independent central banks low inflation at no costs a widely held view suggests that politically independent central banks bring about relatively low and stable inflation rates a more debated question is whether one has to pay for this good outcome with more real instability in his seminal contribution kenneth rogoff 1985 suggests that an independent and inflation averse central bank reduces average inflation but as a result increases output variability the conservative central banker reduces the inflation bias due to the time inconsistency problem but stabilizes less however alesina and summers 1993 do not find that at least within the oecd countries more independent central banks are associated with more variability of growth or unemployment thus they conclude that independent central banks bring about low inflation at no apparent real costs the point of this paper is to provide theoretical underpinnings to this finding which is in contrast to rogoff 1985 2 the basic idea is that one can isolate two sources of output variability one is the economic variability induced by standard exogenous shocks that monetary policy is supposed to stabilize for instance money demand shocks or supply shocks the second source of variability is political or more generally policy induced this is the variability introduced in the system by the uncertainty about the future course of policy for instance alesina 1987 studies the effect of uncertain electoral outcomes in a model where the two contending parties have different preferences over inflation and unemployment an inflation averse independent central banker does not stabilize as much the economic variability in order to keep inflation low and stable this is rogoff s point however by insulating monetary policy from political pressures an independent central bank can reduce the political variability the overall effect of independence on output variability is thus ambiguous this result is consistent at least prima facie with the evidence in alesina and summers 1993 on the lack of correlation between centralbank independence and output variability in fact it is possible that when the politically induced output variability is predominant a more independent central bank reduces average inflation and the variance of output

international and domestic constraints on political business cycles in oecd economies a comment we attempt to assess the effect of monetary policy in a panel model for 16 member countries of the organization for economic cooperation and development oecd to answer the question of whether central banks actively create political business cycles we focus on the short term interest rate as a proxy for the use of monetary instruments our results indicate that central banks do not create political business cycles this conclusion holds whether or not central banks are independent and whether or not they are constrained by the exchange rate system in force

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

central bank independence economic behavior and optimal term lengths the authors parameterize central bank independence in terms of partisanship and term length focusing on the implications of alternative policy structures for real economic activity while long terms of office for the central banker can reduce the role of electoral surprises term lengths that are too long are costly if societal preferences are subject to permanent shifts the appointment of a conservative central banker increases the optimal term length and leads to lower average inflation but need not increase the volatility of output copyright 1996 by american economic association

asymmetric information and rational expectations when is it right to be wrong abstract in this paper we examine the effects of private agents being less than fully rational in their expectations we examine this in the context of monetary policy where the central bank may have uncertain preferences either by choice or by necessity the new feature is that we allow the public to react in two different ways they either form rational expectations and internalize the uncertainty about the central bank s preferences in full or alternatively and if this process of internalization is costly it forms a best guess regarding those preferences this implies a certainty equivalence strategy applied to the preference parameters as those parameters enter the decisions non linearly a systematic error emerges we examine the magnitude of the resulting error in inflation and output following the assumption of certainty equivalence under all reasonable levels of uncertainty this error turns out to be small but involves trading a deflation bias against the cost of gathering the information needed for the full information rational expectations solution

supply shocks private sector information and monetary policy is there inevitably a stabilization trade off we assume that while the central bank has an information advantage in respect of aggregate productivity shocks the private sector has superior knowledge of local disturbances it is shown that there is no policy trade off between inflation and employment stability moreover macroeconomic outcomes are independent of the weight assigned to inflation by the central bank

a double hurdle approach to modelling tobacco consumption in italy this article analyzes the determinants of tobacco expenditures for a sample of italian households a box cox double hurdle model adjusted for heteroscedasticity is estimated to account for separate individual decisions concerning smoking participation and tobacco consumption and to correct for nonnormality in the bivariate distribution of the error terms nested univariate and bivariate models are found to be excessively restrictive supporting the adequacy of a generalized specification estimation results show that consumption decisions are significantly affected by income and demographic characteristics in particular income positively impacts tobacco expenditure while participation probability substantially declines as age increases the existence of significant gender differences in both smoking participation and tobacco consumption patterns is found while high education and white collar occupation reduces the likelihood to smoke and tobacco expenditure levels single adult households have a lower

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

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

optimal inflation contracts and inflation targets with uncertain central bank preferences accountability through independence this paper examines some problems which arise when monetary policy is delegated to an independent central bank and where the central bank s preferences are unknown two key conclusions emerge from the paper first even with optimal targets or contracts central bank independence may not always be desirable because central banks may have distorted preferences relative to society second if the delegation solution is preferable and the independent central bank responds to information about supply shocks the central bank may be made more accountable by allowing it to set its own inflation targets i e by making it goal independent

benefits from mutual restraint in a multilateral monetary union summary we show that monetary union can enhance price stability for its member countries even if none of them has a long history of stable prices and independent monetary policy as is the case in a number of monetary union initiatives among developing countries the positive effect obtains because the opportunistic objectives of one country s policy makers are kept in check at the union level by other members with disparate objectives we calibrate the model to evaluate the proposed monetary union in the east african community the empirical results show that the mutual restraint on monetary policy is an important determinant of the expected benefit from an eac monetary union

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

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

endogenous contract structure and monetary policy abstract we analyze the co determination of monetary policy and the labor contracts chosen by members of the public who can either fix or index their nominal wages fixed nominal wages allow the central bank to offset productivity shocks while the public fix nominal wages in response to the central bank offsetting shocks so there is an equilibrium in which realistically nominal wages are fixed and shocks offset a result which holds in single as well as in multi period games in addition there may be equilibria in which agents index their nominal wages and the central bank optimally responds by stabilizing price in contrast to conventional models the ramsey rule may be implemented in a finitely repeated game the central bank does not deviate for fear that agents would change their labor contracts such that the central bank s least favored equilibrium will subsequently be played

the political economy of inflation labour market distortions and central bank independence using the citizen candidate model we study the government s choice of institutions for the labour market and the central bank and derive the implications for inflation and employment we derive conditions for the existence of equilibria in which the labour market is distorted and the central bank is dependent or independent under a range of conditions affecting central bank dependence the post election cycle in inflation and employment and inflation bias our results imply that average inflation and inflation variability are lower under an independent central bank whereas employment variability can be lower or higher consistent with evidence for oecd countries many democratic societies delegate key tasks to non elected and independent institutions a prominent example being independent central banks the belief in the advantage of central bank independence is nursed by the cross country evi

on the electricity shortage price and electricity theft nexus abstract pakistan is facing severe electricity shortfall of its history since 2006 several measures have been implemented in order to mitigate electricity shortage the focus has been on raising the installed capacity of electricity generation and transmission the present policy results in expensive thermal electricity generation mostly using expensive and environmentally hazardous furnace oil and inability of utilities to recover their cost of supply although there is unprecedented rise in electricity tariffs this study concentrates on the electricity demand and traces the relationship between electricity shortfalls tariff rate and electricity theft in the background of recent electricity crisis using the data for the period 1985 2010 we employed the granger causality test through error correction model and out of sample causality through variance decomposition method empirical evidence shows that electricity theft greatly influences electricity shortfalls through lowering investment and inefficient use of electricity the study concludes that electricity crisis cannot be handled without combating rampant electricity theft in the country

central bank independence revisited the case for central bank independence cbi while not a new one has been strengthened by a growing body of empirical evidence by recent developments in economic theory and by the temper of the times the case is a strong one 1 which is becoming part of the washington orthodoxy the purposes of this paper are both to make more precise the type of cbi that is likely to enhance economic performance and to point to some remaining open issues and anomalies i start with the two theoretical approaches to cbi

multiplicative uncertainty in a model without inflationary bias abstract this paper shows that an increase in the degree of multiplicative uncertainty regarding the effectiveness of monetary policy will reduce social loss when policymaker s preferences are highly uncertain this result is still valid even when there is no distortion in the market

median voter preferences central bank independence and conservatism this paper studies how the independence and theconservatism of a central bank relate to the structureand stability of the median voter preferences this isdone by means of a model of endogenous delegationwhere an opportunistic policy maker chooses themonetary regime independence and conservatism tomaximise the welfare of the median voter the resultsshow that a high degree of inflation aversion ofmonetary policy is not necessarily associated with ahigh degree of central bank independence a high andstable degree of inflation aversion of society i e of the median voter may lead to establish a dependentcentral bank which is highly inflation averse this suggests that the negativecorrelation between inflation and central bankindependence indices detected by several empiricalstudies may reflect a link between inflation and somedeep features of social preferences

revisiting the role of multiplicative uncertainty in a model without inflationary bias kobayashi 2003 aims to show that in a model without inflationary bias an increase in the degree of multiplicative uncertainty on the transmission mechanism of monetary policy improves social welfare when central bank s preferences are highly uncertain we demonstrate that this result applies only to the case in which society is strictly conservative i e when the weight attached to output in the social welfare function is lower than one

inflation forecast contracts we introduce a new type of incentive contract for central bankers inflation forecast contracts which make central bankers remunerations contingent on the precision of their inflation forecasts we show that such contracts enable central bankers to influence inflation expectations more eectively thus facilitating more successful stabilization of current inflation inflation forecast contracts improve the accuracy of inflation forecasts but have adverse consequences for output on balance paying central bankers according to their forecasting performance improves welfare

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

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

is new zealand s reserve bank act of 1989 an optimal central bank contract this paper evaluates the reserve bank of new zealand act of 1989 from a principal agent perspective arguing that the act represents a dismissal rule the optimal dismissal rule requires that the central banker be dismissed whenever inflation exceeds a critical level that depends on aggregate supply disturbances and measurement error in the inflation index this is essentially the structure established by the act the scope for renegotiating the target rate however creates an incentive for the government to set the critical rate too high consequently the inflation bias of discretion is reduced but not completely eliminated copyright 1995 by ohio state university press

optimal linear contracts under common agency and uncertain central bank preferences we analyze the effects of imperfectly known central banker s preferences on optimal linear contracts offered by the government and an interest group these effects depend on the type of uncertainty faced by the principals when the central bank s output target is uncertain the results by campoy and negrete public choice 137 197 206 2008 under perfectly known preferences obtain uncertainty about the central banker s degree of conservatism or about its degree of selfishness has a multiplicative impact on the principals instruments in the agent s best response function this may generate an inflation bias independently of the type of contract offered by the interest group

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target