whom can we trust to run the fed theoretical support for the founders views abstract the federal reserve has been called a bizarre policymaking structure this paper documents and formalizes a historical argument that the fed s structure was a response to public conflict over inflation s redistributive powers the paper shows that in the face of conflict over redistributive inflation policy by majority can lead to policy that is worse even for the majority than obvious alternatives in balancing the interests for and against surprise inflation the fed s structure can lead to a better outcome

optimality of the friedman rule in an overlapping generations model with spatial separation recent models with spatial separation and limited communication suggest that the friedman rule may not be optimal this is important in light of the disparity between theory and practice concerning optimal monetary policy we take a close look at these models and show that intergenerational transfers are key to the suboptimality of the friedman rule the friedman rule is a necessary condition for achieving the efficient allocation in equilibrium we also show that the friedman rule is chosen whenever agents can implement mutually beneficial arrangements

sustainable monetary policies abstract this paper uses a model with utility maximizing households monopolistically competitive firms and sticky goods prices to derive a version of barro and gordon s time consistency problem for monetary policy where the government s objectives are consistent with a representative household s preferences the paper applies the methods of chari and kehoe to characterize the entire set of time consistent or sustainable outcomes it goes on to find conditions under which the friedman rule the optimal policy under commitment can be supported when the government lacks a commitment technology

equilibrium policy in an overlapping generations economy abstract this paper offers a mechanism for reducing the number of stationary equilibria that arise in a simple two period lived overlapping generations economy since each equilibrium is associated with a different combination of monetary and fiscal policies i assume that at each date the agent in his second period of life determines how that period s monetary and fiscal instruments will be set i show that the set of stationary equilibria where this occurs is a proper and nonempty subset of the set of stationary competitive equilibria and that at least one such equilibrium is a pareto optimum

identifying higher order rationality strategic choice data from a carefully chosen set of ring network games are used to obtain individual level estimates of higher order rationality the experimental design exploits a natural exclusion restriction that is considerably weaker than the assumptions underlying alternative designs in the literature in our data set 93 percent of subjects are rational 71 percent are rational and believe others are rational 44 percent are rational and hold second order beliefs that others are rational and 22 percent are rational and hold at least third order beliefs that others are rational

rational choice a survey of contributions from economics and philosophy this paper looks at the philosophical foundations of rational choice theory it is argued that l savage s expected utility axioms cannot be defended as requirements of instrumental rationality in part because of their implications for the description of consequences then it is argued that common knowledge of rationality does not imply that rational game players must be in nash equilibrium and for some games is an incoherent concept finally the suggestion that rational choice theory is self defeating is examined in relation to coordination games where the theory cannot explain the role of salience and the concept of resolute choice copyright 1991 by royal economic society

rationally justifiable play and the theory of non cooperative games noncooperative game theory is often interpreted as a theory of how games would be played if players were rational on this view its central project is to discover which strategies are rationally justifiable and which are not in any game in this paper we consider whether the conventional assumptions of modern game theory equip it to fulfil this project we present an impossibility result which concerns the extent to which they can do so the result can be seen as strengthening a claim established by borgers and samuelson 1992 and samuelson 1992

policy boards and policy smoothing partisan politics and random election outcomes generate policy uncertainty and partisan business cycles to reduce policy uncertainty society must design the policy making environment to overcome electoral uncertainty and partisanship i show that delegating policy to an independent policy board with discretionary powers will produce substantial policy smoothing and lower policy uncertainty relative to a simple model in which elected officials set policy board members are chosen in a partisan noncooperative environment yet in the benchmark model policy variability is eliminated and the cooperative bargaining solution is replicated

sentimental fools a critique of amartya sen s notion of commitment abstract commitment is problematic because one sometimes pursues it against one s interest to solve it the paper proposes a distinction between non binding and binding commitments non binding commitment is about ambition such as becoming a great chef which bolsters welfare in the pecuniary sense as well as self respect in contrast binding commitment is about honesty while it diminishes welfare it augments self integrity the neoclassical view reduces both commitments to interest while the multiple self approach separates both commitments from interest the separation permits the confusion of sentimental fools who enter commitments without regard to interest with rational sentimentalists who take interest into consideration

rationalizable strategic behavior the notion of equilibrium proposed by nash 19 has come to play a dominant role in economic applications of noncooperative games while analyses of nash equilibria have unquestionably contributed to our understanding of economic behavior it would be unreasonably optimistic to maintain that nash solved the problem of noncooperative strategic choice there is a small literature beginning with ellsberg 6 and a much larger oral tradition which argues that nash behavior is neither a necessary consequence of rationality nor a reasonable empirical proposition in this paper i take the view that although there may be various reasons why an agent might select a nash strategy the notion of an equilibrium has little intrinsic appeal within a strategic context when an agent reaches a decision in ignorance of the strategies adopted by other players rationality consists of making a choice which is justifiable by an internally consistent system of beliefs rather than one which is optimal post hoc this point of view is not original indeed most serious justifications of the nash hypothesis embrace such an approach arguing that agents will expect the game to yield a nash outcome and consequently will choose their equilibrium strategies nevertheless when we think in terms of maximizing utility subject to expectations rather than realizations it becomes clear that the nash hypothesis far from being a consequence of rationality arises from certain restrictions on agents expectations which may or may not be plausible depending upon the game being played we are then quite naturally led to ask are there any restrictions of individuals expectations and hence choices which are required by rationality alone rather than by subjective plausibility this paper is concerned with defining justifying characterizing and refining a criterion for rational strategic choice which i label rationalizability

rationalizable strategic behavior and the problem of perfection this paper explores the fundamental problem of what can be inferred about the outcome of a noncooperative game from the rationality of the players and from the information they possess the answer is summarized in a solution concept called rationalizability strategy profiles that are rationalizable are not always nash equilibria conversely the information in an extensive form game often allows certain unreasonable nash equilibria to be excluded from the set of rationalizable profiles a stronger form of rationalizability is appropriate if players are known to be not merely rational but also cautious what constitutes rational behavior in a noncooperative strategic situation this paper explores the issue in the context of a wide class of finite noncooperative games in extensive form the traditional answer relies heavily upon the idea of nash equilibrium nash 17 the position developed here however is that as a criterion for judging a profile of strategies to be reasonable choices for players in a game the nash equilibrium property is neither necessary nor sufficient some nash equilibria are intuitively unreasonable and not all reasonable strategy profiles are nash equilibria the fact that a nash equilibrium can be intuitively unattractive is well known the equilibrium may be imperfect introduced into the literature by selten 20 the idea of imperfect equilibria has prompted game theorists to search for a narrower definition of equilibrium while this research some of which will be discussed here has been extremely instructive it remains inconclusive theorists often agree about what should happen in particular games but to capture this intuition in a general solution concept has proved to be very difficult if this paper is successful it should make some progress in that direction the other side of the coin has received less scrutiny can all non nash profiles really be excluded on logical grounds i believe not the standard justifications for considering only nash profiles are circular in nature or make gratuitous assumptions about players decision criteria or beliefs the following discussion of these points is extremely brief due to space constraints more detailed arguments may be found in pearce 18

the crime of 1873 the u s coinage act of 1873 eliminated provision for the free coinage of silver that act cast the die for a gold standard the conventional view is that the act of 1873 was a piece of good fortune this paper indicates that it was the opposite a mistake that had highly adverse consequences this is a judgment about 1873 not 1896 by 1896 when william jennings bryan ran for president on a free silver ticket it was too late to undo the damage bryan was trying to close the barn door after the horse had been stolen

expectation traps and discretion abstract we develop a dynamic model with optimizing private agents and a benevolent optimizing monetary authority that cannot commit to future policies we characterize the set of sustainable equilibria and discuss the implications for institutional reform we show that there are equilibria in which the monetary authority pursues inflationary policies because that is what private agents expect we call such equilibria expectation traps alternative institutional arrangements for the conduct of monetary policy which impose limited forms of commitment on the policymaker can eliminate expectation traps journal of economic literatureclassification numbers e31 e42 e50 e51 e58

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

central bank design in general equilibrium we study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital theoretic general equilibrium economy we consider three institutional arrangements for determining monetary policy the first unconditional majority voting always leads to a substantial inflation bias the second a simple form of bargaining which we interpret as a policy board generally improves on the unconditional majority voting outcome finally we consider a constitutional rule which always achieves the social optimum

axiomatic characterizations of rational choice in strategic environments for more than forty years economists have wrestled with the elusive notion of rational behavior in strategic environments generating a variety of competing approaches even for simple simultaneous move games four distinct solution concepts including the notions of nash equilibria correlated equilibria rationalizability and iterated dominance currently have some standing as theories of strategic rationality here i propose four axioms for rational choice in strategic environments and use these to characterize the sets of pure strategies that players may select under each of the solution concepts mentioned above my results underscore both the similarities and differences between the four concepts

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

internal consistency of choice internal consistency of choice has been a central concept in economics decision theory and social choice this idea is essentially confused we cannot determine whether a choice function is consistent without referring to something external to choice e g objectives values the standard results have to be reexamined in this light kenneth j arrow s general possibility theorem is extended in this paper without demanding any internal consistency of social choice or any notion of social rationality copyright 1993 by the econometric society

the american political economy macroeconomics and electoral politics here is the most comprehensive and authoritative work to date on relationships between the economy and politics in the years from eisenhower through reagan extending and deepening his earlier work which had major impact in both political science and economics hibbs traces the patterns in and sources of postwar growth unemployment and inflation he identifies which groups win and lose from inflations and recessions he also shows how voters perceptions and reactions to economic events affect the electoral fortunes of political parties and presidents hibbs s analyses demonstrate that political officials in a democratic society ignore the economic interests and demands of their constituents at their peril because episodes of prosperity and austerity frequently have critical influence on voters behavior at the polls the consequences of eisenhower s last recession of ford s unwillingness to stimulate the economy of carter s stalled recovery were electorally fatal whereas johnson s nixon s and reagan s successes in presiding over rising employment and real incomes helped win elections the book develops a major theory of macroeconomic policy action that explains why priority is given to growth unemployment inflation and income distribution shifts with changes in partisan control of the white house the analysis shows how such policy priorities conform to the underlying economic interests and preferences of the governing party s core political supporters throughout the study hibbs is careful to take account of domestic institutional arrangements and international economic events that constrain domestic policy effectiveness and influence domestic economic outcomes hibbs s interdisciplinary approach yields more rigorous and more persuasive characterizations of the american political economy than either purely economic apolitical analyses or purely partisan politicized accounts his book provides a useful benchmark for the advocacy of new policies for the 1990s a handy volume for politicians and their staffs as well as for students and teachers of politics and economics

voting transparency in a monetary union we examine whether the monetary policy committee of a monetary union should publish its voting records when members are appointed by national politicians we show that the publication of voting records lowers overall welfare this finding also holds for arbitrary levels of private benefits from holding office and if governments incur costs when replacing committee members high private benefits of committee members always lower overall welfare as they induce nonpartisan members to care more about being reappointed than about beneficial policy outcomes nonrenewable but long terms for national committee members and delegating the appointment of all committee members to a union wide authority would be desirable

rationality and the market for human blood abstract this paper presents a theoretical model of blood supply illustrating an argument advanced by titmuss that it is better to rely on voluntary donation than on the market to obtain whole human blood for transfusion the model incorporates a social custom in the manner of akerlof which causes different equilibria to occur depending on whether the custom of giving blood prevails or not since preferences differ across equilibria the pareto criteria cannot be used to compare them several other possible criteria are proposed but these criteria imply that some preferences are more rational or are preferable to other preferences

policy preferences of fomc members as revealed by dissenting votes the composition of the federal open market committee the ability to predict the effect of policy decisions on economic and f1nancialvariables and political influence from the white house and the congress are all potentially significant determinants of monetary policy decisions this study uses the record of dissenting votes from federal open market committee meetings to consider the relevance of these influences tests for differences between voting patterns of bank presidents versus members of the board of governors and differences during various historical periods provide insight into four questions 1 are the policy preferences of bank presidents different from those of the members of the board 2 does uncertainty about the economic and financial results of policy actions influence the level of dissent 3 is there a difference in the pattern of dissent under different chairmen and 4 is there effective political influence on monetary policymakers the legitimacy of district bank presidents serving on the fomc has been challenged in the courts and the legislature challengers fear that district bank presidents who serve without executive or legislative approval prefer policy that produces lower inflation and higher unemployment relative to the policy preferred by members of the board who are appointed by the president and confirmed by the senate rogoff 1985 argues that in the presence of market distortions it is better for society to have central bankers who attach a larger weight than the society s

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

establishing a central bank issues in europe and lessons from the us list of figures list of tables preface list of conference participants 1 introduction part i the design of a central bank 2 designing a central bank for europe a cautionary tale from the early years of the federal reserve system 3 the european central bank reshaping monetary politics in europe 4 the ecb a bank or a monetary policy rule part ii transition from national central banks to a european central bank 5 hard erm hard ecu and european monetary union 6 voting