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

economics of residential crowding in developing countries residential crowding is one of the most noticeable problems of housing in developing countries crowding in these countries is characterized by two important phenomena first a room is usually shared by more than two persons second a single dwelling unit is occupied by more than one household in developed countries residential crowding was widely observed in their early industrial cities but is no longer common yet it constitutes a housing problem for their low income groups a typical policy objective addressed to residential crowding in both developed and developing countries is the provision of a single dwelling unit for every household for instance in the united kingdom the 1945 housing white paper stated that the government s first objective is to afford a this analysis is part of a study of the korean housing market sponsored by the world bank primary credit is due to gill chin lim and james follain in this paper helpful comments have been received from david bradford james trussel and bryan brown an earlier version of this paper was presented at the second conference on major international economic issues university of southern california los angeles and february 1979

rogoff s conservative central banker restored we show that delegation of monetary policy to a weight conservative central banker can be desirable although the government can also use an inflation contract an employment target an inflation target or any combination of these to control the central banker the key feature of our model is a stochastic inflation bias arising when wage setters receive some information about a supply shock prior to signing nominal wage contracts weight conservatism is found to be desirable if fully state contingent delegation is not possible and the stochastic inflation bias cannot be eliminated by optimal choice of the delegation parameters

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

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

the choice of conservative bankers in open economies monetary regime options for europe that governments should delegate the operation of monetary policy to independent central banks is widely advocated for a closed economy the optimal choice results in a banker who is more conservative than the representative government assigning a lower weight on output in her welfare function but not overconservative thereby allowing monetary policy to adjust to shocks however for open economies the exchange rate externality results in an inefficient nash equilibrium to this delegation game monetary union or cooperation in the optimal choice of banker can internalize the externality these options are assessed under symmetric and asymmetric shocks assuming different levels of fiscal transfers copyright 1996 by royal economic society

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

the demand for residence site characteristics the analysis of residential site choice is the primary concern in urban economics research on this problem is deficient in that rigorous theoretical models concentrate almost exclusively on access to the central business district cbd in this decision process while empirical models have been specified in a manner that is inconsistent with standard demand theory although these models possess the power of simplicity they are unable to explain the non monotonic location patterns which characterize urban areas without resorting to ad hoc theorizing this article develops and tests a model which is consistent with demand theory and is also capable of explaining non monotonic location patterns the hedonic rent function is seen as an intermediate step in the analysis of location which allows one to construct the complete data matrix necessary for the estimation of a set of demand functions for location specific traits the analytical importance of the functional form of this hedonic function is briefly noted finally the empirical analysis notes the importance of children in determining residential preferences with special attention being directed to the endogeneity of children with respect to the process of residential choice the traditional location model is generally tested by regressing some transformation of the annual rental payments or alternatively property value r on access or lack of access to the city center acc a vector of other locational traits z income i and a race variable mc

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

delegation in international monetary policy games abstract in this paper we show that delegation of monetary policy to an independent and more conservative central banker is an optimal policy in a multi country framework with monetary spillovers among countries even in the absence of time inconsistency credibility issues we also study the welfare implications of delegating monetary policy and extend our analysis to the case of coordination of monetary policies

housing crowding in developing countries and willingness to pay for additional space the case of korea the very rapid rate of urban population growth in developing countries is placing great strain on their housing stock housing policies which aim at reducing or eliminating crowding are generally based on notions of needs and standards of adequacy which are more often based on arbitrarily selected criteria than on domestic economic conditions this paper attempts to evaluate the willingness to pay for additional housing space by households and the validity of target housing standards the paper uses three different estimation procedures each with its own strengths and conceptual limitations to determine whether they yield consistent estimates of household willingness to pay for space they show consistently that the willingness to pay for additional space is less than 25 percent of the value of an extra unit of space everything else being equal

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

inflation targeting under asymmetric preferences this paper develops and estimates a game theoretical model of inflation targeting where the central banker s preferences are asymmetric around the targeted rate specifically positive deviations from the target can be weighted more or less severely than negative ones in the central banker s loss function it is shown that some of the previous results derived under the assumption of symmetry are not robust to this generalization of preferences estimates of the central banker s preference parameters for canada sweden and the uk are statistically different from the one implied by the commonly used quadratic loss function

the contribution of environmental amenities to low income housing a comparative study of bangkok and jakarta central and local governments and their creditors are increasingly interested in cost recovery for public services these strategies have two aims increasing revenues and making a better connection between benefits received and consumer bills this paper estimates a hedonic model for household level data in a rare contrast of slums in two asian mega cities to provide comparative information about how the poor value environmental amenities and basic infrastructure access the results suggest that slum housing prices do reflect differentials in public service access and that rough estimates of the value of access can be cheaply and usefully obtained for planning purposes

announcements inflation targeting and central bank incentives this paper studies the incentives a central bank faces in announcing inflation targets when the central bank has private information about the economy and the public is uncertain about the central bank s preferences targeting rules in the absence of announcements reduce the inflationary bias of discretionary policy but they distort the central bank s response to private information about the economy this distortion is eliminated when the central bank is allowed to announce the inflation target announcements also affect credibility although the way they do so depends on the exact definition of credibility that is employed in standard models of monetary policy in which dynamic inconsistency plays a prominent role announcements from the central bank about its policy inten tions are not believable the central bank has an incentive to lie yet central banks often do make announcements and they are legally required to do so in some cases the bank of england for example must issue periodic inflation reports the chairman of the federal reserve is required by the humphrey hawkins act to testify before congress twice each year to explain the fed s policy actions and to detail the fed s outlook for future economic develop ments similarly the reserve bank of new zealand is required under the reserve bank act of 1989 to publish policy statements that spell out its plans the january 1994 legislation governing the banque de france requires its gov ernor to appear before parliament and the european central bank must under the maastricht treaty report at least annually to the european parlia ment if public statements about policy intentions are not credible the question naturally arises as to why central banks are frequently required to make them the answer of course is that announcements do provide the public with some information given the growing interest in policy transparency particu larly among those central banks that have adopted some form of inflation targeting it is perhaps surprising that there has been relatively little explicit analysis of how inflation targeting requirements might combine with reporting requirements to influence the informational content of announcements the conduct of stabilization policies and the central bank s credibility the purpose of this paper is to analyse the way inflation targeting affects the incentives the central bank faces in announcing targets when the central bank has private information about the economy and the public is uncertain about the central bank s preferences inflation targeting has seen increased popularity in recent years but a fixed target for inflation is generally suboptimal in the face of supply shocks while state contingent targets are viewed as not feasible an important result of this paper is that allowing the central bank to announce its own inflation target

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

bilateral real exchange rates and migration abstractmigrants who move across borders are to a large extent motivated by the prospect of earning higher incomes at destination which can be partly transferred back to their countries of origin via remittances this suggests that the real exchange rate can influence the incentives to migrate as it determines the purchasing power of expected income in terms of the currency of the origin country this article investigates empirically how bilateral real exchange rate fluctuations influence international migration flows to do so we build a dataset of 30 oecd destination countries and 165 origin countries over the period 1980 2011 and estimate an equation derived from a micro founded random utility maximization model that allows for unobserved heterogeneity between migrants and non migrants our results show that migration flows are highly responsive to bilateral real exchange rates a 10 real appreciation of the currency of the destination country is associated with an 18 2 19 4 increase in migratio

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

mechanisms for achieving monetary stability inflation targeting versus the erm first we modify the barro gordon model so that a credibility stabilization trade off will remain even when a performance contract of the type envisaged by walsh 1995 is imposed on the central bank governor we do this by modeling a real interest rate bias along with the inflation bias then we discuss how various inflation penalties might actually be imposed on a central bank and ask whether inflation targeting supported by one or another of the penalties is likely to bring a better resolution to the credibility stabilization trade off than the erm

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

inflation targets and contracts with uncertain central banker preferences within a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker s preferences the optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks however variability due to shocks is enhanced by uncertain central banker preferences quadratic contracts are shown to overcome this problem partly but the advantages of delegation may still be dominated by the excess variability due to shocks hence the credibility stabilization tradeoff is restored

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

inflation targeting some extensions previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks consequences of model uncertainty and effects of interest rate smoothing and stabilization model uncertainty output stabilization and interest rate stabilization or smoothing all call for a more gradual adjustment of the conditional inflation forecast toward the inflation target the conditional inflation forecast is the natural intermediate target during inflation targeting the optimal way of reacting to shocks is hence to check how they affect the inflation forecast and then take the appropriate action jel classification e42 e52 e58

the specification of hedonic indexes for urban housing most studies evaluating the effect on housing prices of regulatory programs for controlling urban growth use econometric methods hedonic price models without considering the research design aspects of the task this article examines the strengths and

determinants of bargaining outcome in single family housing transactions an empirical examination using a hedonic regression model this paper examines determinants of bargaining outcome in single family housing transactions it divides potential factors into three broad categories dwelling attributes site amenities and seller s and buyer s characteristics results with use of 1990 data for the reno sparks area in nevada show that bargaining outcome is determined by seller s asking price buyer s household income and some of the dwelling attributes and site amenities this paper concludes that factors affecting housing price do not necessarily affect bargaining outcome and first time home buyers do not statistically bargain less than repeat home buyers

the demand for housing characteristics in developing countries this paper develops and estimates an econometric model of the household demand for housing characteristics the model is estimated using data from five cities and three developing countries overall the procedures employed work well in a wide variety of circumstances more specifically it is found that 1 household willingness to pay for living space increases with income but at a less than proportionate rate 2 willlingness to pay for living space declines as household size increases 3 willingness to pay for several quality measures structural quality wall roof and floor quality is quite responsive to income

a repeated game model of monetary union given a policy rule of the common central bank of a monetary union member countries with different preferences about inflation and facing asymmetric shocks have different incentives to secure political intervention in the bank s operation and achieve the temporary benefit of surprise inflation this is modelled as a repeated game and the most cooperative outcome subject to the countries incentive compatibility constraints is found the optimal rule responds flexibly to asymmetric shocks adjusting policy away from the full commitment level toward the discretionary level so as to maintain the worse hit country s incentive to abide by the rule

housing consumption and permanent income in developing countries estimates from panel data in el salvador the estimation of the parameters of housing demand equations occupies a prominent place in the urban economics literature of developed countries see de leeuw 4 and mayo 20 for thorough reviews of the state of the empirical art most research has focused on income and price elasticities of housing demand using both aggregated and micro level data the main conclusions of those studies which do not suffer from aggregation or other biases seem to be that a on average for a large segment of the population including both renters and owners permanent income elasticities are well below one b permanent income elasticities for owners ranging mostly from 0 5 to 0 7 in mayo s review are slightly higher than estimates for renters which ranged mostly from 0 3 to 0 5 c as predicted by the theory the permanent income demand elasticity generally exceeds that of current

impact of improved water services in informal neighbourhoods in ouagadougou abstractthis article examines the impact of a project to improve water services in underserved neighbourhoods in ouagadougou on household water access conditions we used the propensity score matching method to analyse data from a survey carried out in 2011 and found that the improvement project cut the cost of water neighbourhood wide by 94 cfa francs per cubic meter reduced the portion of this expense by 1 of the average household budget and cut the daily time to collect water by 10 13 min the results that we obtained through the propensity score matching method differ from those obtained by simply comparing the averages of the neighbourhoods participating in the project to those that did not participate this indicates that the propensity score matching method of impact evaluation is valuable in supplying decision makers with nonbiased estimates of the link between ease of access to water and poverty reduction

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

simultaneity in the market for housing characteristics abstract the nature of simultaneity in the markets for housing characteristics is examined simultaneity is found to arise in the implicit markets for individual characteristics because of the presence of nonlinearity in the market hedonic price function for housing however this simultaneity is not the kind discussed by s rosen j political econ 82 34 55 1974 between firm supplies and household demands as a result the rosen suggestion of identifying demand with firm supply shifters is inappropriate among the alternative approaches to identification the most desirable involve use of data over two or more markets in which residence for a given household is exogenous to the choice of housing

hedonic prices demands for urban housing amenities and benefit estimates abstract this paper uses a rosen two step hedonic price trait demand approach to estimate demand functions for a vector of urban amenities to ascertain whether this theoretically preferred approach yields benefit estimates which differ from the oft used ridker henning one step hedonic approach we conduct a sensitivity analysis we find that the two step approach does yield different benefit estimates and that the differences are large for some amenities the estimates are sensitive to the functional form of the hedonic equation when the forms are significantly different according to modified box cox results but are not particularly sensitive to specification of the amenity demand equation

the demand for housing in developing countries empirical estimates from household data cities in developing countries are growing at extraordinary rates often compressing into decades the urbanization process that has taken centuries in developed countries in coping with this growth public authorities have devised a wide range of policy instruments to influence the rate and character of city expansion to meet the needs of people for shelter and urban services and to allocate resources in ways that redistribute both the costs and benefits of urban growth ideally such policy formulation should be informed by a careful understanding of the behavior of urban markets in fact little information on market behavior is available to the policymakers of developing countries such basic information is needed for improved project design and even more important for improved sector wide policies this paper reports on research conducted at the world bank to increase understanding of developing country housing markets in particular of housing demand behavior while the overall project examines both the demand for housing characteristics and the demand for housing as a composite good this paper addresses only the latter the objectives of this paper are 1 to review briefly previous evidence on housing demand parameters in developing countries 2 to present new evidence on housing demand parameters based on application of standardized models and comparable variable definitions in 16 cities in eight developing countries colombia egypt el salvador ghana india jamaica korea and the philippines and 3 to examine similarities and differences among cities in housing demand and in a preliminary way offer explanations for place to place differences limited comparisons are also made to two u s cities in order to begin comparison of developing and developed country market behavior

nonlinear budget constraints and consumer demand an application to public programs for residential housing abstract this study presents a methodology for exploiting the nonlinear hedonic nature of housing prices to estimate the compensated demands of households for particular housing attributes the methodology is employed to provide hicksian benefit measures of a particular housing subsidy program typical of those undertaken recently in developing countries

monetary policy with uncertain parameters this thesis contains four chapters each of which examines different aspects of the uncertainty facing monetary policymakers monetary policy and market interest rates investigates how interest rates set on financial markets respond to policy actions taken by the monetary authorities the reaction of market rates is shown to depend crucially on market participants interpretation of the factors underlying the policy move these theoretical predictions find support in an empirical analysis of the u s financial markets predicting monetary policy using federal funds futures prices examines how prices of federal funds futures contracts can be used to predict policy moves by the federal reserve although the futures prices exhibit systematic variation across trading days and calendar months they are shown to be fairly successful in predicting the federal funds rate target that will prevailafter the next meeting of the federal open market committee from 1994 to 1998 monetary policy with uncertain parameters examines the effects of parameter uncertainty on the optimal monetary policy strategy under certain parameter configurations increasing uncertainty is shown to lead to more aggressive policy in contrast to the accepted wisdom should central banks be more aggressive examines why a certain class of monetary policy models leads to more aggressive policy prescriptions than what is observed in reality these counterfactual results are shown to be due to model restrictions rather than central banks being too cautious in their policy behavior an unrestricted model taking the dynamics of the economy and multiplicative parameter uncertainty into account leads to optimal policy prescriptions which are very close to observed federal reserve behavior

is the fed too timid monetary policy in an uncertain world estimates of the taylor rule using historical data from the past decade or two suggest that monetary policy in the u s can be characterized as having reacted in a moderate fashion to output and in

incentives compensation and social welfare first version received january 1985 final version accepted august 1986 eds alternative wage structures under conditions of moral hazard are analysed from a social welfare standpoint it is argued that ex post equity judgements in an uncertainty context should incorporate a preference for positive correlation of utilities of different individuals in the design of compensation schemes this may give rise to a conflict between ex post equity objectives and the need to provide effort incentives relative performance clauses in compensation schemes that are useful for providing incentives are undesirable from an ex post equity standpoint this is demonstrated by showing a in a context of independent production uncertainties every rankorder tournament is welfare dominated by a set of independent randomized contracts and b welfare optimal compensation schemes in general depend separately on an equity and an incentive component that tend to correlate agent compensations in different directions a central question in welfare economics concerns the design of a system of rewards for productive effort that balances distributive considerations with the provision of effort incentives this issue has usually been studied in the context of a model due to mirrlees 1971 in which the conflict between distribution and incentives arises because the social planner lacks perfect information about the abilities of individuals in this paper we analyse a model in which individual abilities are publicly known a conflict between distribution and incentives arises instead from the existence of uncertainty in production processes and a moral hazard problem stemming from the unobservability of workers effort most analyses of moral hazard have concentrated on the tradeoff between insurance of agents against wage fluctuations and provision of effort incentives the context is generally taken to be a capitalist firm where the self interested planner has a residual claim on workers output in other settings such as public sector or labour managed firms the planner may have preferences over the distribution of ex post welfare among the workers this paper analyses how with such preferences effort incentives under moral hazard are constrained both by insurance and by distributive considerations in section 2 we suggest that a concern for ex post equality of individual welfares can be expressed by a preference for positive correlation among welfare levels we then consider what properties of the ex post welfare function incorporate this preference for correlation welfare functions that are additively separable across individuals are inappropriate no matter how concave with them expected value depends only on the

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

hedonic prices and the demand for housing attributes in a third world city the case of ibadan nigeria this paper estimates the demand functions for a set of housing attributes for the city of ibadan nigeria using rosen s two step estimation procedure the empirical results reveal that the most im

what should central banks do what should be their macroeconomic objectives and operations before turning to the normative question of what central banks hereafter cbs should do we need to deal with the contentious issue of what cbs actually can do in the field of monetary control one might think that this should be a relatively straightforward matter of fact instead there is a yawning chasm of mutual misunderstanding which has persisted for decades between economists and those working in cbs which has bedevilled the subject virtually every monetary economist believes that the cb can control the monetary base hereafter mo and subject to errors in predicting the monetary multiplier the broader monetary aggregates as well after all mo apart from some relatively unimportant qualifications about coins from the mint represents the liabilities of the cb and the cb should be able to control its own liabilities by open market operations hence the normal assumption is that mo is controllable within a narrow margin if the central bank should fail to do so it must be because it has chosen some alternative operational guide for its open market operations e g holding interest rates constant at some level which operational rule is frequently decried as sub optimal assuming that cbs can almost perfectly control mo economists have constructed several simulated schemes of how an optimal rule for so doing might be set up mccallum i993a b provides good recent examples almost all those who have worked in a cb believe that this view is totally mistaken in particular it ignores the implications of several of the crucial institutional features of a modern commercial banking system notably the need for unchallengeable convertibility at par between currency and deposits and secondly that commercial bank reserves at the cb receive a zero or belowmarket rate of interest the first means that fluctuations in the public s demand for cash which are both strongly seasonal and somewhat unpredictable must be accommodated the second means that commercial banks will not willingly hold free reserves at the end of each day assuming for this purpose that a stated reserve ratio has to be held on each day rather than averaged over say a couple of weeks beyond that needed to meet late fluctuations in the demand for cash after the money market has closed or become thin only if interest rates fall to the very low levels of the i930s and or risks of interest rate variability or late in the day cash runs increase would commercial banks increase their desired free reserves thus given the