a simple model of disinflation and the optimality of doing nothing abstract this paper analyses the optimal monetary policy of a government facing an election whose disinflationary abilities are uncertain under the assumption that reducing inflation is costly because of backward looking contracts it is shown that if the government likes to be in power it can choose to do nothing on the inflation front in order to avoid risking electoral defeat should disinflation prove too costly the costs of inflation reduction are worth bearing if initial inflation is sufficiently high therefore it is possible to observe quick disinflations that however stop short of low inflation

stabilizing a previously centrally planned economy poland 1990 stabilization in poland guillermo a calvo and fabrizio coricelli we examine the dynamics of the january 1990 stabilization programme in poland focusing on the substantial and sudden collapse in industrial output and inflation persistence we discuss three non mutually exclusive explanations of these phenomena 1 excessive initial stocks of inventories 2 an exogenous fall in household demand and 3 tight credit we conjecture that tight credit was at centre stage it helped to magnify the fall in output and to coordinate such a fall across sectors we base such a conjecture on the existence of substantial credit segmentation and on the underdevelopment of private credit markets the latter may explain the substantial shrinkage of interenterprise credit compounding the initial contraction of bank credit they argue that credit tightness is reflected in firms offering wages below the programme s ceilings especially given that firms are controlled by workers councils this conjecture is further strengthened by the fact that wages increased and even went beyond the programme s ceilings as credit expanded during the year we argue that the wage hike may be the reason why credit expansion did not result in a major output recovery and inflation persisted during the year

the credibility of policy announcements greek evidence this paper by using error correction ec methodology along with chow stability tests examines whether three cases of policy announcements in greece over the 1975 1995 period have been considered credible or not by the public focusing on the phillips curve trade off the empirical findings reveal that two out of three policy announcements are characterized as credible by private agents

wage and price control policies in transition economies abstract this paper studies the structural impact of wage and price control policies in transition economies using a two sector three factor small open economy model it illustrates the results quantitatively via simulation exercises at the earlier stage of the transition when labor is immobile a strict control on the price of the nontradables and the wage rate minimizes the fall in employment and output also a more severe control on the price of the nontradables than on the wage rate alleviates the fall in the real wage at negligible costs in lost employment and output at the later stage of the transition when labor becomes mobile the liberalization of the price of the nontradables can proceed faster than that of the wage rate this policy combination increases employment and output and reduces the shortage for the nontradables but lowers the real wage

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

the quantitative importance of news shocks in estimated dsge models we estimate a dynamic stochastic general equilibrium dsge model with several frictions and both unanticipated and news shocks using quarterly u s data from 1954 to 2004 and bayesian methods we find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output consumption and investment growth interest rate and the relative price of investment the unanticipated shock to the marginal efficiency of investment is the dominant shock accounting for over 45 of the variance in output growth news shocks account for less than 15 of the variance in output growth within the set of news shocks nontechnology sources of news dominate technology news with wage markup news shocks accounting for about 60 of the variance share of both hours and inflation we find that in the estimated dsge model i the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions and ii while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply the contributions of nontechnology news shocks are relatively more sensitive

how is the debt managed learning from fiscal stabilizations this paper provides evidence on the behavior of public debt managers during fiscal stabilizations such episodes provide valuable information on the way debt instruments are chosen because they allow to overcome the problem that policymakers expectations of interest rates are generally not observable we find that governments increase the share of fixed rate long term debt denominated in the domestic currency the higher is the conditional volatility of short term interest rates the lower are long term interest rates and the stronger is the fall in long term rates that follows the announcement of the stabilization program by contrast conventional measures of the relative cost of issuing long term debt such as the long short interest rate spread are not significant this evidence suggests that debt managers tend to prefer long to short maturity debt because they are concerned about the risk of refinancing at higher than expected interest rates however when long term rates are high relative to their expectations they issue short maturity debt to minimize borrowing costs

monetary mystique secrecy and central banking abstract the paper contains a discussion of the role of secrecy in the implementation of monetary policy it documents the federal reserve s defense of secrecy as argued in a recent freedom of information act suit the federal reserve s arguments are evaluated on the basis of economic theory theoretical papers related to the secrecy issue are reviewed the discussion highlights a number of potential benefits and costs of central bank secrecy and identifies some conditions under which secrecy could be socially beneficial

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

model uncertainty learning and the gains from coordination this paper considers gains from international economic policy coordination when there is uncertainty concerning the functioning of the world economy but also learning about the true model on the part of policymakers the paper reports estimates of plausible alternative versions of a standard two country model activist policy either coordinated or uncoordinated may produce large welfare losses in the absence of learning if policymakers behave in the wrong model hence exogenous money targets and freely flexible exchange rates may be best however model learning from observations on macroeconomic variables causes coordinated policies to dominate activist uncoordinated policies or exogenous money targets copyright 1991 by american economic association

the political economy of stabilization commitment capacity and public response abstract political pressures are generally recognized as important in determining success or failure of economic stabilization and adjustment programs but there has been little comparative analysis of the politics of stabilization this study examines the factors affecting i political leaders commitment to stabilization measures often called political will ii governmental ability to implement stabilization measures and iii the responses of key interest groups and the public at large to those measures the study also discusses political implications of the design of programs and the attempted speed of stabilization and sketches the tactics available to governments to manage political risk including partial compensation persuasion diversion or obfuscation and containment of protest the discussion is based on case studies of stabilization efforts in five fairly poor small highly trade dependent countries ghana in the late 1960s and early 1970s and zambia kenya sri lanka and jamaica in the late 1970s and early 1980s a subsidiary theme within the broader discussion is the ways in which the political economy of stabilization may differ in such countries as compared to larger semi industrialized economies

monetary news shocks we pursue an empirical strategy to identify a monetary news shock in the u s economy we use a monetary policy residual along with other variables in a vector autoregression var and identify a monetary news shock as the linear combination of reduced form innovations that is orthogonal to the current residual and that maximizes the sum of contributions to its forecast error variance over a finite horizon real gdp declines in a persistent manner after a positive monetary news shock this contraction in economic activity is accompanied by a fall in inflation and a rapid increase in the nominal interest rate

term premia and inflation uncertainty empirical evidence from an international panel dataset this paper provides cross country empirical evidence on bond risk premia i construct a panel of zero coupon nominal government bond yields spanning ten industrialized countries and nearly two decades i hence compute forward rates and then use two different methods to decompose these forward rates into expected future short term interest rates and term premiums the first method uses an affine term structure model with macroeconomic variables as unspanned risk factors the second method uses surveys i find that term premium estimates declined across countries over the sample period especially in countries that appear to have reduced inflation uncertainty by making substantial changes in the monetary policy frameworks of their central banks during the recent financial crisis term premiums have remained flat and even declined further in some countries perhaps reflecting the effects of quantitative easing actions by many central banks

the transition to a market economy pitfalls of partial reform we present a theory of a partial economic reform of a planned economy similar to the one that took place in russia since 1988 and in china earlier in such a reform some markets are liberalized in the sense that producers can sell output to whomever they want including private firms at free prices but at the same time must sell to state firms at state prices we show that such a reform can result in a substantial diversion of subsidized inputs away from state firms and toward private firms even when state firms value these inputs more the result may be a reduction of total output the simple analysis sheds light on many consequences of the soviet reform such as breakdown of coordination of production increased state policing of delivery quotas prohibitions of trading cooperatives and opposition to privatization the model also explains why partial reform failed in russia but worked in china

fiscal conservatism as a response to the debt crisis abstract in this paper we develop a model in which social conflict and adjustment costs induce delayed inflation stabilization we show that the longer this delay is the less demanding are the conditions that some groups will accept in order to stabilize in the context of the latin american debt crisis our model gives a rationale for the time lag between the outset of the crisis and the implementation of reform programs as well as for the strongly conservative nature of those that are currently being implemented

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

growth under uncertainty with experimentation abstract we introduce bayesian learning into a stochastic growth model and study the effect of experimentation on the optimal level of the investment decision and on the amount of information gathering when more investment produces more information experimentation can push towards a lower level of investment thus reducing information acquisition symmetrically when more investment reduces information experimentation can increase investment and again decrease information gathering these results run contrary to intuitions generated by the standard literature on experimentation

intertemporal speculation shortages and the political economy of price reform price controls often focus on commodities that are storable and can thus be used in intertemporal speculation second opposition to dismantling of controls is often based on claims of low supply response and greatly bolstered if a strong supply response fails to materialise this is especially relevant in eastern europe where experience with markets is limited we show the difficulties that these two factors create for gradual decontrol of prices we endogenise the probability of a collapse of the reform programme and show that such endogeneity in the presence of intertemporal speculation leads to a strong case against gradualism the smaller the initial price increase the lower the observed supply elasticity and the greater the probability that the programme of reform will be abandoned this implies that the policy that makes most sense from a microeconomic point of view decontrol immediately is also advisable from a macroeconomic point of view credibility problems which are at the core of the transitional output losses that characterise most stabilisation programmes will be much less under a cold turkey approach and so will therefore transitional unemployment

net migration endogenous incomes and the speed of adjustment to the north south differential the model of net migration is developed in the next section in section iii the model is used to estimate the net flow of heterogeneous labor over the 1965 to 1970 period between the northern and southern regions of the united states forty eight age education race specific categories of labor constitute the observation set the estimates of the net migration function are then used with the relationship developed in section iv to obtain a measure of the speed for each labor category at which the long run north south income disparity was being eliminated the estimates obtained indicate that migration systematically induced by interregional income differences does operate to close the income differential but that the process is quite slow for every demographic category considered excerpt

optimal sequencing of credible reforms with uncertain outcomes abstract we study a two period representative agent economy in which economic liberalization is modeled as adding a positive random variable to the marginal product of capital we show liberalization always raises the expected utility of agents agents may respond to this by increasing consumption in the first period consequently consumption in the second period is sometimes smaller than the in the first depending on the realization of the random variable this tail may cause the government to reject liberalization of declining gdp enters negatively in the government s objectives we apply these results to the chilean experience of the 1980s

futures prices as risk adjusted forecasts of monetary policy many researchers have used federal funds futures rates as measures of financial markets expectations of future monetary policy however to the extent that federal funds futures reflect risk premia these measures require some adjustment in this paper we document that excess returns on federal funds futures have been positive on average and strongly countercyclical in particular excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business cycle indicators such as treasury yield spreads and corporate bond spreads excess returns on eurodollar futures display similar patterns we document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy we also show that risk premia matter for some futures based measures of monetary policy shocks used in the literature

coherence and the credibility of convertibility announcements abstract the recent devaluation crisis in mexico and its tequila effect elsewhere illustrate that two credibility problems associated with convertibility policies currency boards are announcements that violate truth telling and a non zero probability of policy failure we derive the trade off between these problems when announcements resemble cheap talk the strategic uncertainty created by this trade off implies that both the government and investors should recognize the presence of fed watchers who exploit any policy inconsistency for their own gain in this context credibility can be restored if the policy is coherent if it eliminates the marginal benefits for fed watching jel e63 e58 f40 1997 published by elsevier science ltd

the virtues of gradualism and legitimacy in the transition to a market economy this paper presents a simplified model of sectoral restructuring in eastern europe a move towards allocative efficiency is desired by the reform minded government but the shift to higher productivity which such efficiency requires would lead to massive layoffs and labour reallocation in the transition period we look at the impact of political constraints unanimity and or majority worker approval on reform proposals when the government faces a heterogeneous workforce holding private information on relative outside opportunities when the budgetary consequences of exit compensations are so important as to make partial reforms preferable to full reforms gradualism emerges as the optimum in a dynamic context without government commitment it is also shown that under democratic majority rule a government in control of the agenda of reforms can win majority approval for plans which end up hurting majority interests intertemporally by threatening to switch majorities in future reform proposals this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

learning experimentation and monetary policy abstract we present a model of monetary policy where the policymaker faces uncertainty about which he is learning in a bayesian fashion a fixed money supply rule is not optimal since the learning leads to adjustments in the monetary action we present cases in which it is optimal to bear some cost in terms of current output performance in order to gain information that can be used in the formulation of future monetary policy experimentation therefore pays we also show that even passive learning without experimentation still leads to an activist monetary policy i e one that is responsive to new information

the dynamics of optimal gradual stabilizations inflation inertia may be quite tenacious because of the simultaneous interaction between policy actions and inflationary expectations under imperfect credibility this result is particularly relevant for understanding some of the failed efforts to stabilize inflation in south america this article deals with the issue of inertia in the framework of imperfect information about the type of the policymaker and extends the existing models to an infinite horizon because policymakers do not have perfect control of inflation a frivolous stabilizer may deviate from the policies of a serious stabilizer without necessarily being unmasked immediately when the difference in the ability of strong and weak policymakers to control inflation is large unexpected inflation may be persistently negative for quite a while thus causing reduced economic activity and giving the indication that credibility is low if the policymaker persists with the stabilization this pattern gradually disappears as his reputation rises but before this final stage the serious policymaker has to compromise his inflation objective in view of adverse expectation about this type and pay the cost of imperfect credibility

the effects of monetary policy news and surprises there is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks the shocks that are investigated however almost exclusively represent unanticipated changes in policy which surprise the private sector and which are typically found to have a delayed and sluggish effect on output in this paper we estimate a new keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks the paper shows that the conventional estimates confound two distinct effects on output an effect due to unanticipated or surprise shocks which is smaller and more short lived than the response usually obtained in the literature and a large delayed and persistent effect due to anticipated policy shocks or news news shocks play a larger role in influencing the business cycle than unanticipated policy shocks although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited

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

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

structural uncertainty and subsidy removal for economies in transition abstract economies in transition are faced with a high degree of structural uncertainty i e uncertainty about which it is possible to learn through experience we study structural uncertainty s effects on a subsidy removal program subsidy removal causes unemployment but yields fiscal benefits and facilitates private sector growth when the policymaker does not know the speed with which the private sector absorbs the unemployed he will be driven toward a more decisive and therefore more informative policy the model also rationalizes policy reversals and implies that irreversibility constraints and political instability dampen the learning effect making policy more gradualist

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

can news be a major source of aggregate fluctuations a bayesian dsge approach we examine whether the news shocks as explored in beaudry and portier 2004 can be a major source of aggregate fluctuations for this purpose we extend a dynamic stochastic general equilibrium model a la christiano eichenbaum and evans 2005 by allowing news shocks on the total factor productivity and estimate the model using bayesian methods estimation results on the japanese and u s economies show that 1 the news shocks play an important role in business cycles 2 a news shock with a longer forecast horizon has larger effects on nominal variables and 3 the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks

estimating the effects of forward guidance in rational expectations models abstract simulations of forward guidance in rational expectations models should be assessed using the modest policy interventions framework introduced by eric leeper and tao zha that is the estimated effects of a policy intervention should be considered reliable only if that intervention is unlikely to trigger a revision in private sector beliefs about the way that monetary policy will be conducted i show how to constrain simulations of forward guidance to ensure that they are regarded as modest policy interventions and illustrate the technique using a medium scale dsge model estimated on us data i find that many experiments that generate the large responses of macroeconomic variables deemed implausible by many economists the so called forward guidance puzzle are not modest policy interventions those experiments should therefore be treated with caution since they may prompt agents to believe that there has been a change in the monetary policy regime that is not accounted for within the model more reliable results can be obtained by constraining the experiment to be a modest policy intervention in the cases i study the quantitative effects on macroeconomic variables are more plausible when this constraint is imposed

foreign exchange reform in iran badly designed badly managed abstract the paper first highlights the undesirable economic consequences of the multiple exchange rate regime adopted in iran soon after the islamic revolution it then critically assesses the government s march 1993 attempt to unify the exchange rates from two perspectives 1 a the pace timing and the rate chosen for unification 2 b the design administration and therefore the effectiveness of government s safety net policies to overcome the adverse welfare effects of the attempted unification it identifies some of the fundamental political economy obstacles to the exchange rate reform in particular and economic liberalization in general and draws policy implications for the future course of the reform and the economy

a theory of public debt management with unobservable demand the literature on debt management has devoted little attention to the practice of floating debt using subscription issues i e at a fixed price and quantity even if this practice is rather common in many countries as an alternative to placement techniques that involve competitive bidding the focus of this paper is on this marketing strategy for a public debt manager facing uncertain market conditions in particular we consider a framework where government bonds are the only investment opportunity the debt manager therefore holds monopoly power over the market for financial assets and solves his profitmaximisation problem by setting the price of the bonds in the face of an unobservable demand function intertemporal economic decisions under uncertainty can be modelled as multiperiod control problems when the parameters of the true model are unknown as in our case a tradeoff typically arises between current profits and the value of information which can be extracted through price experimentation in an active learning framework in particular agents are assumed to use such information in order to update their stock of knowledge according to bayes rule 2 several applications of the modelling strategy discussed above have been explored for example an active learning setting can fit the description of the problem of a consumer facing the decision to buy a good with uncertain quality alternatively the same setting can be employed in order to investigate the behaviour of a monopolistic firm facing an unknown demand for its product in this paper we model the macroeconomic policy oriented issue previously illustrated as a stochastic multiperiod control problem with learning we therefore assume that debt policy and in particular the debt manager s pricing strategy is the result of the intertemporal maximisation of the government s objective function subject to a budget constraint in a context where information is optimally employed in the decision process in addition the

shortages and price decontrol considers a study which analyzed the impact of the political process on the dynamics of reform with a background on the economics of reform data and methods used findings and its implications

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

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

the design of reform packages under uncertainty the authors present a model of large scale economic reforms modeled on the transition process in eastern europe with aggregate and individual uncertainty concerning the outcome of reforms the government is assumed to choose the speed and sequencing of reforms the authors compare big bang strategies with gradualist reform packages they show that gradualist reform packages may be easier to get started optimal sequencing of reforms should aim at creating constituencies for further reforms and gradualism may generate a higher investment response because of a lower option value of waiting than would a big bang approach copyright 1995 by american economic association

factor movements and commodity trade as complements abstract several models are presented in which factor mobility leads to an increase in the volume of world trade the models share the common characteristic that the basis for trade is something other than differences in relative factor endowments these alternative bases for trade include returns to scale imperfect competition production and factor taxes and differences in production technology taken together the models suggest a more general idea the widely held notion that trade in goods and factors are substitutes is in fact a rather special result which is a general characteristic only of factor proportions models

the timing of stabilizations abstract a unified framework is developed for examining stabilization from high inflation in a stochastic environment optimality conditions for the delay in the adoption of a stabilization program and its possible abandonment are derived and analyzed the anticipation of external aid is shown to reinforce delay in the implementation of a stabilization also conditionality agreements become necessary to ensure that the administration of external aid will increase the probability of success of the program the presence of speculative activity reinforces delay in the implementation of stabilizations and is found to necessitate otherwise unnecessary frontloading of adjustment

animal spirits investment and international capital movements abstract in the aftermath of the debt crisis developing countries are endeavoring to repatriate flight capital and to resume domestic private investment yet investment and the associated capital inflows continue to be disappointing and highly uneven over time in many cases this paper provides a model of investment and capital movements in and out of such countries central to the paper is the introduction of fiscal increasing returns to domestic capital into a standard dynamic optimizing model the resulting system may display multiple steady states and surprising dynamic behavior initial conditions and expectations both matter in selecting the equilibrium on which the economy converges for some initial conditions animal spirits can determine the course of investment and capital flows a limit cycle may occur around one of the welfare inferior equilibria along that cycle capital stocks and relative prices display endogenous fluctuations

credibility and changes in policy regime this paper addresses the issue of credibility from an econometric perspective it develops a rational expectations model of inflation in which the dynamics are driven by the level of government spending and by the effect of past inflation rates on the value of real taxes government expenditure is modeled as an exogenous autoregressive process subject to discrete changes in regime the regimes are defined by whether the level of spending is or is not consistent with the rate of inflation targeted by the government as part of a stabilization program in making their money demand decision the agents need to construct probability inferences regarding the state of the expenditure process credibility is quantified by the agents inferred probability that the joint observation of inflation the nominal interest rate and government spending is generated by the reformed expenditure regime in an application to israel results indicate that the failed stabilization program of november 1984 was less than fully c

an exploration into pigou s theory of cycles abstract this paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy s future needs in terms of capital the idea has a long history in the macroeconomic literature as reflected by the work of pigou industrial fluctuation macmillan london 1926 the contribution of this paper is twofold first we illustrate the type of general equilibrium structure that can give rise to such phenomena second we examine the extent to which such a model can explain the observed pattern of u s recessions frequency depth without relying on technological regress we argue that such a model offer a framework for understanding elements of both the recent u s recession and of the asia downturns of the late 1990s

monetary policy and policy credibility theories and evidence within the past decade there has been a significant shift in attitude by many western industrialized countries toward the objectives and conduct of national economic policy the events of the 1970s accelerating inflation and stagnant economic growth motivated the view that inflation had created its own stubborn self sustaining momentum that either was not amendable to the influences of conventional macroeconomic policy or else would yield to such influences only at unacceptable costs this led to the development of a program aimed at reestablishing control over prices while minimizing any adverse consequences of anti inflationary policies on output and employment seen as a new monetary experiment the essential ingredients included prudent financial management abstinence from discretionary intervention commitment to intermediate targets and above all prior announcement of these policies evidence of this program and its effects can be found oni the continents of europe north america and latin america and provide further important lessons in anti inflationary management this paper is a survey of recent theoretical developments in monetary policy which among other issues attempt to explain one rationale for this program and the likely consequences thereof to the extent that the new program of monetary and fiscal reform was deliberately made public and impressed upon citizens as an overriding commitment of governments in advance of its execution reflects a prevailing opinion that economic policies are more effective if they are credible to private economic agents this view emphasized forcefully by william fellner 1976 1979 may be seen as being mainly due to the assimilation of the rational expectations hypothesis

what causes the failure of inflation stabilization plans abstract the paper discusses the causes of failure of inflation stabilization plans following a description of stylized facts of inflation stabilization a model of balance of payments crises is presented highlighting some of the main factors leading to the collapse of stabilizations empirical results obtained when estimating a binary probit model over a panel of 34 stabilizations identify real exchange rate appreciation lack of foreign reserves and government budget deficits as the main causes of failure of inflation stabilization plans this is consistent with the model presented in this paper with the stylized facts of stabilizations and with some of the models found in the literature

governance structures and the durability of economic reforms evidence from inflation stabilizations abstract this paper investigates the relationship between a country s political economic and institutional environment and its ability to implement sustainable economic reform programs the policy issue on which the study focuses is inflation stabilization it consists principally of econometric estimations of the relationship between the success of stabilizations in a large sample of countries and several political and economic explanatory variables the hypotheses tested are drawn both from the recent macroeconomic literature on policy credibility and from political science the major findings include the following 1 a despite the conventional wisdom to the contrary political repression does not appear to be an effective means for implementing sustainable stabilization policies durable economic reforms and political freedoms appear to be complementary 2 b as has been previously argued theoretically and demonstrated empirically political instability is detrimental to policy reform 3 c the political will and popular consensus for stabilization policies are enhanced during a severe economic crisis 4 d there is weak evidence that intervention by the international monetary fund rather than supporting reform programs can undermine their credibility

credibility disinflation and gradualism abstract the following conundrum is examined success or failure of a disinflation policy depends largely on expectations of maintained lower money growth this suggests two equilibria a a policy is expected to be maintained and succeeds policy makers are re elected maintaining the policy and validating initial expectations b a policy is not expected to be maintained and fails policy makers are not re elected the policy is not maintained validating initial expectations

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

labor force migration and allocative efficiency in the united states the roles of information and psychic costs this paper examines the relative importance of information psychic and other costs of relocation as mitigating factors off sets to spatial earnings differentials within the migration decision the method employed for this examination is based upon 1 observation of relationships between the geographic allocation and personal characteristics of labor force migrants and 2 inferences drawn from these observations about the relative importance of various relocation cost components empirical analyses of the migration decision based upon this indirect method provide important insights on both the determinants and allocative efficiency of interstate labor force migration in the united states excerpt

reputation in a model of monetary policy with incomplete information abstract previous models of rules versus discretion are extended to include uncertainty about the policymaker s type when people observe low inflation they raise the possibility that the policymaker is committed to low inflation type 1 this enhancement of reputation gives the uncommitted policymaker type 2 an incentive to masquerade as the committed type in the equilibrium the policymaker of type 1 delivers surprisingly low inflation with corresponding costs to the economy over an extended interval the type 2 person mimics this outcome for awhile but shifts eventually to high inflation this high inflation is surprising initially but subsequently becomes anticipated

economic reform and dynamic political constraints in this paper we examine the impact of political constraints on economic reform plans with special reference to the transition from centrally planned to market economies we analyse the problem of an agenda setting reform minded government facing a bureaucracy or industrial sector for which allocative efficiency requires redundancies and an increase in work intensity the government also tries to minimize the rents conceded to its heterogeneous workforce we examine two types of political constraints unanimity rule and majority rule both in a one period and a two period horizon the main results are the following first of all we show how adverse selection and time consistency may generate the widely observed feature of gradualism as an ingredient of an optimal reform second under a majority rule it is shown to be possible for the government to obtain a majority vote for a reform scheme that intertemporally hurts majority interests indeed the government can improve rent extraction through the strategic use of the threat of future proposals the group which expects to be in the minority tomorrow may accept concessions while its votes can be used to extract rents from another group these results suggest that in a dynamic context democratic constraints should not be overestimated as an obstacle against efficiency enhancing economic reforms the results of this paper may throw some light on the political economy of current reforms in eastern europe governments and political decision makers in general always face political constraints when elaborating reform proposals they know that the need to overcome potential opposition from various groups of the population constrains proposals for change political constraints vary depending on the specific institutional structure of society and are clearly different under a military dictatorship than under a parliamentary democracy the role of political constraints seems particularly important in eastern europe today where new democratic governments face the huge task of achieving the transition to a market economy while the introduction of democracy may have removed some important obstacles to economic change namely the veto power of a powerful nomenclatura under communist one party rule fears are expressed that it could potentially jeopardize economic reforms which may during the transition period hurt a majority of the population what can economic theory tell us about optimal economic reform under political constraints this paper starts addressing this ambitious question by looking at structural reform focusing on a restructuring of economic sectors which requires massive redundancies and a significant rise in labour productivity our model illustrates the case of planning

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

factor endowments heterogeneous labor and north south migration the relationship between the relative factor endowments of heterogeneous labor in the north and south of the united states and interregional labor migration is examined the purpose of the present paper is to make explicit a sufficient set of conditions that will support a factor endowment based migration model and to evaluate the advantages and weaknesses of that model the models predictions are tested using data from the 1970 census excerpt

changes in the federal reserve communication strategy a structural investigation this paper structurally investigates the changes in the fed s communication strategy since the mid 1990s through the lens of anticipated and unanticipated disturbances to a taylor rule the anticipated disturbances are identified using treasury bond yield data in estimating a dynamic stochastic general equilibrium dsge model with a term structure of interest rates our estimation results show that the fed s decisions were unanticipated for market participants until 1999 but thereafter a larger portion of its future policy actions tended to be communicated in advance we also find that the relative contribution of the anticipated monetary policy disturbances to macroeconomic fluctuations became larger after 1999 the bond yield data is indispensable to these results since it contains crucial information on an expected future path of the federal funds rate

obstacles to disinflation what is the role of fiscal expectations persistently high expected inflation often makes it difficult for policy makers to recover from inflationary episodes without substantial output losses using survey data from eleven disinflation episodes we can assess whether the more or less sluggish decline of inflation rates towards lower target levels is related to backward looking pricing behavior or to imperfect credibility of the stabilization efforts we find that expectations of future inflation play a much more important role than past inflation in shaping the inflation process second we find that an improvement in various measures of fiscal balances significantly reduces inflation expectations this evidence suggests that when attempting to stabilize inflation priority should be given to building fiscal credibility oya celasun r gaston gelos and alessandro prati

a structural decomposition of the us yield curve abstract by expanding the macro part of macro finance models historical fluctuations in us bond yields turn out to be largely consistent with the rational expectations hypothesis we estimate a medium scale macro finance dsge model of the term structure to establish this our finding contrasts with existing macro finance models and suggests that their small scale or non structural perspective on the macroeconomy mutes expectations thereby underestimating the expectations hypothesis potential out of sample forecasts are competitive with more flexible term structure models given the empirical validation we interpret various episodes through the lens of the model and investigate which structural shocks cause the yield curve to contain information about future growth

optimal reform postponement abstract the postponement of a reform program recognized to be necessary to control inflation is examined as a decision in an optimal control framework with a deteriorating and increasingly costlier inflation it is found that reforms are both more likely to be implemented and more likely to fail as inflation rises factors suggesting improved future conditions for a reform such as the possibility of external aid induce further postponement indexation and any other measures that reduce the current costs of inaction have the same effect

polarization political instability and active learning in a multiperiod setting decision makers can learn about the consequences of their decisions through experimentation we examine how polarization and political instability affect learning through experimentation we distinguish two cases i the decision to be made is not salient and does not affect the outcome of subsequent elections exogenous elections and ii the decision is salient and the election outcome depends on it endogenous elections it is shown that while the possibility of learning increases activism the existence of political instability distorts learning furthermore we demonstrate that when elections are exogenous polarization between political parties does not always decrease active learning

on stabilization plans and central bank independence we argue that the benefits of appointing an independent central banker may go beyond low inflation rates within a government debt stabilization framework and with a decentralized policy making where the government acts as a stackelberg leader delegating monetary policy to an indepenent authority monetary policy to an independent authority turns out to be a discipline for the government and overall this leads to better results

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

building consensus for stabilizations abstract several stabilization attempts in the 1980s followed a two stage approach in the first stage some partial and temporary measures were taken to achieve a very drastic fall in the inflation rate in the second stage which sometimes never materialized the fiscal reform was implemented we develop a model where under certain conditions it will be rational for a government that cannot implement a lasting stabilization to go ahead with this two stage approach allowing for political uncertainty introduces the possibility that after the first stage is in place the government is not able to achieve the fiscal reform the probability of success of the program is positively related to the level of individual uncertainty and the speed of learning about the benefits of stabilization and negatively related to the cost of financing the budget deficit during the first stage and under certain conditions to the degree of political uncertainty

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations

credibility and stabilization the paper deals with stabilization as a one shot problem to ask what credibility means in a world where programs will succeed with probability one a model is spelled out where the equilibrium program has some ex ante probability of failure the model draws attention to the factors that raise or lower the probability of success of a stabilization program and thus offers a positive theory of stabilization reputation that emerges as a central element in repeated games has no role in this model

capital repartriation and the waiting game abstract a stylized fact on post stabilization economies is that getting the fundamentals right even though necessary is not sufficient to ensure a prompt and costless resumption of growth uncertainty whether stabilization can in fact be sustained confers an option value to postponing investment in domestic real assets