedman s reasoning involving inflation uncertainty and time lagged adjustments

bureaucracy altruisme and monetary policy a note from a forecasting perspective sets over the period 1916 1987 their structured critique is consistent with the earlier work of strong 1984 boyd 1984 allen mccrickard cartwright and delorme 1988 mester 1994 and others in general all question the findings of toma 1982 shughart and tollison 1983 boyes mounts and sowell 1988 and others that bureaucratic effects and institutional incentives have had a significant impact on the development and conduct of monetary policy an underlying issue in this debate is whether variables proxying bureaucratic or institutional effects emanating from the incentives contained in the structure

congressional influence on u s monetary policy abstract congressional influence is generally discounted or ignored in political models of federal reserve behavior here i show that changes in the leadership of the senate banking committee are significantly correlated with monetary base growth more liberal committee leaders are associated with significantly higher base growth other factors held constant the result is shown to hold across several econometric specifications and different definitions of the congressional preference variable

presidential politics budget deficits and monetary policy in the united states 1960 1976 this paper has focused on the extent to which the traditional tools of macroeconomic management in the united states monetary and fiscal policy have contributed to a political business cycle regardless of whether politicians can successfully influence real economic variables to their own ends the evidence presented here suggests that they tried and that they enjoyed some at least indirect aid from their independent monetary authorities in doing so several major conclusions emerge

reaction functions optimization and politics modelling the political economy of macroeconomic policy a central concern of policy research is to disentangle the consequences of discretionary acts of authorities from the constraints under which they operate in economic policy research reaction functions a broad class of single equation models appear to offer insights into this problem however reaction functions share many of the pitfalls of the empirical use of optimizing models of policy and particular difficulties attach to disentangling the results of preferences from constraints using reaction functions in comparative research magnifies this problem even so the reaction function approach provides an attractive framework incorporating many of the traditional concerns of research into the politics of economic policy provided due caution is exercised in selecting hypotheses to test

political and economic determinants of interest rate behavior are central banks different i introduction do politicians manipulate the instruments of macroeconomic policy to improve their electoral prospects or in response to the preferences of their own party these questions are addressed but not yet resolved by the literature on political business cycles 1 to generate a political business cycle politicians must control the instruments of macroeconomic policy monetary policy plays an important role in the determination of inflation output and employment the objects of concern to politicians and voters yet politicians do not directly control the instruments of monetary policy in industrialized countries instead these instruments are controlled by the central banks which vary widely across countries in their degree of statutory independence we wish to examine empirically whether monetary policy is influenced by the timing of elections or a change in the party in power after controlling for unexpected changes in economic fundamentals our paper assesses therefore one aspect of independence namely whether a central bank makes monetary policy decisions without measurable political influence 2 in this study we attempt to look at what central banks actually do as opposed to what they are legislated to do to distinguish between the form and substance in discussions of central bank independence as in mayer 1976 3 our paper enlarges and improves on cowart 1978 and woolley 1983 both of whom studied the role of political factors in monetary policy for a sample of industrialized countries our methodology is to compare the responsiveness of interest rate changes to economic and political factors in seventeen countries as we discuss below there are differences in opinion about whether an interest rate variable or a monetary aggregate is a better representation of monetary policy actions we compare the results of qualitative measures of differences in central bank design e g rankings of banks in order of independence as determined by legislative criteria with the results of a quantitative comparison of differences in central bank behavior this exercise should help identify the important qualitative features in the reform of existing central banks or in the design of new central banks 4 in our empirical work the relevant relationships are estimated with a recursive vector autoregression technique to control for temporal instability in the economy between 1960 and 1990 and the endogeneity of the variables in question this methodological innovation has important consequences for the understanding of reaction functions and more generally for measuring the impact of macroeconomic shocks on monetary policy we also stress results for separate subsamples of fixed and flexible exchange rates as well as for the full sample our methodology measures the influence of politics on monetary policy relative to the choices and information actually available to the central bank when the monetary policy decision was made our study does not measure the influence of politics on the instruments of fiscal policy as in alesina et al 1991 our study also does not measure the direct influence of fiscal variables on the instruments of monetary policy although there is some evidence on this issue in for example parkin 1986 and burdekin and wohar 1990 burdekin and wohar estimate the relationships between deficits money base growth and inflation for a sample of countries and time period comparable to ours all these studies find some evidence that central banks do accommodate fiscal policy by financing deficits via money growth especially since the end of bretton woods we return to the issue of fiscal policy in considering the interpretation of our results but stress that the effects of fiscal policy are partly captured in our specifications because we measure monetary policy relative to the state of the economy 5 a brief review of the literature which measures statutory central bank independence is given in section ii

the bundesbank s communications strategy and policy conflicts with the federal government in this paper we provide an estimate of the likelihood of conflict between the federal government and the bundesbank for the 1989 1998 period we rely on a novel proxy for the impact of public communication by bundesbank officials on the probability of conflict in addition to interest rate exchange rate money supply behavior as well as electoral influences the empirical evidence is consistent with the view that speeches by the bundesbank president dealing with inflation and economic policy are a positive source of conflict in a probabilistic sense conflict was not a constant but flared up at times of economic stress and could be exacerbated by the talking of bundesbank officials

a comparison of the economic development policies of county metropolitan and non metropolitan district councils local authorities in england and wales have become important participants in economic development policy this paper draws upon a comprehensive new date set covering the activities of the councils in the period 1990 92 the date set is unusual in that it allows the direct comparison of the activities of the three main groups of councils county councils metropolitan districts and non metropolitan districts the paper contrasts the degree of commitment to economic development policy and the range of initiatives of the three categories and compares the manner in which the three types of councils package their initiatives in order to develop conherent strategies the analysis reveals significant differences between the categories of councils and shows that despite the rapid spread of economic development policy amongst councils in more prosperous areas during the 1980s the policies operated still depend on the economic and political characteristics of the councils

a two factor model to combine us inflation forecasts the combination of individual forecasts is often a useful tool to improve forecast accuracy the most commonly used technique for forecast combination is the mean and it has frequently proved hard to surpass this study considers factor analysis to combine us inflation forecasts showing that just one factor is not enough to beat the mean and that the second one is necessary the first factor is usually a weighted mean of the variables and it can be interpreted as a consensus forecast while the second factor generally provides the differences among the variables and since the observations are forecasts it may be related with the dispersion in forecasting expectations and in a sense with its uncertainty within this approach the study also revisits friedman s hypothesis relating the level of inflation with expectations uncertainty at the beginning of the twenty first century

reliable and unreliable partisan appointees to the board of governors every new appointment to the board of governors in recent years has triggered speculation as to how the new governor will vote in fomc meetings while several studies have hinted at partisan voting behavior by governors no study has yet attempted to identify reliable and unreliable partisan voting behavior and to pinpoint the background characteristics of governors that distinguish between the two this paper indicates that board members with a background in economics consistently voted in line with the economic ideology of the appointing president noneconomists on the board however displayed no such partisan voting behavior and were seen to be influenced by pressures emanating from the administration and by the monetary environment prior to their appointment over the 1951 to 1987 period most presidents have appointed reliable governors earlier in their presidential terms when the returns from being able to influence subsequent monetary policy are great and have chosen unreliable governors later in their terms when election support from the interest groups that these unreliables represent is important the results of the present paper suggest skepticism toward the recent spate of rational expectations game theoretic models which feature a dictatorial policy maker gaming atomistic market participants whose only political activity voting generates monetary surprises followed by convergence to an equilibrium because of their obsession with the ceremonial formalism of their genre these models ignore a vast complementary literature and as a consequence display conspicuously flimsy institutional and historical premises instead the present paper argues for the greater relevance of models of uncoordinated interaction between multiple political and private principals and federal reserve agents

bashing and coercion in monetary policy bashing and coercion in monetary policy i introduction we ve got excess plant capacity i don t think that growth is excessive i have not been overly concerned with inflation president bush in a february 14 1989 interview with the wall street journal p a8 with the economy running close to potential the risks seem to be on the side of a further strengthening of price pressure chairman greenspan in testimony before congress on february 21 1989 reprinted from the wall street journal february 22 1989 p a2 many investors appeared to be confused by conflicting statements by bush greenspan and other u s officials wall street journal february 22 1989 p a1 if the fed pushes interest rates significantly higher bush may go public with critism wall street journal march 24 1989 p a1 recent research in macroeconomic policy games by rogoff 1985 alesina 1988 tabellini 1987 and waller 1989a has concentrated on the importance of an independent central bank in a discretionary policymaking environment in the original work on policy games by barro and gordon 1983a 1983b no distinction was made between the monetary authority and the fiscal authority but these researchers argue that because the fiscal authority may have incentives to create excessive inflation giving the powers of money creation to an independent monetary authority whose inflation preferences differ from the current fiscal authority may enable society to reduce the equilibrium inflation rate this results holds even though monetary policy is still chosen in a discretionary fashion therefore backus and driffill 1985a 537 conclude autonomous central banks thus act as a precommitment device which may help to make noninflationary policies more credible and less costly implicit in the term independent is the belief that the central bank is free to choose monetary policy without interference from the fiscal authority administration however this is not generally the case the appointment of central bankers by the legislative or executive branch of the government governmental oversight of policy decisions or political pressure on the central bank by these branches will tend to influence the setting of monetary policy and subsequently the extent to which the central bank is truly independent 1 kane 1984 argues that even if it is not able to directly choose monetary policy the current administration still may be able to achieve its preferred monetary growth path by putting pressure on the monetary authority to do its bidding restricting the powers of the central bank public criticism of central bank performance here after referred to as bashing 2 exclusion from fiscal policy planning which hurts the egos of central bankers or undertaking actions which damage the post central bank income or opportunities of the central bankers are ways he suggests in which the administration can coerce cooperation from the central bank in creating excessive money growth such arguments have given rise to the view that the administration is engaged in a reputation building game with the central bank although the central bank has control of the money supply the administration can threaten to impose a welfare loss by bashing the central bank if it does not generate the monetary policy preferred by the administration the success of this strategy depends on the size of the bashing costs imposed on the central bank and also on the extent to which these threats are credible credibility in turn depends on the benefits and costs incurred by the administration in carrying out its threats as a result the administration may choose to bash the central bank if it does not produce the administration s preferred money inflation outcome by establishing a reputation for bashing the administration may be able to obtain its desired policy outcome in the future

the political manipulation of macroeconomic policy conventional wisdom and some research indicate that macroeconomic policies follow cycles corresponding to political as well as economic forces using vector autoregression analysis i test three models of monetary policy determination for the united states 1953 1984 the electoral cycle model that reelection motivations on the part of presidents create a policy cycle the party differences model that policy changes reflect revolving presidential party administrations and the referendum model that changes in presidential approval create in effect a continuing referendum allowing presidents to monitor their success and change macroeconomic policies when necessary analysis shows that monetary policies as measured by the monetary base and short term interest rates respond to the election cycle and presidential approval although the effect on macroeconomic outcomes is ambiguous party differences are found in real income but are not very significant in other variables

the policy preferences of fomc members as revealed by dissenting votes comment the purposes of this comment are to present evidence that casts doubt on several of the conclusions of susan belden s recent paper in this journal 1989 and to suggest directions for future research in this area to begin there is skepticism that dissenting votes at least as belden measures them can be unbiased indicators of policy preferences in addition belden partially recognizes but does not fully specify three influences on federal open market gommittee fomc member voting that are prominently featured in the literature these influences are 1 fomc member training background and career experience 2 state of the economy measures and 3 partisanship measures each of these factors alone may help to explain one of belden s three major findings first the training backgrounds and career experiences of bank presidents may help to explain belden s affirmation of their penchant to dissent from fomc directives on the side of monetary tightness second the state of the economy may help to explain belden s finding of a decline in dissent voting when arthur burns was chairman of the federal reserve third differences between the party of the president and the partisan composition of the board of governors may help to explain belden s discovery of shifts in ease and tightness dissent voting behavior under different chairmen since this comment will indicate how these influences qualify belden s elndings it will at the same time suggest fruitful directions for the research agenda in this area

central bank independence and macroeconomic performance some comparative evidence this note uses information on a sample of sixteen oecd countries to assess the relationship between central bank independence and macroeconomic performance as previous work suggests politically controlled central banks are more likely to pursue policies that lead to high and variable inflation however the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth unemployment or the ex ante real interest rate copyright 1993 by ohio state university press

monetary policy signaling from the administration to the federal reserve this chapter employs the index of monetary policy signaling from the administration to the federal reserve safer that was developed in chapter two the safer index is a simple weekly sum of articles that appeared in the wall street journal in which administration officials expressed a desire for easier 1 or tighter 1 monetary policy a key assumption is that systematically over time the financial media capture the essence of communication that is going on between the executive branch and federal reserve officials 1 the signaling index is employed in ordinary least squares regressions for the period from january 1964 to november 1991 cumulative values of the safer index over a three week period as an explanatory variable are found to have a statistically significant effect on the average federal funds rate during the third week as the dependent variable further evidence suggests that the safer index is granger causal with respect to the federal funds rate after classifying the signals by sources within the administration oval office council of economic advisers treasury and other and unidentified sources it is shown that for the overall 1964 1991 period signals from the treasury department and from other and unidentified sources have a statistically significant effect on the federal funds rate while signals from the oval office and the council do not when the data are segmented according to who was the chairman of the federal reserve board at the time ordinary least squares results indicate that the federal reserve did not systematically respond to executive branch signaling in a statistically significant way when william mcchesney martin g william miller and alan greenspan were chairmen but did respond statistically significantly to administration signaling during portions of the periods during which arthur burns and paul volcker were chairmen

federalism and central bank independence the politics of german monetary policy 1957 92 two channels of political control allow elected politicians to influence monetary policy first political threats to the status structure or very existence of the central bank may force central bankers to comply with politically motivated demands on monetary policy second politicians may use their powers of appointment to ensure that central bank appointees share their electoral and party political goals this paper derives the monetary policy outcomes obtained as a function of the degree of central bank independence zero partial or full and central bankers types partisans or technocrats based on a case study of the 1957 and 1992 institutional changes to the german central banking system and a regression analysis covering the period in between i argue that the formal independence of the system is protected by its embeddedness in the institutions of german federalism and by the federalist components of its decentralized organizational structure the behavioral independence of the german central bank fluctuates over time with the party control of federalist veto points the bundesbank is staffed with nonpartisan technocrats who are partially insulated from political pressures

why doesn t society minimize central bank secrecy i introduction central banks have repeatedly revealed a preference for secrecy in conducting monetary policy in the united states for example the federal reserve has expressed its bias towards policy secrecy in a number of ways ranging from delays in releasing the minutes of federal open market committee fomc meetings to ambiguous policy statements at congressional hearings 1 nevertheless the degree of disclosure required by congress and the court system does not appear to minimize central bank secrecy indeed the fed s right to limit disclosure of policy intentions was upheld in a recent supreme court case 2 furthermore similar social tolerance of central bank secrecy appears in the banking institutions of other countries since legal and social institutions allow for central bank secrecy its presence may be attributed to the preferences of the social planners who designed these institutions in the first place forward looking planners know that monetary policy in future periods will be the outcome of a symbiotic relationship between monetary authorities politicians and private interest groups 3 as the relative importance of these different groups and their preferences change over time so will the policy objectives of the monetary authorities if secrecy is allowed monetary authorities could effect policy changes in response to relationship changes without immediate detection by private markets recognizing this policy effect of secrecy a social planner would design institutions to affect the environment so that desirable future policy formation takes place 4 this paper offers two explanations for why social institutions do not legally minimize central bank secrecy 5 first when establishing institutional disclosure requirements for central banks social planners recognize the tendency for central bankers to be secretive this secrecy imposes costs upon members of society by making shifts in policy objectives more difficult to detect faced with this tendency members of society set legal institutions that appear to require less disclosure because more restrictive laws would induce central bankers to become more secretive in other less informative ways 6 second if the policy objectives that society finds desirable change over time then members of society may directly prefer some degree of central bank secrecy economic theory holds that unanticipated changes in monetary policy can have an economic effect intuitively secrecy allows central banks to conduct unanticipated policy actions in periods when on average society most prefers them for example in periods when public opinion favors pushing down unemployment central banks may conduct a surprise monetary expansion 7 the paper develops examples of each of these two effects using a discretionary equilibrium similar to that in cukierman and meltzer 1986a the desired trade off between two policy objectives changes over time in response to changing political pressures although i use the trade off between output and inflation as an example the basic results hold with any policy trade off that varies over time the policy objectives could include targets for real exchange rates or interest rates for instance the plan of the paper is as follows section ii describes the discretionary equilibrium given institutional settings for the conduct of monetary policy sections iii and iv describe examples of each of the two explanations for secrecy described above concluding remarks follow ii the degree of policy disclosure in a discretionary equilibrium when the policy objectives of the monetary authorities shift over time due to changing economic or political circumstances their choice of discretionary policy also shifts 8 in the absence of a mechanism to pre commit to a particular policy rule the authorities will implement policy changes

a bargaining model of partisan appointments to the central bank abstract in this paper a bargaining model is developed to analyze the appointment of central bankers in a two party political system the major results of the paper are 1 the party in power will appoint partisans early on but later appointments will be increasingly moderate in their views concerning monetary policy 2 changing the timing of the appointment of the board chairman from the end of a president s term in office to the first period of the president s term will lead to more partisan monetary policy 3 in equilibrium nominations to the board are not rejected thus confirmation hearings appear to be nothing more than a rubber stamp process 4 lengthening the terms on the board relative to the electoral cycle will lead to more moderate appointments to the central bank and a reduction in partisan policymaking

a multinominal logit analysis of the influence of policy variables and board experience on fomc voting behavior previous studies have used probit or logit models to analyze two states of monetary policy tighter or looser in this paper we employ multinominal logit to permit federal reserve monetary policy to assume one of three alternative states tighter looser or no change as a function of three independent economic variables unemployment real growth and inflation and the amount of experience of the board of governors the results indicate that the federal reserve reacted differently under burns miller and volcker and between volcker s two operating procedures in the formulation of monetary policy

partisan monetary policies presidential influence through the power of appointment we investigate the channels through which partisan influence from a presidential administration could affect monetary policy making influence could be a result of direct presidential pressure exerted on members of the federal open market committee fomc or it could be a result of partisan considerations in presidential appointments to the board of governors to investigate these two channels of influence we devise and apply a method for estimating parameters of monetary policy reaction functions that can vary across individual members of the fomc our results suggest that the appointments process is the primary mechanism by which partisan differences in monetary policies arise

congressional influence on u s monetary policy a reconsideration of the evidence abstract one of the few works that finds strong evidence of congressional influence on u s monetary policy is grier 1991 which finds a direct relationship between the liberalism of the senate oversight committee leadership and monetary base growth we extend this analysis by considering a longer sample period and by considering the preferences of house oversight committee leaders in addition to senators grier s evidence is not robust to these extensions where we do find correlation between congressional preferences and monetary base growth increased liberalism of congressional oversight committees is associated with lower monetary base growth

does government ideology matter in monetary policy a panel data analysis for oecd countries this paper examines whether government ideology has influenced monetary policy in oecd countries we use quarterly data in the 1980 1 2005 4 period and exclude emu countries our taylor rule specification focuses on the interactions of a new time variant index of central bank independence with government ideology the results show that leftist governments have somewhat lower short term nominal interest rates than rightwing governments when central bank independence is low in contrast short term nominal interest rates are higher under leftist governments when central bank independence is high the effect is more pronounced when exchange rates are flexible our findings are compatible with the view that leftist governments in an attempt to deflect blame of their traditional constituencies have pushed market oriented policies by delegating monetary policy to conservative central bankers

china and its dollar exchange rate a worldwide stabilising influence 1 we argue that criticism concerning the chinese dollar peg is misplaced as no predictable link exists between the exchange rate and the trade balance of an international creditor economy the stable nominal yuan dollar rate is argued to have stabilized chinese east asian and global growth however linked to us low interest rates chinese sterilization policies and potentially subsidized capital allocation in china the real yuan dollar rate is undervalued this has caused both in china and the united states structural distortions and threatens to undermine global growth and stability we propose sino american policy coordination to escape from the policy dilemma which continues to drive global imbalances jel code f150 f310 f330

checks and balances and the supply of central bank independence abstract the paper analyzes the institutional conditions under which policymakers can credibly commit to an independent central bank and thereby mitigate the well known time consistency problem in monetary policy it is shown theoretically that granting independence via a statute is only credible for legislative systems with at least two heterogeneous decision making bodies which both have veto rights for example bicameral systems this thesis is supported by empirical evidence the legal independence of central banks is significantly higher in those oecd countries whose legislative processes are characterized by extensive checks and balances furthermore the negative relation between legal independence and inflation is larger in countries with checks and balances than in countries without checks and balances

partisan political business cycles in the german labour market empirical tests in the light of the lucas critique this paper focuses on alternative specifications ofpartisan political business cycles partisan theory rational partisan theory and hysteresis augmentedrpt it elaborates on analogies of the natural ratehypothesis underlying all specifications and thecointegration concept accordingly problems of thespecification of hypotheses estimation and inferencein a cointegrating framework with politicalinterventions are treated super exogeneity tests areshown to be equivalent to tests of the lucas critiqueand the rpt therefore the concept ofsuper exogeneity is transferred to empirical tests ofpartisan cycles by this a new testing framework ofpartisan cycles is developed and applied to germanlabour market data

how are exchange rates managed evidence of an anchor based heuristic central banks often intervene in the foreign exchange market to obtain desirable exchange rates how this is done has remained totally opaque although central banks are likely to adopt a satisficing rather than optimizing strategy as they need to intervene frequently in a timely manner under incomplete information in this paper we propose a simple exchange rate management rule that spreads the volatilities originated from the anchor currencies among the exchange rates with the domestic currency we test out this rule on 10 currencies and find the empirical evidence consistent with the proposed anchor based heuristic

central bank behavior a positive empirical analysis abstract the central bank is analyzed as a utility maximizing unit acting in the framework of a politico economic model it derives utility from keeping the price level stable and is constrained by government the structure of the economy and the political commitment to stable exchange rates it uses a satisficing strategy concentrating on keeping conflicts with government below a certain level in the case of serious conflict the central bank follows the policy directions undertaken by government but with a time lag the complete model comprising endogenous consumer voters government and central bank is econometrically tested for germany with good results

presidential influence on the federal reserve in the 1970 s this research examined presidential influence on federal reserve monetary policy in the 1970s a reaction function for the change in the federal funds rate was estimated and then checked to determine whether that reaction function shifted at politically important points the two political influences studied were elections and administration the federal reserve did not appear to manipulate the money supply in 1972 to aid president nixon s reelection the reaction function shifted between the nixon and ford administrations it did not shift with the ascension of carter and it did not shift with the replacement of chairman arthur burns by chairman william miller

elections and the fed is there a political monetary cycle to understand the political causes of macroeconomic policy it is necessary to examine the institutions that actually make such policy and the incentives those institutions face an explanation of the political causes of united states monetary policy must treat the various institutions that are influential in the monetary policy process which are at a minimum the federal reserve fed and the executive including the president the treasury department and other advisors in the executive office of the president the reelection motive has proven useful in modeling presidential incentives in this article i investigate whether electoral incentives associated with the theory of the political business cycle pbc can help to explain the behavior of the fed over the last quarter century the political business cycle has had a curious hold on modern political economy while the empirical evidence in favor of the cycle is far from overwhelming its theoretical importance leads to continuing empirical

high and variable inflation further evidence on the friedman hypothesis abstract this study employing a garch model finds a positive and significant relationship between the level and variability of inflation this provides evidence in support of friedman s friedman 1977 view that high inflation leads to more variable inflation

federal open market committee structure and decisions abstract this paper examines the dissents of federal open market committee members regarding the domestic monetary policy directive it shows that on balance governors appointed by democratic u s presidents dissented significantly on the easier side while governors appointed by republican u s presidents dissented significantly on the tighter side the pattern of dissents for the reserve bank presidents was like that of republican appointees to the board of governors the bank presidents voting did not reflect regional points of view furthermore the timing of the dissents by both the governors and presidents did not seem to be associated with the onset of congressional or presidential elections

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

a partisanship theory of fiscal and monetary regimes this paper indicates that income redistribution motivated by the distributive ideals of liberal political p arties create unanticipated disincentives for productive effort thi s suggests that newly elected liberal parties are likely to engage in monetary surprises in order to compensate for the adverse effects of these disincentives on real income estimated reaction from function s support these predictions a measure of income redistribution the change in the ratio of the social expenditures of government to gnp has a positive significant effect on money growth in addition when the presidency changes from conservative to liberal there is a posit ive and significant increase on money growth copyright 1987 by ohio state university press

does government performance matter the effects of local government on urban outcomes in england this paper applies an extensive literature that argues that political leadership and local government activity enhance urban performance using the state of the cities database of 56 primary urban areas in england it tests for the impact of consolidated governance political stability planning performance average service performance local government capacity and planning development expenditure on jobs and population growth from 1995 to 2005 the regression analysis finds that the competence of service delivery is weakly associated with full time jobs growth and that a consolidated governance structure is weakly associated with greater population growth none of the other tests is statistically significant overall the findings place doubt on the salience of the political determinants of economic performance in english cities for the period in question

the mirage of exchange rate regimes for emerging market countries this paper argues that much of the debate on choosing an exchange rate regime misses the boat it begins by discussing the standard theory of choice between exchange rate regimes and then explores the weaknesses in this theory especially when it is applied to emerging market economies it then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits the conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal financial and monetary institutions in producing macroeconomic success in emerging market countries this suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable and more on these deeper institutional arrangements a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years

money and politics in a small open economy a time series analysis indicates monetary growth and the gallup poll in canada are systematically related at electoral cycle periodicities 5 to 20 quarters under flexible exchange rates and demonstrates the absence of an electoral component in canadian monetary growth under fixed rates these results confirm empirically a widely accepted extension of the mundell fleming argument that monetary policy is effective only under flexible rates which to my knowledge has not before been directly investigated international constraints on the small open economy under fixed rates lead to the abandonment of monetary policy as an active instrument in electoral politics

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed