stabilizing inflation in the open economy optimal monetary policy in the open economy continues to be of interest to the profession as in benavie and froyen 1 and price level stabilization has been investigated by bradley and jansen 4 marquis and cunningham 13 and fischer 6 among many others price level stabilization has also been investigated in the monetary policy literature by for example black 2 or black and gavin 3 the academic literature has included analysis of price level stabilization in a variety of macroeconomic frameworks ranging from overlapping generations models to equilibrium business cycle models and keynesian contracting models what has been lacking however is a rigorous analysis of price level stabilization in the open economy this apparent omission is interesting because the most famous historical application of price level targeting occurred in the 1930s in sweden a small open economy in this paper we carefully examine the effectiveness of price level or inflation stabilization in the small open economy 2 employing an equilibrium business cycle model with differentially informed agents we find that when shocks to the economy exhibit some persistence inflation stabilization has favorable output stabilization properties relative to alternative monetary policies further these beneficial aspects of inflation stabilization exist whether or not agents contemporaneously observe the money stock the only instance in which inflation stabilization policy is not preferred is when all shocks to the economy are strictly temporary shocks and when uninformed agents can not observe the money stock contemporaneously finally in all instances we find that price level stabilization is preferred from a macroeconomic stabilization perspective to exchange

granger causality and policy effectiveness it is generally recognized that if a set of monetary and fiscal policy variables granger cause1 real economic variables this does not imply that alternative deterministic rules for determining the values of these policy instruments will alter the joint density function of the real variables 2 it has however also been asserted that letting x denote a suitably restricted vector of real economic aggregates g a list of monetary and fiscal policy variables and e the mathematical expectation operator

optimal price and inventory adjustment in an open economy model of the business cycle this paper presents a macroeconomic model containing optimizing inventory holding firms that is consistent with a number of prominent empirical regularities concerning fluctuations in output exchange rates relative prices and money prices are sticky but they are not predetermined still our model is consistent with exchange rate overshooting in the sense of dornbusch typical sticky price models allow a divergence between current production and current demand but this divergence is never allowed to feed back into the model our optimal inventory adjustments reconcile divergences between current demand and production and the inventory stock movements provide expected future dynamics

cost versus control understanding ownership through outsourcing in hospitals for profit hospitals in california contract out services much more intensely than either private nonprofit or public hospitals to explain why we build a model in which the outsourcing decision is a trade off between cost and control since nonprofit firms are more restricted in how they consume net revenues they experience more rapidly diminishing value of a dollar saved and they are less attracted to a low cost but low control outsourcing opportunity than a for profit firm is this difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when a fixed cost shock raises the marginal value of a dollar of cost savings we test these predictions in a panel of california hospitals finding evidence for each and that the set of services that private non profits are particularly interested in controlling physician intensive services is very different from those than public hospitals are particularly interested in labor intensive services these results suggest that a model of public or nonprofit make or buy decisions should be more than a simple relabeling of a model derived in the for profit context

factors explaining local privatization a meta regression analysis this paper aims at explaining the differences in the results of empirical studies of motivations for local privatization by undertaking a meta regression our results suggest that fiscal constraints and interest groups were especially relevant in the early studies of the us which considered several services further studies that focus on one service capture the influence of scale economies more accurately finally our results show that small towns are more affected by fiscal and political factors while ideology plays a major role for european and large cities thus no clear conclusions emerge from this literature because the findings of each study are sensitive to its characteristics

a rational expectations approach to macroeconometrics frederic s mishkin university of chicago press for the national bureau of economic research chicago 1983 pp xii 172 20 00

why do different countries choose a different public private mix of educational services we observe a wide range across countries in the percentage of total enrollments that attend private rather than public schools this paper seeks to explain 1 the systematically higher proportion of private enrollments pvt in developing as compared with developed countries at the secondary level and 2 the seemingly random variation across countries within a given level of education and stage of development i argue that the latter is due to differentiated demand and nonprofit supply both of which stem from cultural heterogeneity especially religious heterogeneity in contrast the large pvt at the secondary level in developing countries is hypothesized to stem from limited public spending which creates an excess demand from people who would prefer to use the public schools but are involuntarily excluded and pushed into the private sector the limited public spending on secondary education in turn is modelled as a collective decision which is strongly influenced by the

why democracies produce efficient results by applying the standard tools of microeconomic analysis i argue that democratic markets work as well as economic markets in particular i show that previous work has greatly exaggerated the existence of principal agent and informational problems in electoral markets and has drawn incorrect conclusions

futures markets and monetary policy abstract it has recently been argued that when differentially informed agents trade with one another monetary policy can influence the distribution of output by altering the information content of prices this paper introduces a futures market into the barro 1980 model and shows that under certain conditions prices may aggregate information in a manner such that differentially informed agents hold identical beliefs concerning aggregate market conditions in such cases monetary policy will be unable to influence the distribution of output these results then serve as a backdrop for a more general discussion of the relationship between asset prices and the role of monetary policy

an empirical study of the consolidation of local public health services in connecticut this study contributes to the literature by empirically examining the decision of connecticut communities to consolidate the delivery of public health services as theory suggests the prospect of scale economies is found empirically to increase the likelihood that a community consolidates public health services in addition differences across communities are found to inhibit the consolidation of public health services overall the results imply that financial incentives may be necessary to encourage more regional districts because localities may underestimate the true minimum efficient scale for public health services and because heterogeneity among jurisdictions impedes regional cooperation

money endogeneity and neutrality abstract this paper examines the implications of a contemporaneously observed endogenous money supply in rational expectations models of the lucas barro variety first if there is contemporaneously perceived policy response e g to interest rates then a simultaneous equations bias produces inconsistency in the neutrality tests proposed by king and boschen grossman second if money acts as a signal about economic conditions then autonomous money shocks can have real effects in polar contrast to the lucas barro analyses this non neutrality requires that monetary information be utilized by economic agents

assessing the case for social experiments rs ecent academic debates pit two alternative approaches to policy evaluation against one another the first is the experimental approach based on the random assignment of accepted program applicants to a recipient or treatment group and a non recipient or control group the second is the nonexperimental or econometric approach that uses a variety of microdata sources statistical methods and behavioral models to compare the outcomes of participants in social programs with those of nonparticipants the central question addressed in this paper is whether or not randomized social experiments aid in securing answers to basic questions about the evaluation of social programs there are many distinct and complementary approaches to the study of the impact of public policy including full general equilibrium analysis of policy impacts tinbergen 1956 auerbach and kotlikoff 1987 shoven and whalley 1992 kydland and prescott 1991 and less ambitious partial equilibrium microeconomic structural research programs such as those designed to estimate the impact of taxes on labor supply both approaches offer answers to many interesting counterfactual policy questions but their credibility rests critically on the quality of the empirical input used to generate their answers

wage stickiness and the non neutrality of money a cross industry analysis abstract the paper provides an empirical test of sticky wage models of business fluctuations by focusing on industry level cross sectional implications that emerge this breaks the observational equivalence existing at the aggregate level between rational expectations long term contracting and imperfect information models the specific implication tested is whether output responses to nominal disturbances industry phillips curve slopes are inversely related to wage indexation elasticities the phillips curve slopes are found to vary across industries for the canadian economy but bear no relationship to indexation elasticities casting doubt on the role of nominal wage rigidity in generating the observed non neutrality of money

money and the dispersion of relative prices a price dispersion equation is tested with data from the german hyperinflation the equation is derived from a version of lucas s and barro s partial information localized market models in this extension different excess demand elasticities across commodities imply a testable dispersion equation in which the explanatory variable is the magnitude of the unperceived money growth in order to test this hypothesis a price dispersion series is constructed and a measure of the unperceived part of money growth is estimated the model receives support from the empirical analysis although it is evident that unincluded variables have important effects on price dispersion

monetary information and monetary neutrality abstract the monetary theory of business fluctuations in market clearing models constructed under the rational expectations assumption as advanced by lucas and others involves the idea that suppliers and demanders will typically misinterpret movements in the general level of prices as representing more or less favorable relative opportunities for real activities the present paper examines the consequences of agents possessing contemporaneous monetary information of a potentially noisy variety for the non neutrality of unanticipated monetary events within such an equilibrium business cycle model this modification of the information structure has the strong testable implication that real activity will be uncorrelated with contemporaneous monetary data

stabilization policies in open economies with imperfect current information abstract in an open economy with perfect capital mobility the exchange rate and the interest rate may convey different information about current shocks in a model with one period wage contracts we explore the information content of the financial signals along with the optimal stabilization policy and how the two may be related some self fulfilling properties of the information structure are encountered and it is shown that the market clearing level of outputs is generally obtainable while full information output may only be obtained in special cases where it is a necessary condition that the agents believe the signals are informationally different

on the optimality of activist policies with a less informed government abstract i investigate whether a government should lead an activist policy in a rigorous utility maximizing framework under rational expectations the economy is one with preset wages and is subject to both demand and supply shocks it is assumed that the government can never act on the basis of information superior to that of the private sector moreover wages are set after government policy has been carried out we find that the optimal policy is nevertheless an activist countercyclical one it has the remarkable property that although the economy is hit each period by stochastic shocks after wages have been preset this optimal policy will nevertheless succeed in keeping the economy on a full employment track

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

information decisions and productivity on board computers and capacity utilization in trucking productivity reflects not only how efficiently inputs are transformed into outputs but also how well information is applied to resource allocation decisions this paper examines how information technology has affected capacity utilization in the trucking industry estimates for 1997 indicate that advanced on board computers obcs have increased capacity utilization among adopting trucks by 13 percent these increases are higher than for 1992 suggesting lags in the returns to adoption and are highly skewed across hauls the 1997 estimates imply that obcs have enabled 3 percent higher capacity utilization in the industry which translates to billions of dollars of annual benefits jel d24 l92 o33 o47

the economics of child labor if child labor as a mass phenomenon occurs not because of parental selfishness but because of the parents concern for the household s survival the popular argument for banning child labor loses much of its force however this assumption about parental decision making coupled with the assumption of substitutability in production between child and adult labor could result in multiple equilibria in the labor market with one equilibrium where children work and another where adult wage is high and children do not work the paper establishes this result and discusses its policy implications copyright 1998 by american economic association

aggregate fluctuations as an information transmission mechanism a model is presented in which individuals attempt to track shocks with a capital like quantity that is costly to produce and to adjust the shocks have separate individual specific and economy wide components individuals do not have direct access to desired information about economy wide shocks the information is potentially available from the observation of endogenous aggregates but because the aggregates are endogenous there is an informational externality associated with them two polar cases are considered when the desired information is about economy wide real shocks as in townsend 1983 the externality is potentially completely internalized when the desired information is about purely nominal aggregates as in lucas 1973 1975 aggregate fluctuations are a necessary condition of equilibrium

islands indexation and monetary policy this paper develops a synthesized macroeconomic model that incorporates the local global informational asymmetries of an islands economy into a setting characterized by endogenous wage indexation in such an economy agents are unable both to filter out the separate influences of demand and supply shocks on observed output prices and to distinguish between the separate price effects of local and aggregate disturbances so that optimal wage indexation depends upon both the variances of supply and demand disturbances and the information conditioned forecasts of agents as a result optimal monetary policy generally depends upon the variances of local and aggregate supply and demand

monetary and fiscal policies under two alternative types of rules abstract this paper considers the relative advantage of two types of monetary and fiscal feedback rules when the private agents have full current information the appropriate combination of monetary and fiscal feedback on past disturbances dominates the contemporaneous feedback in stabilizing the real output and the price level this dominancy however disappears when the exchange rate stability is included in the objective function or when the currently observable variables are limited in general there exist some tradeoffs among feedback parameters some of the policy coefficients can be set arbitrarily enabling the optimal policy rules to be specified in many equivalent ways

money output and the trade balance theory and evidence this paper develops a two country equilibrium model of the world economy under floating exchange rates and draws out its implications for co movements of money output and the trade balance the predictions of this model are then compared with those of a fixed price keynesian version of the mundell fleming model the predictions of the two models for co movements of money output and the trade balance are shown to differ on almost all counts empirical evidence on the effects of anticipated and unanticipated changes in money growth rates on output and the trade balance from the recent canadian experience with floating rates is presented and discussed this evidence generally speaking is consistent with the implications of the equilibrium model

the labour market impact of body weight in china a semiparametric analysis while a positive wage effect of body mass index bmi is widely observed in low income developing countries a negative wage effect of bmi is often observed in high income developed countries to fill the gap between these previous findings we investigate the relationship between body weight and wages in transition economies we focus on china whose rapid economic growth of the 1990s was followed by a rapid increase in overweight and obesity while still experiencing significant food insecurity and underweight we first use several parametric regression strategies to obtain a consistent estimate of the wage effects of weight second we adopt a semiparametric partially linear model that allows for endogeneity of weight parametric regressions provide mixed results and the sign and magnitude of their estimates are sensitive to the choice of samples and regression strategies semiparametric estimates provide evidence of a wage penalty for very heavy and thin persons among both men and women the wage pena

fixed versus flexible exchange rates in an equilibrium business cycle model abstract this essay re examines the question of which exchange rate regime is preferable using a rational expectations model that explicitly incorporates wealth and emphasizing the information signalling role of prices previous authors have stressed the argument that floating rates provide agents with an additional source of information which improves forecasting accuracy leading to more efficient allocations this paper adds the counterweighing argument that they also have the effect in contrast to fixed rates of introducing an additional source of monetary disturbances in the determination of real variables another issue addressed is the nature of exchange rate adjustments to monetary disturbances

policy effectiveness in an open multi market economy with risk neutral exchange rate speculation abstract in an open multi market equilibrium model of the business cycle the informational role of a forward exchange market is that the forward rate aggregates individual perceptions of the aggregate state of the economy in the case of risk neutral exchange rate speculation the forward rate perfectly reveals average expectations of current nominal shocks that hit the economy this paper analyzes the informational implications of forward speculation when markets are structurally diverse the two types of structural diversity considered are heterogeneous price elasticities of output demand and supply and asymmetric information between traders in output markets and traders in asset markets in contrast to previous results the paper shows that risk neutral speculation is not in general sufficient to generate a fully revealing rational expectations equilibrium in which monetary policy is ineffective

municipal government approaches to service delivery an analysis from a transactions cost perspective municipal governments are less likely to contract out for service delivery if citizen preferences for the service are heterogeneous this conclusion is based on an analysis that extends to the public sector the empirical industrial organization literature on transaction costs and the make or buy decision faced by private firms service delivery practices for sixty three municipal services are examined the findings are consistent with the proposition that the cost for writing and monitoring contracts may be an important consideration in municipal service delivery approach and that bureaucratic supply may not be as inefficient as some previous studies indicate

differential information and the role for an active stabilization policy the paper considers the possibility of pursuing a systematic monetary policy to overcome the coordination problems arising when agents have differential information it is shown that a monetary feedback rule involving current feedback but no prospective feedback can eliminate the information problem making the implications of the differential information immaterial for real allocations the paper also considers a private indexation scheme as a substitute for monetary policy and it is shown that these differ since indexation on currently known variables is neutral indexation of a prospective nature is however equivalent to a prospective feedback to the money supply

monopolistic competition as a foundation for keynesian macroeconomic models a general equilibrium macroeconomic model based on monopolistic competition is presented the model exhibits a traditional multiplier in the short run but due to free entry the multiplier disappears in the long run by construction all agents are fully rational the keynesian results are a consequence of the assumption of monopolistic competition which creates a divergence between optimal private behavior and optimal social behavior

price and output responsiveness to nominal changes under differential information abstract the paper considers how changes in nominal income are transmitted into price and output changes within a setting where the traditional assumption of instantaneous market clearing costless coordination is given up in favour of a more realistic setting where price decisions are made by numerous agents firms acting independently on their private decentralized information the responsiveness of firm specific prices is considered and it is shown how absolute or nominal price rigidity can be explained building this into a theory of the general price level it is proved that heterogenously perceived nominal changes affect the price level less than proportionally moreover it is shown how a phillips curve relation between inflation and output can be rationalized within the model finally the issue of relative price variability is considered and related to misallocation of economic resources under differential information

make buy or ally a transaction cost theory meta analysis since the publication of williamson s markets and hierarchies many empirical articles have investigated the tenets of transaction cost theory using meta analytic techniques we quantitatively syn

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

making the most out of programme evaluations and social experiments accounting for heterogeneity in programme impacts the conventional approach to social programme evaluation focuses on estimating mean impacts of programmes yet many interesting questions regarding the political economy of programmes the distribution of programme benefits and the option values conferred on programme participants require knowledge of the distribution of impacts or features of it this paper presents evidence that heterogeneity in response to programmes is empirically important and that classical probability inequalities are not very informative in producing estimates or bounds on the distribution of programme impacts we explore two methods for supplementing the information in these inequalities based on assumptions about participant decision making processes and about the strength in dependence between outcomes in the participation and non participation states dependence is produced as a consequence of rational choice by participants we test for stochastic rationality among programme participants and present and implement methods for estimating the option values of social programmes

an informational rationale for action over disclosure abstract the past two decades have seen a considerable increase in the amount of public information provided by policymakers are such disclosures desirable or is it instead preferable to use such information to condition a policy instrument such a tax or an interest rate this paper studies the relative merits of each means to use a policymaker s information in a flexible class of economies that feature dispersed information and payoff and learning externalities i provide conditions for when the exclusive use of a policy instrument or disclosure is optimal i then relate these to differences in the equilibrium and socially optimal use of information i conclude with a series of applications that show how my results apply to common beauty contest models competitive economies and a broad class of macroeconomic models among others

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

information heterogeneity and market incompleteness information is market consistent if agents only use market prices to infer the underlying states of the economy this paper applies this concept to a stochastic growth model with incomplete markets and heterogeneous agents the economy with market consistent information can never replicate the full information equilibrium and there are substantial differences in impulse responses to aggregate productivity shocks these results are robust to the introduction of a noisy public signal and aggregate financial markets we argue that the principle of market consistent information should be applied to any model with incomplete markets

austrian and neoclassical economics any gains from trade austrian economics has been important to the development of modern economics but its role in current practice is much diminished the neoclassical approach dominates today s thinking many austrians bemoan this state of affairs most neoclassical economists just ignore it but austrian and neoclassical economics aren t mutually exclusive each represents a distinctive point of view although with little meaningful intellectual exchange between them these days this is unfortunate many different concepts are associated with both austrian and neoclassical economics to concentrate on where the most exchange of ideas might occur i am concerned about those aspects of austrian economics primarily dealing with the process of competition and that portion of neoclassical economics primarily dealing with the determination of economic equilibrium this in a nutshell is the main intellectual difference between them some consequences of this difference are discussed in what follows i hope to show that mutually advantageous gains from trade exist austrian economics offers a valuable perspective of the economy as an evolutionary process akin to biological evolution with entrepreneurial activities representing the main instruments of change it is primarily a macroeconomic theory of the economy as a whole with keen insights on the nature of decentralization and the process of competition that deserve more attention neoclassical economics offers a microeconomic theory of economic behavior that is especially useful for analyzing specific economic problems and for orienting analysis around more sharply described empirical phenomena and data

fiscal policy and entrepreneurship abstract this paper reexamines the effect of expansionary fiscal policy on real gdp in the presence of entrepreneurship when government expenditure partially crowds out private consumption as government expenditure cannot reflect changes in consumers tastes expansionary fiscal policy weakens the social role of firms activities to predict and adapt to idiosyncratic changes in consumers taste i show that expansionary fiscal policy can lower real gdp when idiosyncratic risk and the substitutability of goods are large and when firms have a strong ability to predict changes in consumer tastes i also investigate how expansionary fiscal policy influences firms investments in prediction ability

you get what you pay for schooling incentives and child labor abstract can schooling promotion deter child participation in hazardous forms of child labor we examine two interventions intended to promote schooling and deter child labor for children associated with carpet factories in kathmandu the first intervention provides scholarships for school related expenses the second provides the scholarship and an in kind stipend conditional on school attendance paying for schooling expenses promotes schooling but only at the beginning of the school year when most schooling expenses occur the scholarship combined with the conditional stipend increases school attendance rates by 11 decreases grade failure rates by 46 and reduces carpet weaving by 48 financial support lasted one year effects on schooling and weaving do not persist past the year of support you get what you pay for when schooling incentives are used to combat hazardous child labor

conditional relative price variance and its determinants open economy evidence from germany the authors present empirical tests of two hypothesis derived from an open economy version of the multimarket equilibrium model the first hypothesis holds that the conditional relative price variance is positively related to the variance of domestic monetary and foreign nominal and real shocks the second hypothesis claims a negative impact of an increase in conditional relative price variance on normal output in contrast to earlier studies the authors use direct measures of conditional relative price variance based on arch estimates the authors results show that both hypotheses are consistent with german data copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

village banking and maternal and child health evidence from ecuador and honduras abstract many microcredit institutions bundle credit with health education or other programs this paper reviews arguments on such tie ins and concludes that net benefits are possible but requires empirical testing quasi experimental data from project hope s health banks and credit only village banks are then examined the paper presents evidence that health practices do not improve automatically with greater wealth in honduras results show that health bank participation is robustly associated with reduced subsequent conditional child diarrhea probability but in no specification does credit only bank participation have this effect in ecuador results suggest a larger effect of credit only banks in both countries health bank participation significantly raises subsequent healthcare over credit only participation and at least reduces the tendency to switch from breast feeding to bottle feeding as income rises effects on expenditures are ambiguous there is no clear link between tie ins and bank performance

intertemporal substitution and the role of monetary policy new classical macroeconomists have asserted that once one ignores the consequences of sustained expected inflation or what is normally referred to as the tobin effect or inflation tax monetary policy is invariably ineffective both in the long and short run this view is not correct it will be shown that inflation tax free monetary policy rules can have strong stabilisation effects in rational expectations models with intertemporal substitution the best way to eliminate possible inflation tax effects of monetary growth is to assume that as in barro s i976 model the long run expected rate of growth of the money supply is zero more generally if one were concerned exclusively with the effectiveness of stabilisation policy in the new classical sense i e the capability of influencing deviations of actual equilibrium output from its full information level it would be sufficient to postulate that money transfers are simply proportional to pre existing money holdings the a priori exclusion of the tobin effect as a pre requisite for the new classical doctrine is clearly stated in lucas i98i

incomplete information higher order beliefs and price inertia the question that motivates this paper is how incomplete information impacts the response of prices to nominal shocks our baseline model is a variant of the calvo model in which firms observe the underlying nominal shocks with noise in this model the response of prices is pinned down by three parameters the precision of available information about the nominal shock the frequency of price adjustment and the degree of strategic complementarity in pricing decisions this result synthesizes the broader lessons of the pertinent literature however this synthesis provides only a partial view of the role of incomplete information once one allows for more general information structures than those used in previous work one cannot quantify the degree of price inertia without data on the dynamics of higher order beliefs or of the agents forecasts of inflation we highlight this with three extensions of our baseline model all of which break the tight connection between the precision of information and higher order beliefs featured in previous work

price level determinacy and the choice of policy targets under rational expectations abstract we show that in a conventional macro model with rational expectations the government can use monetary policy to peg real interest rates and still attain a determinate price level provided it also pegs some nominal policy variable e g nominal expenditures

school subsidies for the poor evaluating the mexican progresa poverty program abstract this paper evaluates how the progresa program which provides poor mothers in rural mexico with education grants has affected enrollment poor children who reside in communities randomly selected to participate in the initial phase of the progresa are compared to those who reside in other control communities pre program comparisons check the randomized design and double difference estimators of the program s effect on the treated are calculated by grade and sex probit models are also estimated for the probability that a child is enrolled controlling for additional characteristics of the child their parents local schools and community and for sample attrition to evaluate the sensitivity of the program estimates these estimates of program short run effects on enrollment are extrapolated to the lifetime schooling and the earnings of adults to approximate the internal rate of return on the public schooling subsidies as they increase expected private wages

rational expectations and the role of countercyclical monetary policy the potential role for systematic monetary policy to dampen fluctuations around the natural rate is examined in barro s 1976 model the source of the non neutrality is the effect of nonpermanent changes in the money supply on the inflation rate the real return to money which induces labor leisure substitutions when these non permanent changes take the form of future reactions to imperfectly perceived current disturbances they affect the deviation from the natural rate

what happens to diet and child health when migration splits households evidence from a migration lottery program the impact of migration on food security and child health is likely to differ depending on whether children themselves migrate or whether they remain behind while other household members migrate however existing studies have not been able to examine how impacts differ in these two scenarios because parallel data are required for both the sending and receiving country moreover self selection into migration makes unbiased estimation of either impact difficult we overcome these problems by using a unique survey of tongan households that applied to migrate to new zealand through a migrant quota which selects households through a random ballot this survey covers both migrant children in new zealand and non migrant children in tonga with the migration policy rules providing a source of exogenous variation for identifying impacts our estimates of short run impacts show that diets diverge upon migration children who migrate experience improvements while diets worsen for children who remain there is also suggestive evidence of a divergence in health outcomes with increases in weight for age and height for age found for migrant children and decreases found for children who remain behind while other household members migrate

the welfare costs of expected and unexpected inflation the monetary search model by lagos and wright 2005 is extended with imperfect information about nominal shocks as in lucas 1972 an analytical solution exists with logarithmic preferences in general individuals hold precautionary balances calibrated to united states postwar data the welfare cost of the monetary cycle is calculated to be small below 0 0003 of gdp compared to the welfare cost of the inflation tax around 0 25 of gdp the main reason for the minute welfare cost of the monetary cycle is its low amplitude in 1947 2007 but monetary crashes such as those experienced during the great depression can generate important welfare costs

informational implications of money interest rate and price rules the information available to private agents determines the effectiveness of various types of monetary policy in an economy in which private agents have differential information sets the ranking of three classes of monetary policy rules critically depends on the specification of agents information sets a price rule for example minimizes the variance of output around its full information level when agents observe both the interest rate and money stock more generally if all three monetary policy variables the money stock the price level and the interest rate are contemporaneously observed the policy ranking is indeterminate

the existence of fully rational expectations approximate equilibria with noisy price observations abstract nonrevealing fully rational expectations approximate equilibria exist in microeconomic pure exchange economies in which uninformed agents have suitably dispersed noisy price observations such traders maximize a state dependent expected utility conditional on the price vector they observe the distributions of noisy price observations and the correct equilibrium relationship between states of the world and prices in equilibrium aggregate excess demand is small with high probability in every state of the world and its expectation is also small this magnitude diminishes as the noisy price observations become more accurate equilibria are obtained by applying a fixed point argument to state dependent excess demand functions which are smooth because of the noisy price observations

interest rates aggregate information and monetary policy abstract interest rates set on economy wide markets represent an important source of information to economic agents within the class of business cycle models advanced by lucas and barro this paper explores the information conveyed by such aggregate signals and the types of monetary policies that can influence economic activity by changing the information content of interest rates

information aggregation and policy the function of monetary policy to alter the informational content of money price signals is examined in a model where traders can observe an economy wide financial signal and a local commodity price under a passive policy money demand disturbances which are not directly observable are shown to be confused with real productivity shocks and thereby preclude prices from fully reflecting all information even when the policy authority has no informational advantage prospective money growth feedback rules can improve the structure of available information applications of the rational expectations hypothesis to monetary theory have focused on the informational aspects of money price signals a key element of the models of lucas 1972 1975 barro 1976 and sargent and wallace 1975 is that agents have limited powers of information acquisition and use prices as imperfect summaries from the rest of the world those works have suggested that monetary policy can affect the informational content of observed price signals and thereby affect real variables in weiss 1980a it was shown systematic money growth feedback rules can contribute to economic efficiency when the money demands of one group are based on factors not directly observed by all in this context monetary policy can alter the information content transmitted from the informed to the uninformed through observation of nominal price signals a limitation of these analyses is the omission of economy wide financial signals clearly stock and bond prices are observed accurately and costlessly empirically there are strong comovements between financial signals and economic activity traditional keynesian theory argues that financial signals exert an important influence on output by affecting the demand for new capital goods understanding the informational role of such signals is crucial to any theory which explains fluctuations as arising from incomplete information the present analysis investigates the structure of available information with its implications for real variables in a model where agents trade on both an economy wide capital market and a local commodity market the model has positive implications for the comovements of money demand disturbances aggregate investment expected and realized returns as well as normative implications for the conduct of policy the structure of exogenous information in the model differs from that of my earlier paper rather than assuming two types of traders informed and uninformed the model considers traders to have symmetric although noisy exogenous private information in this framework the economy wide market both aggregates and transmits individuals information about an aggregate structural variable this modification is both analytically convenient and illustrates how noise in the price system alters the importance of public relative to private sources of information the idea that prices aggregate individual information was first formalized in grossman 1976 in that paper a non monetary model of a speculative market was developed in which the price system conveyed all relevant information so as to yield an efficient allocation however this feature was also shown to break down if prices are influenced by

effects of public policy on child labor current knowledge gaps and implications for program design many policy instruments can be used to address or affect child labor even if they are implemented to achieve other objectives from a theoretical point of view however the impact of these policies on child labor is undetermined this paper discusses the evidence generated by rigorous evaluations on the impact on child labor of labor market programs conditional and unconditional transfers and microcredit among other social programs and interventions the study finds that although transfer programs generally tend to reduce child labor other policies risk increasing child labor especially if they affect households productive opportunities the findings also point to knowledge gaps that should be addressed in future evaluations while progress has been made over the past decade there is still much to learn about the effects of public policy on the labor participation of many children in developing countries

real exchange rate effects of monetary disturbances under different degrees of exchange rate flexibility an empirical analysis abstract we examine the effects of monetary policy on the real exchange rate in a cross country analysis we find that the variability of money shocks and the degree of informativeness of the exchange rate are important determinants of the magnitude of the real exchange rate effects of domestic money shocks our results are consistent with previous cross country evidence on the output effects of money shocks but also highlight the role of the exchange rate regime

a prudential stable funding requirement and monetary policy in a small open economy abstract the basel iii net stable funding requirement introduced in january 2018 requires banks to use a minimum share of long term wholesale funding and deposits to fund their assets a similar regulation has been in place in new zealand since 2010 we introduce the stable funding requirement sfr into an open economy dsge model featuring a banking sector with richly specified liabilities and estimate the model for new zealand we then evaluate the impact of the new prudential instrument on monetary policy trade offs a higher steady state sfr level amplifies the effects of shocks to the spread on long term bond financing in the banking sector adding to macroeconomic volatility conditional on these shocks however the sfr plays a passive role in the transmission of all other shocks to the real economy hence in the overall picture the monetary policy trade off between inflation stabilisation and output stabilisation is only slightly worsened by the sfr we note that the trade off can be improved when monetary policy responds systematically to credit growth

health nutrition and economic development the relationship between health and economic development is explored focusing on nutrition based health indicators the spotlight is placed on the inter related feedbacks between the influence of health on productivity on one hand and the influence of income on health status on the other disentangling causality in these relationships has preoccupied much of the literature we evaluate different empirical strategies that have been adopted and assess the results there is now a body of evidence based on careful empirical studies that demonstrates a causal relationship between health and labor productivity there is also evidence that at least among the very poor additional income is spent on improved nutrition there are two issues that have received little attention although we argue they are likely to be very important first measurement of health is discussed in detail evidence is presented on how taking into account differences in the extent of measurement error is critical for interpreting the impact of health on wages the same theme emerges in studies of the effect of income on health specifically calorie intake the key role of non linearities in these relationships is highlighted and we demonstrate that a good deal of the variation in estimates of income elasticities of demand for calories can be ascribed to the role of measurement and functional form authors

the neutrality and optimality of counter cyclical monetary policy in equilibrium models with a wealth effect a condition is offered which is both necessary and sufficient for the counter cyclical neutrality of all linear monetary feedback rules with respect to deviations in real market output in that class of stochastic macro economic models with rational expectations additive disturbances multiple markets and a wealth effect on excess commodity demand studied by barro 1976 barro and fischer 1976 king 1982 asako 1982 waldo 1982 and marini 1985 the condition has the form of a constraint on the values of the control parameters of a general monetary feedback rule that includes all other linear feedback rules in this class of models as special cases when the selection of parameters violates this constraint prospective monetary feedback can completely stabilize deviations in real market output around its natural rate without sustained inflation la neutralite et loptimalite de la politique monetaire dans des modcles d equilibre quand un effet de richesse existe on propose une condition necessaire et suffisante pour assurer la neutralite contre cyclique de toutes les regles de retroaction mon6taires lin6aires pour ce qui est des deviations dans le niveau de produit r6el dans cette classe de modeles macro economiques stochastiques avec anticipations rationnelles chocs additifs marches multiples et un effet de richesse sur la demande exc6dentaire de biens tels qu etudies par barro 1976 barro fischer 1976 king 1982 asako 1982 waldo 1982 et marini 1985 cette condition prend la forme d une contrainte sur les valeurs des parametres de controle d une regle mon6taire generale de retroaction dont toutes les autres regles mon6taires lineaires dans cette classe de modele ne sont que des cas particuliers quand la s6lection des parametres ne satisfait pas cette contrainte la retroaction mon6taire prospective peut stabiliser completement les deviations du produit reel autour de son taux naturel sans engendrer une inflation soutenue i would like to thank jim brander ed burmeister john b carlson marsha courchane mike devereux ian domowitz jim glassman craig hakkio stephen r g jones woo sik jung doug mctaggart keizo nagatani doug pearce steve poloz neil raymon stan reynolds john seater shinichi watanabe de mmn wu two anonymous referees and seminar participants at the 1986 canadian economic association meetings the 1986 north american summer meetings of the econometric society the system committee on financial canadian journal of economics revue canadienne d economique xx no 3 august aouit 1987 printed in canada imprime au canada 0008 4085 87 612 624 1 50 canadian economics association this content downloaded from 207 46 13 52 on fri 21 oct 2016 05 54 00 utc all use subject to http about jstor org terms neutrality and optimality 613

economic incentives under contract supply of local government services it has been argued that organizations which are unable to directly appropriate any of the firm s residual earnings tend to experience various forms of wealth taking by managers alchian and kessel 1962 this wealth taking has been observed in privately owned regulated firms nelson 1980 as well as in government operated bureaus the results in this paper suggest that the x inefficiency associated with various forms of wealth taking may be constrained when external competitive pressures exist niskanen argued that one strategy for reducing the inefficiency associated with monopoly bureaus would be to set up two bureaus to compete for the sponsor s budget in order to generate better information on cost and production functions at the local level the lakewood plan by generating information on actual production cost to purchasing cities and to unincorporated area residents appears to create the desired effect by generating this flow of information on cost the lakewood plan eases the task of monitoring the performance of county departments second the threat of entry posed by the city bureau which can always produce services in house appears to effectively constrain the x inefficiency of the county supplier bureaus

the impact of conditional cash transfers on the amount and type of child labor this paper analyzes the impact of conditional cash transfers on the amount and type of child labor in poor households it first develops a simple theoretical model where child labor and training are chosen to maximize inter temporal household income given constraints to social household and child endowments then it conducts an empirical analysis using the randomized trial data collected to evaluate the 2006 nicaragua conditional cash transfer cct program this social program transferred wealth to poor families in rural areas of the country conditional on children s school attendance and health check ups one third of the beneficiaries received in addition a wealth transfer to begin a non agricultural business the paper finds that the cct program had a selective impact on the volume and quality of child labor reducing it in the aggregate and steering it toward skill forming activities specifically the program appears to have reduced child labor for household chores and traditional farming while increasing it for non traditional activities related to commerce and retail these require the child to develop basic skills in reading and writing arithmetic and interpersonal relationships moreover the paper finds that the source behind the increase in the better quality type of child labor is not the basic component of the program but distinctively its business grant intervention

inflation at the household level abstract we use scanner data to estimate inflation rates at the household level households inflation rates have an annual interquartile range of 6 2 9 0 percentage points most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods lower income households experience higher inflation but most cross sectional variation is uncorrelated with observables households deviations from aggregate inflation exhibit only slightly negative serial correlation almost all variability in a household s inflation rate comes from variability in household level prices relative to average prices not from variability in aggregate inflation

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

monetary policy and the information content of prices rational expectations and cleared markets lead to the proposition that feedback monetary policy is irrelevant to real activity as in the analyses of sargent and wallace however if agents are differentially informed and have access to a common price then prospective monetary policy actions future feedback to imperfectly known current circumstances can alter real activity by changing the information content of prices

income productivity in china on the role of health this study provides empirical evidence regarding the income productivity of health human capital in china we appeal to concepts from human capital theory to support a basic model that treats health as a form of human capital in the income production process our model examines the economic return at the household level from the health of its individual members we estimate this with a longitudinal sample drawn from the china health and nutrition survey chns allowing us to exploit within variation in health and income to address possible unobservables biasing estimates of the impact of health on income in the simple cross sectional setting household income is strongly influenced by the health of its members particularly in rural areas these findings could have important implications for health and economic policy making aimed at reducing the long standing urban rural economic gap and more comprehensively insuring the rural population against health and economic risk

tests of equilibrium macroeconomics using contemporaneous monetary data abstract this paper uses contemporaneous monetary data to carry out econometric tests of the equilibrium approach to modelling the relation between monetary disturbances and macroeconomic fluctuations the theoretical analysis introduces into an equilibrium macroeconomic model the availability of preliminary data on current monetary aggregates and the process of accumulation of revised monetary data the econometric analysis tests two hypothesis derived from this extended model one hypothesis concerns the neutrality of perceived monetary policy the econometric results imply rejection of this hypothesis the other hypothesis concerns the non neutrality of errors in preliminary monetary data the econometric results fail to reject the contrary of this hypothesis these tests provide strong evidence against the reality of the equilibrium approach

on the policy ineffectiveness proposition and a keynesian alternative one of the most controversial macroeconomic developments of the last decade has been the rise of the so called new classical nc approach to macroeconomic theory and policy lucas i972 sargent and wallace i975 and barro i 976 have presented models which combine the friedman i968 phelps i970 natural rate theory with assumptions of market clearing and rational expectations as is well known these models deliver the striking result that the mean values of real variables cannot be affected by the government s monetary policy the publication of the theoretical work establishing the impotency result led to much empirical testing of the nc models one of the most successful approaches from the point of view of nc advocates is contained in a series of papers by barro i977 i978 i98i barro and rush i980 and rush i986 recently pesaran i982 has questioned barro s results and claimed that once an implausible assumption is discarded barro s work can be rejected in favour of a keynesian alternative because pesaran has put forth an explicit counter model to barro s work his results are potentially quite important this paper examines in detail pesaran s work and conclusions

macroeconomic policy evaluation and optimal control theory a critical review of some recent developments abstract this survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design this literature focuses on strategic interactions between governments and private agents engaged in dynamic non cooperative games and emphasizes such issues as precommitment credibility and reputation as important and endemic aspects of optimal policy design a dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single stage full information games without commitment this may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium the type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players beliefs under uncertainty included here are separating and pooling equilibria involving notions of learning signalling and information revelation additional dimensions exist in stochastic systems which introduce other forms of uncertainty optimal control and game theory have also been applied to international macroeconomic policy design with emphasis on the potential costs and benefits of non cooperative and cooperative behaviour between countries and problems of international policy coordination

heterogeneous impacts of conditional cash transfers evidence from nicaragua abstract in the last decade the most popular policy tool used to increase human capital in developing countries has been the conditional cash transfer program a large literature has shown significant mean impacts on schooling health and child labor this paper examines heterogeneous effects using random assignment data from the red de proteccion social in rural nicaragua using interactions between the targeting criteria and the treatment indicator estimates suggest that children located in more impoverished localities experienced a larger impact of the program on schooling in 2001 but this finding is reversed in 2002 estimated quantile treatment effects indicate that there is considerable heterogeneity in the impacts of the program on the distribution of food expenditures as well as total expenditures in particular households at the lower end of the expenditure distribution experienced a smaller increase in expenditures this study also presents evidence of the rank invariance assumption to hel

production costs transaction costs and local government contractor choice i introduction declining fiscal conditions increasing service obligations and public clamor for more effective government have led local governments to examine alternatives to the bureaucratic supply of publicly provided services the alternative which has received the most attention is contracting under this arrangement services are financed by the local government but production of the service is contracted to external suppliers a growing body of work has explored the contracting decision 1 focusing on the production choice does a local government providing i e financing a service produce it internally or externally the contracting decision however has a second part the contractor choice given the decision to externally produce a service does the local government contract with other governments with nonprofit organizations or with for profit firms 2 contracting is expected to yield production cost savings by exploiting scale economies overcoming input rigidities and capitalizing on managerial and competition induced efficiency incentives the extent to which these production cost savings are achieved depends on the sector of the external producer at the same time public accountability requires contracting governments to be concerned with the proper execution of the contracting process to ensure that shirking is minimized the transaction costs generated by this oversight also vary by the sector of the contractor thus the cost of service delivery depends on the sector of the external producer understanding the contractor choice from among the three sectors would add insight into the motivations for contracting and ultimately enable us to more correctly predict the cost and service quality effects of different external supply alternatives this paper explores the determinants of local government contractor choice in the next section we examine the production and transaction costs associated with organizations from the public nonprofit and for profit sectors we then develop a general model of the contractor choice and empirically test it using data on local government contract arrangements for three health services hospital drug and alcohol prevention and treatment and mental health ii service delivery costs and contractor options we posit that a local government in selecting the sector with which to contract seeks to maximize its utility by choosing the alternative that minimizes the costs of service delivery there are two components of service delivery costs production costs and transaction costs 3 production costs contracting is viewed as a means to overcome scale diseconomies perverse managerial incentives and input rigidities which generate a production cost premium for internal production external production separates the production scale decision from jurisdictional size thus allowing scale economies to be realized this benefit is provided by external production with any contractor of the appropriate size and thus scale economies should not in theory affect the sector choice however the extent to which the contractor exhibits managerial incentives and input flexibility which contribute to production cost savings depends on its organizational form managerial incentives the efficiency incentives of managers vary by the form of their organization in public bureaus principal agent problems arise from the informational advantages of the agents bureaucrats over their principals mayor council which are perceived to increase public production costs for example niskanen s 1971 notion of public bureaucrats as budget maximizers is predicated on the bureau s knowledge of the actual cost of delivering services and the use of this knowledge to increase their budgets in addition the lack of property rights to residuals the difference between budgets and actual production costs reduces incentives for bureaucrats to minimize costs

exchange rate policy and monetary information this paper develops a model of a small open economy in which the presence of local deviations from purchasing power parity give rise to differential information it is assumed that the monetary authorities are committed to buy and sell foreign exchange in order to support an exchange rate policy rule it is demonstrated that exchange rate policy can influence the distribution of real output i if agents possess incomplete and differential information and ii if they have contemporaneous money supply or balance of payments information it is also shown that exchange rate policy can be effective because of its ability to influence the information content of available monetary data the argument is turned around and used to support the frequent release of monetary data

monetary instruments and policy rules in a rational expectations environment abstract this paper explores the implications of rational expectations and the aggregate supply theory advanced by lucas 1973 and barro 1976 for analysis of optimal monetary policy under uncertainty along the lines of poole 1970 returning to a topic initially treated by sargent and wallace 1975 not surprisingly these two classical concepts alter both the menu of feasible policy choice and the desirability of certain policy actions in our setup unlike that of sargent and wallace 1975 the systematic component of monetary policy is a relevant determinant of the magnitude of business fluctuations that arise from shocks to the system central bank behavior both the selection of monetary instruments and the framing of overall policy response to economic conditions can work to diminish or increase the magnitude of business fluctuations however the activist policies stressed by the present discussion bear little if any relationship to the policy options rationalized by the conventional analysis of monetary policy under uncertainty in particular in contrast to poole s analysis money supply responses to the nominal interest rate are not important determinants of real economic activity rather the central bank should focus on policies that make movements in the general price level readily identifiable by economic agents

do prices lead money a reexamination of the neutrality hypothesis do prices lead money a reexamination of the neutrality hypothesis in one class of theoretical models real effects occur only if changes in money growth are expected to occur in some future period if expected in the current period they are neutral some empirical models examine the neutrality of expected current money growth and therefore do not directly address the neutrality of expected future growth this paper develops an empirical model that explicitly incorporates expected future changes in money growth a reexamination of the rationality neutrality and macro rational expectations hypotheses over a sample of four countries suggests that the use of expected future money growth results in strong rejections of the neutrality hypothesis i introduction the revolution in macroeconomics inspired by the theory of rational expectations called into question the ability of systematic monetary policy to affect real economic variables much research has been devoted to the issue of policy effectiveness in the last decade and many examples have been constructed that demonstrate the theoretical possibility of nonneutrality even when expectations are formed rationally one result of this research has been to demonstrate that the expectation of a future change in the money growth rate can cause a change in the current value of real output in these models an expected change in money growth at some point in the future results in a change in the price level in all time periods prior to the change in the money growth rate this phenomenon of prices leading money see brock 1974 751 results in a change in real money balances in each time period prior to the expected change in the money growth rate and the change in real money balances results in nonneutral changes in real output in order for the nonneutrality result to hold in this class of models it is essential that the expected change in money growth be in some future time period so that prices and hence real balances change prior to the change in the money growth rate when the change in money growth is expected to occur in the current time period rather than in the future prices and the money supply change proportionately leaving the value of real balances unchanged in this case there is no change in real output this difference in the theoretical predictions concerning the neutrality of expected future and expected current changes in the money growth rate has implications for empirical tests of the neutrality hypothesis according to these models such tests ought to examine the significance of the relationship between the current value of real output and expected future changes in money growth tests of the neutrality hypothesis performed in the past such as those by barro 1977 1978 mishkin 1982 1983 and hoffman and schlagenhauf 1982 have examined the significance of the empirical relationship between the current value of real output and the expected current money growth rate thus these empirical models do not capture the crucial distinction between current and future changes in money growth rates this paper develops an empirical model based on expected future rather than expected current changes in the money growth rate in the real output equation and then reexamines the neutrality hypothesis the issue of whether expectations are formed rationally is also important in the analysis of the empirical evidence for the neutrality hypothesis as mishkin 1982 1983 points out the neutrality hypothesis has little meaning without a theory of expectation formation in light of this tests of the rationality hypothesis as well as the joint hypothesis of rationality and neutrality known as the macro rational expectations hypothesis 1 mre are also conducted ii theoretical models of nonneutral money in many equilibrium rational expectations models the neutrality of money depends upon whether an expected change in the money supply is in the current or some future time period

prospective monetary policy and the empirical relation between money and output abstract this note clarifies the empirical implications of non neutral prospective monetary policy the basic message is that prospective monetary policy even if empirically important is not an explanation for the positive correlations between observed money growth and output found in the data

optimal monetary policy with uncertain fundamentals and dispersed information this paper studies optimal monetary policy in a model where aggregate fluctuations are driven by the private sector s uncertainty about the economy s fundamentals information on aggregate productivity is dispersed across agents and there are two aggregate shocks a standard productivity shock and a noise shock affecting public beliefs about aggregate productivity neither the central bank nor individual agents can distinguish the two shocks when they are realized despite the lack of superior information monetary policy can affect the economy s relative response to the two shocks as time passes better information on past fundamentals becomes available the central bank can then adopt a backward looking policy rule based on more precise information about past shocks by announcing its response to future information the central bank can influence the expected real interest rate faced by forward looking consumers with different beliefs and thus affect the equilibrium allocation if the announced future response is sufficiently aggressive the central bank can completely eliminate the effect of noise shocks however this policy is typically suboptimal as it leads to an excessively compressed distribution of relative prices the optimal monetary policy balances the benefits of aggregate stabilization with the costs in terms of cross sectional efficiency copyright wiley blackwell