central bank design abstract starting with a blank slate how could one design the institutions of a central bank for the united states this paper explores the question of how to design a central bank drawing on the relevant economic literature and historical experiences while staying free from concerns about how the fed got to be what it is today or the short term political constraints it has faced at various times the goal is to provide an opinionated overview that puts forward the trade offs associated with different choices and identifies areas where there are clear messages about optimal central bank design

the two faces of janus institutions policy regimes and macroeconomic performance in greece greece the two faces of janus institutions policy regimes and macroeconomic performance the clear change in policy regime in greece around 1974 offers an opportunity to assess the extent to which economic performance depends on institutional underpinning for twenty years up to 1974 greece enjoyed rapid growth high investment and low inflation during the next twenty years growth and investment collapsed and inflation became high and persistent i describe the political background to such clear institutional change and the nature of the two economic regimes the first providing coordination and commitment mechanisms to sustain adequate returns for high investment the second failing to do so the same change in political climate after 1974 raised public sector deficits and debt fuelling a trade deficit and monetary expansion entry to the ec did not cause the economic slowdown in greece but transfers from the ec did mask the underlying problem delaying necessary adjustment recent attempts to reverse greece s fortunes are in the right direction but as yet inadequate george alogoskoufis

determinacy and learnability of monetary policy rules in small open economies this paper evaluates under which conditions different taylor type rules lead to determinacy and expectational stability e stability of rational expectations equilibrium in a simple new keynesian small open economy model developed by gali and monacelli 2005 in particular we extend the bullard and mitra 2002 results of determinacy and e stability in a closed economy to this small open economy framework our results highlight an important link between the taylor principle and both determinacy and learnability of equilibrium in small open economies more importantly the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways a key finding is that contrary to bullard and mitra expectations based rules that involve the cpi and or the nominal exchange rate limit the region of e stability and the taylor principle does not guarantee e stability we also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability yet these rules might not be desirable since they promote greater volatility in the economy

pioneering price level targeting the swedish experience 1931 1937 in september 1931 sweden became the first country to make the stabilization of the domestic price level the official goal of its monetary policy actually the only country that so far has adopted such an explicit price level target starting from the issues and concepts familiar from research and policy experience of inflation targeting as contrasted to price level targeting this paper examines the evolution of the swedish price level targeting in the 1930s we bring out a number of similarities and differences between price stabilization in the 1930s and in the 1990s

are interest rate regressions evidence for a taylor rule abstract in a variety of recent papers researchers have found that interest rate behaviour approximately follows a taylor rule we show that such interest rate behaviour results when the central bank may be following quite different monetary policy rules from the one proposed by taylor in other words an interest rate relation with output and inflation does not identify a central bank reaction function

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

the economics of worldwide stagflation the last fifteen years have witnessed dramatic changes in economics not only in the manner in which the economics profession views economics but also in the manner in which the general public views economics and economists by the late 1960 s there had emerged more or less a consensus macroeconomic framework that is an agreed upon structure to be used to study economic problems at the aggregate level robert solow stated as quoted in leijonhufvud 1968

optimal interest rate rules and inflation stabilization versus price level stabilization abstract this paper compares the properties of interest rate rules such as simple taylor rules and rules that respond to price level fluctuations called wicksellian rules in a basic forward looking model by introducing appropriate history dependence in policy wicksellian rules perform better than optimal taylor rules in terms of welfare robustness to alternative shock processes and are less prone to equilibrium indeterminacy a simple wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule i e a monetary policy rule that implements the optimal plan and that is also completely robust to the specification of exogenous shock processes

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

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

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

price level targeting and stabilisation policy a survey this paper surveys recent articles on the costs and benefits of price level targeting focusing its use as a tool for stabilisation policy it discusses how price level targeting can affect the short run trade off between output and inflation variability by influencing inflation expectations it reviews how assigning an explicit price level target to a central bank that is unable to commit to its future policies can improve economic performance it surveys other potential benefits and costs among the costs it underlines the importance of perfectly rational expectations for the optimality of price level targeting and an exacerbation of the time inconsistency problem

comparing new keynesian models of the business cycle a bayesian approach abstract the baseline new keynesian model cannot replicate the observed persistence in inflation output and real wages for sensible parameter values as a result several extensions have been suggested to improve its fit to the data we use a bayesian approach to estimate and compare the baseline sticky price model of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 and three extensions our empirical results are as follows first we find that adding price indexation improves the fit of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 model second models with both staggered price and wage setting dominate models with only price rigidities third introducing wage indexation does not significantly improve the fit fourth all model estimates suggest a high degree of price stickiness fifth the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts finally the estimated inflation parameters of the taylor rule are stable across models

self selecting agri environmental policieswith an application to the don watershed we consider a model of regulation for nonpoint source water pollution through non linear taxation subsidization of agricultural production farmers are heterogenous along two dimensions their ability to transform inputs into final production and the available area they possess asymmetric information and participation of farmers to the regulation scheme put constraints on the optimal policy that we characterize we show that a positive relationship between size of land and ability may exacerbate adverse selection effects we calibrate the model using data on a french watershed and we simulate the optimal second best policy and characterize the allocation of the abatement effort among the producers

the price effects of joining the euro modelling the greek experience using non linear price adjustment models the widely held hypothesis that accession to the emu has caused a structural increase in greek consumer prices is tested no econometric evidence of such an effect is found there is strong evidence of a multiple structural breaks in the process driving greek equilibrium consumer prices and b non linear price adjustment the findings explain the post emu accession acceleration in greek prices as normal equilibrium restoring behaviour they also have important policy implications for the countries planning to join the euro in the foreseeable future

why is canada s price level so predictable this paper draws attention to the fact that the price level in canada which is an inflation targeter has strayed little from the path it would have taken had inflation never wandered off the 2 target since its introduction and has tended to revert to that path after temporary deviations econometric analysis using bayesian estimation suggests that a low probability can be assigned to explaining this behavior by mutually offsetting shocks more plausible is the assumption that inflation expectations and interest rates are determined in a way that is consistent with an element of price level path targeting

wicksellian rules and the taylor principle some practical implications in this paper we derive and compare the determinacy regions of price level targeting rules wicksellian rules and taylor rules in a standard new keynesian model we conclude that wicksellian rules do not require the taylor principle to hold in order to induce determinacy our results have two implications first in a univariate setting the estimation of simple taylor rules when the true rule is wicksellian can lead to the erroneous conclusion that the equilibrium is indeterminate second indeterminacy is ruled out when using system based methods but it can be concluded that the central bank is less averse to inflation movements than it actually is

weak instrument robust tests in gmm and the new keynesian phillips curve we discuss weak instrument robust statistics in gmm for testing hypotheses on the full parameter vector or on subsets of the parameters we use these test procedures to reexamine the evidence on the new keynesian phillips curve model we find that u s postwar data are consistent with the view that inflation dynamics are predominantly forward looking but we cannot rule out the presence of considerable backward looking dynamics moreover the phillips curve has become flatter recently and this is an important factor contributing to its weak identification

agricultural runoff as a nonpoint externality a theoretical development the purpose of this paper is to develop and explore a theory dealing with an important facet of agricultural runoff problems agricultural runoff is a nonpoint externality with notable implications for both research and policy a nonpoint externality exists whenever the externality contributions of individual economic agents cannot be practically measured by direct monitoring without monitoring regulations on emissions cannot be enforced and charges or subsidies cannot be assessed thus policies which are usually suggested for pollution abatement are not available there is great need for a theoretical base that can adequately capture these facts such a theory yields some important implications even before specific empirical applications the economic problem of agricultural runoff can be separated into three distinct categories first the sediment nutrients and chemicals removed by runoff represent a loss of resources to the individual farmer these costs are borne privately by farmers second if the discount rate of the individual farmer is greater than the social discount rate or if the farmer has a planning horizon which is shorter than society s the farmer will mine the soil resource at a rate which is more depletive than is socially optimal this is a temporal externality a third category involves the conservation of mass physical resources lost by the individual farm must appear elsewhere in the environment in sufficient quantities these resources are pollutants since water is the primary transport media for these resources it is water that is polluted by soil nutrients and agricultural chemicals this spatial externality has been the focus of much research here we intend to develop a theory for these issues to employ it to suggest a revised research methodology and to provide some important conclusions about alternative runoff policies only two of the three categories of agricultural runoff problems involve externalities and only the spatial externality is considered here

price level versus inflation targeting abstract this paper shows that price level targeting outperforms inflation targeting in the standard new keynesian model under the assumption that the central bank is forced to operate in an environment characterized by discretion in the benchmark case with no persistence in the shocks the commitment solution can be fully replicated intuitively price level targeting introduces history dependence and a stationary level of prices both of which are prominent features of the commitment solution

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

trend inflation taylor principle and indeterminacy positive trend inflation shrinks the determinacy region of a basic new keynesian dynamic stochastic general equilibrium model when monetary policy is conducted by a contemporaneous interest rate rule neither the taylor principle which requires the inflation coefficient to be greater than one nor the generalized taylor principle which requires that the nominal interest rate to be raised by more than the increase in inflation in the long run is a sufficient condition for local determinacy of equilibrium this finding holds for different types of taylor rules inertial policy rules and price indexation schemes therefore regardless of the theoretical setup the monetary literature on interest rate rules cannot disregard average inflation in both theoretical and empirical analyses

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

pitfalls of forward looking monetary policy a distinctive feature of the procedures recently adopted by inflation targeting central banks is their forward looking character forecasts of the economy s future evolution conditional upon alternative policies play a central role in the banks deliberations to an extent that the procedures adopted are sometimes characterized as forecast targeting this emphasis upon the future consequences of policy is unsurprising in an approach that tries to maintain as transparent as possible a relation between the banks9 decisions and the ultimate goals of monetary policy after all current decisions can still affect the future but not the past nonetheless common descriptions of how inflation targeting is or should be practiced go too far in proposing purely forward looking procedures i shall argue instead that an optimal framework for the conduct of monetary policy must generally be history dependent in ways

determinacy learnability and monetary policy inertia we show how monetary policy inertia can help alleviate problems of indeterminacy and non existence of stationary equilibrium observed for some commonly studied monetary policy rules we also find that inertia promotes learnability of equilibrium the context is a simple forward looking model of the macroeconomy widely used in the rapidly expanding literature in this area we conclude that this might be an important reason why central banks in the industrialized economies display considerable inertia when adjusting monetary policy in response to changing economic conditions

a small open economy model with transaction costs in foreign capital abstract in this paper we develop a stochastic dynamic general equilibrium model for a small open economy in the real business cycle modeling tradition household preferences depend on private and public consumption and leisure production technology depends on public capital government finances its investment consumption and transfer payments by means of a proportional income tax rate households buy and sell foreign assets in an international capital market with transaction costs and also receive transfer payments from abroad we calibrate the model for the greek economy the volatility persistence and co movement properties of the business cycle component of the data generated by the model are broadly consistent with the actual behavior of the corresponding actual data we use the model to investigate the response of major macroeconomic variables to temporary and permanent changes in government policy variables foreign transfers and the rate on return of foreign assets we find that increasing government consumption and domestic transfers financed through distorting taxation lowers capital labor in most cases and output while it increases foreign asset holdings both in the short and the long run increasing government investment financed by distorting taxation eventually increases capital and output and decreases labor finally transfers from abroad decrease capital labor and output while they increase consumption

demand for greek imports using multivariate cointegration techniques starting from a theoretical model with importable traded and nontraded goods we identify a long run relationship among greek imports domestic activity and relative prices the model supports weak exogeneity of relative prices which means that greek importers take the price of imports as given the greater than one income elasticity which persists even when cyclical demand effects are netted out means that greece faces an external constraint on growth as verified by the negative effect of the disequilibrium error in the short run output equation the findings of this paper suggest that the price of domestic tradeables and nontradeables are significant determinants of the long run and short run import demand while instability in domestic inflation is found to have a strong short run depressing effect on domestic activity

taylor rules and the deutschmark dollar real exchange rate we explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate the interest rate rule in conjunction with some standard assumptions implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials the weights are functions of the parameters of the interest rate rule an initial look at german data yields some support for the model

the regulation of non point source pollution under imperfect and asymmetric information abstract this paper develops a bayesian framework for discussing the role of information in the design of non point source pollution control mechanisms an ambient concentration tax is examined allowing for spatial transport among multiple zones imposition of the tax requires costly measurement of concentrations in selected zones and the selection of zones for measurement must be undertaken without perfect information regarding several parameters of the problem potentially crucial information issues discussed include a the impact of asymmetric priors regarding fate and transport b the cost of measuring ambient concentration and c the optimal acquisition of information regarding fate and transport

environmental policy under imperfect information incentives and moral hazard abstract when net emissions of individual polluters cannot be efficiently monitored then emissions charges controls on emissions levels or subsidies for emissions reduction are not effective as environmental policy instruments this paper proposes instruments that can be applied in such limited information situations these instruments take the form of contracts between a pollution control agency and individual polluters the contracts include a combination of fines and subsidies that induces dischargers to follow optimal environmental policies in the absence of individual monitoring

the perils of taylor rules abstract since john taylor s 1993 carnegie rochester conf ser publ policy39 195 214 seminal paper a large literature has argued that active interest rate feedback rules that is rules that respond to increases in inflation with a more than one for one increase in the nominal interest rate are stabilizing in this paper we argue that once the zero bound on nominal interest rates is taken into account active interest rate feedback rules can easily lead to unexpected consequences specifically we show that even if the steady state at which monetary policy is active is locally the unique equilibrium typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap that is a steady state in which the nominal interest rate is near zero and inflation is possibly negative journal of economic literature classification numbers e52 e31 e63

uncoordinated agricultural and environmental policy making an application to irrigated agriculture in the west agriculture and the environment are linked by a mutual reliance on scarce resources and prevalent market distortions in this paper we examine the efficiency costs of policies that correct distortions in one sector while ignoring those in another the dual distortions of an environmental externality and water subsidies are studied in the context of irrigated agriculture in california the welfare costs associated with independent action by either a water agency or an environmental authority when that policy maker attempts to correct the respective market distortion without consideration of the distortion in the other market are estimated policies to correct the two distortions are found to be complementary under these conditions the independent correction of either distortion improves welfare by at least 118 per acre in most cases the simultaneous adoption of various second best policies further reduces welfare losses associated with these distortions

monetary policy in a low inflation environment developing a state contingent price level target a number of academic studies find that either price level targeting or temporary above average inflation are nearly optimal policies to address a liquidity trap crisis still central bankers and the public generally question whether even a temporarily higher inflation rate could be beneficial in addressing a liquidity trap or could be consistent with price stability over the longer term at the same time however the federal reserve s projections for high unemployment and low inflation do not seem to be consistent with the best monetary policies to address the fed s dual mandate responsibilities accordingly it is useful to seriously discuss these potentially beneficial alternative policies

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

inflation targeting price path targeting and indeterminacy abstract in this paper we examine the areas of indeterminacy in a flexible price rbc model with shopping time role for money and a central bank that uses an interest rate rule to target inflation and or the price level we present analytical results showing that although inflation targeting often results in real indeterminacy a price level target generally delivers a unique equilibrium for a relevant range of policy parameters

on the macroeconomic implications of maintenance in public capital abstract an infrastructure led growth model is constructed where the durability of public capital is endogenous and varies according to its usage and the level of maintenance expenditure policy changes in total expenditures and the maintenance share are shown to be important for the steady state and the dynamic behavior of the economy the optimal growth maximizing taxation burden which goes to both new investment and maintenance expenditure is in contrast to standard results from other growth models larger than the elasticity of infrastructure in the production function the optimal shares of maintenance expenditure and investment in new capital that ensure maximum utilization of public resources are calculated

employment output and political business cycle effects in the greek non tradable sector starting from a theoretical model with traded and non traded goods a long run labour demand equation is identifed with employment being proportional to relative output and prices using greek data the model supports weak exogeneity of relative prices and fiscal expansion with respect to the long run parameters in the cointegrating space it also highlights structural rigidities in the functioning of the greek labour market political business cycle and partisan effects are shown to affect the short run employment decisions

incomplete exchange rate pass through and simple monetary policy rules abstract this paper investigates the performance of various monetary policy rules in an open economy with incomplete exchange rate pass through implementing monetary policy through an exchange rate augmented policy rule does not improve social welfare compared to using an optimized taylor rule irrespective of the degree of pass through a direct exchange rate response improves welfare only if the other reaction coefficients on inflation and output are sub optimal however an indirect exchange rate response through a policy reaction to consumer price index cpi inflation rather than to domestic inflation is welfare enhancing this result is independent of whether society values domestic or cpi inflation stabilization

ambient taxes when polluters have multiple choices economic research on environmental policy design has largely been concerned with the merits of emissions based economic incentives e g emissions charges emissions reduction subsidies transferable discharge permits ambient based tax subsidy schemes have drawn considerable interest in nonpoint pollution literature as alternatives to emissions based instruments expanding especially on segerson s seminal article this article examines the optimal design and budget balancing properties of ambient tax subsidy schemes under more realistic assumptions about the dimensions of firms choice sets than prior research

campaign contributions as a commitment device we explore the idea that the influence of interest groups in elections may have positive economic effects since the investment decisions of firms determine economic growth and employment voters have a common interest in making their governments commit to policies that encourage private investments however governments may renege on promises for economic stability and choose excessively leftist policies campaign contributions by firms tend to restrain the scope for such opportunism and provide a commitment device this is achieved if firms after the policy is chosen contribute to the governing party or to its rivals

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

testing wagner s law using disaggregated public expenditure data in the case of greece 1958 93 the factors that have influenced the growth of public expenditures have been the subject of extensive theoretical and empirical research the validity of wagner s law in the case of greece is tested using disaggregated public expenditure data for the period 1958 93 the methodology employed is that of cointegration and the related notion of error correction results reported here suggest that in the case of greece only the growth of defence expenditure may be explained in terms of wagner s law

monetary policy when potential output is uncertain understanding the growth gamble of the 1990s abstract t he fed kept interest rates low and essentially unchanged during the late 1990s despite a booming economy and record low unemployment these interest rates were accommodative by historical standards nonetheless inflation remained low how did the fed succeed in sustaining rapid economic growth without fueling inflation and inflationary expectations in retrospect it is evident that the productive capacity of the economy increased yet as events unfolded there was uncertainty about the expansion of the capacity of the economy and therefore about the sustainability of the fed s policy this paper provides an explanation for the success of the fed in accommodating growth with stable inflation in the late 1990s it shows that if the central bank is committed to reverse policy errors it makes because of unwarranted optimism inflation can remain in check even if the central bank keeps interest rates low because of this optimism in particular a price level target which is a simple way to model a commitment to offset errors can serve to anchor inflation even if the public does not share the central bank s optimism about shifts in potential output the paper shows that price level targeting is superior to inflation targeting in a wide range of situations the paper also provides econometric evidence that in contrast to earlier periods the fed has recently put substantial weight on the price level in setting interest rates moreover it shows that cpi announcement surprises lead to reversion in the price level finally it provides textual evidence that alan greenspan puts relatively more weight on the price level than inflation

measuring the marginal cost of nonuniform environmental regulations a method is presented for measuring the marginal welfare cost of environmental regulations affecting agriculture the method incorporates output market effects and recognizes diversity in production conditions among crops regions and seasons an important advantage of the method is that only regional outputs and changes in regional production costs are needed to calculate deadweight loss thus simplifying the measurement of welfare changes this feature of the model is significant since the complexity and substantial data requirements of most existing impact models cause many environmental regulations to be enacted with inadequate analysis of their economic impacts the method also disaggregates welfare impacts by crop place and time thus encouraging the implementation of nonuniform interventions that achieve a given level of environmental quality more efficiently than uniform policies

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

research issues in nonpoint pollution control research on nonpoint pollution control instruments has focused primarily on incentives applied either to production inputs that affect nonpoint pollution or to ambient pollution concentrations both approaches may in theory yield an efficient solution however input based incentives will generally have to be second best to make implementation practical design issues include which inputs to monitor and the rates to apply to them the limited research indicates that second best input based incentives can be effective in adjusting input use in environmentally desirable ways alternatively ambient based incentives have theoretical appeal because efficient policy design appears to be less complex than for input based incentives these incentives have no track record nor close analogues that demonstrate potential effectiveness however research on how households and firms might react in response to ambient based incentives is needed before these instruments can be seriously considered

following the leader the relevance of the fed funds rate for inflation targeting countries abstract in a new keynesian model for a small open economy we derive a cpi inflation based taylor rule that implements the flexible price allocation we conclude that in this rule the natural rate of interest should be linked to the foreign interest rate and to domestic productivity shocks this rule ensures that the cpi real rate moves in order to induce movements in consumption that are coherent with the flexible price allocation the empirical evidence shows that inflation targeting central banks respond to movements in the fed funds rate besides reacting to expected cpi inflation and to the domestic output gap this is true for developed and emerging economies furthermore we find that in emerging countries the response to foreign variables is not different from zero as suggested by theory when domestic inflation rather than cpi inflation is introduced in the policy rule

contract design for the purchase of environmental goods from agriculture an environmental stewardship program whereby farmers are paid directly for the environmental goods they provide is developed by combining the microparameter distribution model with mechanism design principles the program overcomes the information asymmetry between farmers and governments and accounts for the deadweight losses from distortionary taxes the characteristics of optimal input and payment schedules of the program are derived these optimal schedules are determined by the tradeoffs between farming profits environmental benefits and deadweight losses from taxes and are second best except under restrictive conditions on deadweight losses from taxes and on the marginal product of inputs and marginal pollution costs

regulatory policy design for agroecosystem management on public rangelands this paper analyzes regulatory design for agroecosystem management on public rangelands we present an informational and institutional environment where three of the most prominent regulatory instruments on public rangelands input regulation cost sharing taxation and performance regulation can be de ned and compared the paper examines how the optimal regulation is shaped by the informational and institutional constraints faced by federal land management agencies flmas such as the bureau of land management and the u s forest service these constraints include informational asymmetries between ranchers and flmas limitations on flmas ability to monitor ranch level ecological conditions and constraints on flmas actions due to budget limitations and restrictions on the level of penalties they can assess the theoretical model extends the previous work of baker 1992 prendergast 2002 and hueth and melkonyan 2009 by considering optimal regulation by a budget constrained regulator in an environment of asymmetric information and moral hazard

structural changes in the us economy is there a role for monetary policy this paper investigates the contribution of monetary policy to the changes in output growth and inflation dynamics in the us we identify a policy shock and a policy rule in at ime varying coefficients var using robust sign restrictions the transmission of policy shocks has been relatively stable the variance of the policy shock has decreased over time but policy shocks account for a small fraction of the level and of the variations in inflation and output growth volatility and persistence we find little evidence of a significant increase in the long run response of the interest rate to inflation a more aggressive inflation policy in the 1970s would have produced large output growth costs

stabilisation policy rational expectations and price level versus inflation targeting a survey we survey literature comparing inflation targeting it and price level targeting pt as macroeconomic stabilisation policies our focus is on new keynesian models and areas that have seen significant developments since ambler s 2009 price level targeting and stabilisation policy a survey journal of economic surveys 23 5 974 997 survey optimal monetary policy the zero lower bound financial frictions and transition costs of adopting a pt regime ambler s conclusion that pt improves social welfare in new keynesian models is fairly robust but we note an interesting split in the literature pt consistently outperforms it in models where policymakers commit to simple taylor type rules but results in favour of pt when policymakers minimise loss functions are overturned with small deviations from the baseline model since the beneficial effects of pt appear to hang on the joint assumption that agents are rational and the economy new keynesian we discuss survey and experimental evidence on rational expectations and the applied macro literature on the empirical performance of new keynesian models overall the evidence is not clear cut but we note that new keynesian models can pass formal statistical tests against macro data and that models with rational expectations outperform those with behavioural expectations i e heuristics in direct statistical tests we therefore argue that policymakers should continue to pay attention to pt

regional determinants of technical efficiency evidence from the greek economy abstractthis paper emphasizes the role of regional determinants in the technical efficiency of the greek economy we employ a regional production function which is simultaneously estimated with an inefficiency equation the results underline the considerable and growing core periphery disparities in technical efficiency they show the significant efficiency enhancing impact of intra regional market access and its dispersion they also demonstrate that interregional market access specialization sectoral concentration and human capital exert a positive but varying influence on the efficiency of greek regions

tax and spend or spend and tax empirical evidence from greece spain portugal and ireland the paper examines empirically the relationship between government revenues and expenditures in four european countries greece spain ireland and portugal in relative terms all four may be considered as the poorest members of the european union yet they present a fairly diverse picture as far as their macroeconomic performance and fiscal position is concerned the empirical findings from cointegration and causality tests that are reported here indicate that in the case of greece and ireland tax and spending decisions are taken simultaneously by the fiscal authority the tax and spend hypothesis is supported in the case of spain while absence of any causal ordering between government expenditure and tax revenues has been established for portugal

price level targeting and stabilization policy we construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy prices are fully flexible and money is essential for trade our main result is that if the central bank pursues a price level target it can control inflation expectations and improve welfare by stabilizing short run shocks to the economy the optimal policy involves smoothing nominal interest rates that effectively smooths consumption across states