modelling the domestic and foreign tourist arrivals to tamil nadu india in recent years due to the indian federal government s and tamil nadu state government s various initiatives and promotional activities foreign and domestic tourist arrivals in tamil nadu are on the increase this article aims to model the monthly tourist arrivals foreign as well as domestic in tamil nadu for monthly time series data during the period 1998 to 2002 using univariate time series models as both time series show strong seasonal patterns we also investigate the possibility of seasonal unit roots in the domestic and foreign tourist arrivals series the results show that significant growth in domestic and foreign arrivals takes place during the months december to january growth rate for domestic tourist arrivals is positive during april and may but is negative for the foreign tourist arrivals during april and insignificant during may such information would be very useful to the tamil nadu government and the tourism industry in maximizing the usage of available tourist spot infrastructure

optimal monetary policy and the role of hybrid inflation price level targets this study investigates the role of hybrid inflation price level targets as a solution to the well known stabilization bias problem that arises under discretionary policies the analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank s target variables in addition to the output gap growth target the reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way in particular the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate

implications of dynamic optimal taxation for the evolution of tax structures the paper by james alt 1983 lists several interesting observations in relation to the evolution of tax structures in many developed countries the share of tax revenues collected as direct taxes has been increasing over the past century although the timing of the major increases has varied among the countries on page 201 he says the growth of the business share of direct taxes was the most striking feature of figure 1 the figure compares seven countries in the years 1880 and 1979 some of that growth took place between 1955 and 1979 as figure 4 indicates direct taxes on households have become more progressive over time irt attempting to explain these and other observations alt pays little or no attention to economic efficiency considerations this is perhaps understandable since most of the taxation literature has dealt with static models recently however several papers have

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

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

designing monetary policy when unemployment persists this paper investigates how unemployment persistence affects the optimal delegation of monetary policy to an independent central banker cb two opposing forces are shown to be at work with more persistence the government s incentive to stabilize the economy is greater but if the cb is forward looking its incentive to create inflation surprises is also greater we show that owing to the second effect the government may wish not to delegate at all unlike the case where there is no persistence in the event that the government does delegate the paper identifies conditions under which either effect dominates in the government s choice of conservatism of the cb we compare delegation to discretion and precommitment using a diagrammatic approach that may be of independent interest we also present some preliminary empirical evidence on the cross country relationship between unemployment persistence and inflation that appears consistent with the model s predictions

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

conservative central banks and nominal growth exchange rate and inflation targets a framework is developed in which inflation biases with different target variables are compared a nominal growth target measured in consumer prices may yield less stabilization bias than a nominal income growth target exchange rate and inflation targets result in less stabilization bias than an income growth target the more important the terms of trade stabilization persistence in output causes excessive stabilization of productivity shocks and of shocks to the terms of trade under discretion an inflation weight conservative central bank is more likely under an inflation target than under an exchange rate target and less likely under a nominal income growth target

an analysis of count data models for the study of exclusivity in wine consumption several models which analyse count data have been proposed in econometric literature these models allow the discrete nonnegative nature of specific phenomena of interest to be gathered in a appropriate way and can be useful for the explanation of specific preference structures among individuals in this work an analysis of the number of wine types consumed by residents of tenerife is carried out with an aim to observe which characteristics determine the exclusivity in its consumption given the current context of increased competition in this sector the specific characteristics of the considered variable allow the study to cover two aspects the first is methodological and is seen by the variety of models that may be considered in this case this focus consists in comparing several possibilities which fit the type of count data involved the second aspect is clearly empirical and is based on the description of not only the most appropriate decision making mechanism for the study but in the identif

the council of economic advisors from stabilization to resource allocation this paper traces the changing role of the council of economic advisers in the 50 years since its creation the cea s focus has shifted from the design of policies to achieve full employment to one of advising on the much enlarged spending and tax activities of the federal government the cea s original attention to achieving cyclical stability through fiscal policy diminished as economists changed their views about the inherent stability of the economy and the usefulness of fiscal policy with the shift of macroeconomic policy to the federal reserve the cea s macroeconomic role has diminished but not disappeared the rapid growth of government spending during the past five decades has greatly increased the role for the cea in seeking efficient resource allocation this abstract was borrowed from another version of this item

optimal inflation targets conservative central banks and linear inflation contracts comment inflation targeting regimes like those of new zealand canada the united kingdom and sweden are interpreted as having explicit inflation targets and implicit employment targets without employment persistence an inflation target conservative central bank eliminates the inflation bias mimics an optimal inflation contract and dominates a rogoff weight conservative central bank with employment persistence a state contingent inflation bias and a stabilization bias also arise a constant inflation target and a constant inflation contract are still equivalent a state contingent inflation target combined with a weight conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment copyright 1997 by american economic association

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

central bank inflation contracts and strategic wage setting in a multiunion economy abstract a shared feature of models used to investigate the welfare enhancing potential of a central bank inflation contract is their stochastic nature central to the benefits conferred by such a contract is the presence of supply shocks in constructing a framework where wages are set strategically by a number of nonatomistic inflation averse unions this note identifies circumstances in which an inflation contract improves macroeconomic outcomes even in the absence of supply shocks

cost efficiency of the lodging industry in the tourist destination of gran canaria spain abstract this paper analyses whether the expansion of the lodging industry in gran canaria canary islands spain which has occurred during the last 10 years as a result of increases in tourist numbers and the accommodation made available to them has been accompanied by a parallel increase in efficiency over the same period thus the cost efficiency and economic scale of the lodging industry hotels and apartments on the island of gran canaria during the period 1991 2002 are studied assuming that such efficiency is non constant over time the estimation of a stochastic cost frontier model was considered by using a panel data approach a translog cost function was estimated using unbalanced panel data for a sample of 44 companies over the study period the overall results indicate the existence of diseconomies of scale except in the case of small companies with an operating revenue of less than 3 7 million euros these comprised 40 of the companies in the sample the findings on cost inefficiency show that this is time variant that not all lodging companies produce at minimum cost levels and that it decreases over time specifically average cost inefficiency is around 17 and decreases over time

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

average inflation targeting the analysis of this paper demonstrates that when the phillips curve has forward looking components a goal for average inflation i e targeting a j period average of one period inflation rates will cause inflation expectations to change in a way that improves the short run trade off faced by the monetary policymaker average inflation targeting is thus an example of a modified loss function which when implemented in a discretionary fashion results in more efficient outcomes from the standpoint of the true social objective inflation targeting under commitment than the discretionary pursuit of the true objective itself in purely forward looking models average inflation targeting is dominated by price level targeting but we also demonstrate in a micro founded model where the phillips curve has both forward and backward looking components that there are cases when the average inflation target provides more efficient outcomes than both ordinary one period inflation targeting and price level targeting

price level targeting vs inflation targeting a free lunch price level targeting without base drift and inflation targeting with base drift are compared under commitment and discretion with persistence in unemployment price level targeting is often said to imply more short run inflation variability and thereby more employment variability than inflation targeting counter to this conventional wisdom under discretion a price level target results in lower inflation variability than an inflation target if unemployment is at least moderately persistent a price level target also eliminates the inflation bias under discretion and as is well known reduces long term price variability society may be better off assigning a price level target to the central bank even if its preferences correspond to inflation targeting a price level target thus appears to have more advantages than commonly acknowledged

the oil price increase and the alleviation of poverty income distribution in caracas venezuela in 1966 and 1975 abstract two caracas household budget surveys are used to compare household and individual income distributions real 1975 incomes are derived from income specific price indexes minimum food budgets define destitution and poverty levels during 1966 1975 mean real income rose substantially especially among the rich the fraction poor declined markedly but mean income did not rise for those remaining poor the poor s share of income growth came entirely from reduction in the number of poor and exceeded their 1966 income share the poverty gap expanded with population growth but shrank in per capita terms and relative to total income

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

state contingent inflation contracts and unemployment persistence this paper shows that if unemployment or some other real variable follows a dynamic autoregressive process the government can still achieve its precommitment outcome in monetary policy by offering the central banker a linear inflation contract where the penalty for incremental inflation depends positively on lagged unemployment this note therefore offers an extension of recent results of c walsh 1995 to the case of persistence in real economic variables such as output or unemployment copyright 1997 by ohio state university press

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

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

institutional arrangements for monetary policy when output is persistent a discretionary monetary policy gives rise to a constant average inflation bias a state contingent inflation bias and a stabilization bias when output is persistent the paper considers institutional arrangements contracts for central banks that remove these policy imperfections the average and state contingent inflation biases can be removed by directing the central bank to target the growth of nominal income and appoint a central banker with a specific relative weight attached to output stabilization an alternative to this institutional solution is to direct central banks to aim for a feasible output target although this would remove the inflationary biases the government must appoint a liberal as opposed to conservative central banker in order to implement optimal stabilization

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

insider power unemployment dynamics and multiple inflation equilibria this paper incorporates employment dynamics due to insider power into the barro gordon theory of inflation unlike in the static barro gordon case and even though our infinitehorizon model is linear quadratic there can be two markov perfect equilibria so that the same unemployment may correspond to either low or high inflation both equilibrium inflation rates measured per unit of the gap between the insiders and government s employment targets are higher than the corresponding rate in the static case the low inflation equilibrium has intuitive comparative statics properties in that inflation is increasing in insider power and the discount factor but the high inflation equilibrium behaves in the opposite way the highinflation equilibrium can be eliminated by a future precommitment to a fixed inflation regime e g erm but only if this precommitment can be made with certainty contrary to the static model inflation may be lower when the union puts a positive weight on a wage target than when it cares only about employment even when this wage target is consistent with a lower employment level than the employment target

central banking as a political principal agent problem i introduction conventional wisdom holds that during election periods political leaders have incentives to misuse policy instruments to enhance their chances of reelection rogoff and sibert 1988 construct a rational political economy model of monetary policy based on this theme 1 the results of their model can be interpreted in the following way 2 society elects a leader every other period whose competence affects the level of output in the economy and private agents will tend to vote for the incumbent if the level of output is expected to be higher than that which can be provided by an unknown challenger voters have imperfect information regarding the politician s true impact on output and exogenous shocks to output and consequently cannot disentangle the effects of one from the other in an election period this asymmetry of information gives the incumbent an incentive to expand output through the use of inflationary monetary policy in order to appear more competent than he really is however rational voters are aware of this incentive to inflate and adjust their expectations such that in equilibrium no gain in output occurs and the economy suffers from excessive inflation an implication of the rogoff sibert model is that unless a society does away with elections as a way to choose policymakers excessive inflation and a political inflation cycle will be an unavoidable cost of democracy however societies can try and have tried to avoid these ill effects by taking the power of money creation away from the elected officials and giving it to an appointed independent central banker who will presumably pursue the public good but can this approach actually work the problem with this proposal is that the central bankers well being in many respects reappointment post central bank employment opportunities avoidance of public criticism etc often hinges on pleasing their political benefactors giving the central bankers incentives to act in the interest of elected officials 3 as a result the central banker could pursue objectives different from society s and may actually function as a veil for the elected policymaker in the real world this veil is not complete but partial and hence we can characterize the relationship between the monetary authority and society as a principal agent problem the advantage of delegating power to an appointed central banker and then erecting appropriate institutions is that the inflation problems may be resolved without abandoning the electoral process in this paper we develop a rational political business cycle model that starts from the foundations laid down by rogoff and sibert we depart from their model by having monetary policy delegated to a central banker who is appointed by the elected leaden the concern about reappointment is what motivates the agency problem the central banker would like to be reappointed and this desire leads her to partially accommodate the wishes of the current administration which in turn may not coincide with the desires of the electorate we then analyze the problem faced by a central banker who is concerned about her own selfinterest as well as social well being it is this feature that turns the setting of monetary policy into a political principal agent problem the contributions of our approach to modelling the agency problem of central banking are 1 it explicitly incorporates reappointment concerns into the decision process of the central banker which heretofore has not been done in the literature and 2 we explicitly model the source of the agency problem unlike previous research that simply assumes an agency problem exists our key results are as follows in equilibrium the pursuit of her own self interest leads the central banker to create a socially inefficient inflation bias while rogoff and sibert also obtain this result our explicit functionalform model allows us to analyze this bias in more detail and tie it directly to the strength of the relationship between the central banker and the current administration

credibility of optimal monetary delegation while optimal monetary policy is subject to a credibility problem it is often argued that the government should appoint a central banker whose incentives differ from the government s the author argues however that such delegation does not overcome credibility problems given that delegation is discretionary and without costs reappointment costs of delegation are shown to improve suboptimal outcomes but credibility of optimal monetary policy turns out be worsened at best delegation therefore has no effects on credibility but only if reappointment has no costs copyright 1997 by american economic association

when is discretion superior to timeless perspective policymaking the monetary policy literature assumes increasingly that policy is formulated according to the timeless perspective woodford 1999a however by treating appropriately the auxiliary state variables that characterize the timeless perspective equilibrium when evaluating policy performance this paper shows that discretionary policymaking can be superior to timeless perspective policymaking and identifies model features that make this outcome more likely using standard new keynesian dsge models discretion is found to dominate timeless perspective policymaking when the price wage phillips curves are relatively flat due perhaps to firm specific capital or labor and or kimball 1995 aggregation in combination with nominal rigidities these results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion paying careful attention to how policy performance is evaluated

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

public debt indexation and denomination with an independent central bank abstract this paper examines the interaction between public debt management and the design of monetary institutions the analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation indexed debt if delegation of monetary policy is viable the optimal policy is to issue nominal debt this increases the sensitivity of taxes and output to unexpected inflation thus minimizing the inflation needed to offset supply shocks evidence on central bank independence debt composition and output variability suggests that the normative argument has some positive content

non price rationing and the choice of medical care providers in rural cote d ivoire this paper investigates the role of travel time in rationing medical care services in a developing country where monetary prices are zero a nested multinomial logit model of provider choice is estimated using 1985 data from rural cote d ivoire unlike previous studies of health care demand in developing countries our results indicate that travel time plays an important role in rationing health care and that medical care demand for poorer individuals is substantially more travel time elastic than for richer individuals

return to tourist destination is it reputation after all in this paper the hypothesis that repeated purchases in the tourism markets could be considered as a consequence of asymmetrical information problems is studied this hypothesis is analysed with the case study of the island of tenerife using the estimation of a count data model it was found that the length of the stay and the information obtained from previous visits and or relatives and friends might increase the return to a destination suggesting the presence of a reputation mechanism as proposed by shapiro 1983 the determinants of the willingness to return were also estimated confirming the main results

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

on targeting frameworks and optimal monetary policy we show that speed limit policy a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap consistently outperforms flexible inflation targeting and flexible price level targeting in empirical medium scale dsge models under discretionary policymaking in contrast to small scale new keynesian models this welfare ranking of the targeting frameworks is not overturned when inflation dynamics are mostly backward looking importantly the performance of the speed limit policy shows less sensitivity to its parameterization than other frameworks that target the inflation rate or the price level

sustaining quality in tourism destinations an economic model with an application sustaining quality in tourism destinations can be described as seeking to maintain a destination s reputation this is a strategy that has a dynamic dimension in the sense that the benefits from such a strategy are likely to accrue in the future the task of building reputation will necessitate some investment which implies that in equilibrium a high quality tourism experience will sell for a premium above its cost of production this premium can be seen as the return on the initial investment in reputation or as an important incentive in inducing a destination to maintain its reputation as a particular kind of quality destination without such a premium a destination may find that a fly by night strategy of quality reduction would be profit maximizing this is the type of moral hazard problem that is present when say a tourism destination faces the question of how to react to increases in tourist numbers with large numbers reputation may not be seen as important and the various providers have a str

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

two fallacies concerning central bank independence this paper takes issue with two basic conclusions prevalent in the literature on central bank behavior first the paper argues that it is inappropriate to presume that central banks will in the absence of any precommitment technology necessarily behave in a discretionary fashion that implies an inflationary bias since there is no functional connection between average rates of money creation or inflation and policy responsiveness to cyclical disturbances it is entirely feasible for the bias to be avoided in other words there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any absolute precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it this abstract was borrowed from another version of this item

what s in a name reputation as a tradeable asset the author develops a model in which a firm s only asset is its name which summarizes its reputation and studies the forces that cause names to be valuable tradable assets an adverse selection model in which shifts of ownership are not observable guarantees an active market for names with either finite or infinite horizons no equilibrium exists in which only good types buy good names the reputational dynamics that emerge from the model are more realistic than those in standard game theoretic reputation models and suggest that adverse selection plays a crucial role in understanding firm reputation

establishing credibility a rational expectations viewpoint ongoing attempts to reduce the rate of inflation through restrictive monetary policy in the united states and a number of other countries have brought practical focus to the problem of establishing the credibility of macroeconomic policy while credibility is usually an unquestioned criterion of good public policy in the case of disinflation it takes on special importance credibility about a future change in the course of policy may be able to directly reduce the costs of disinflation by changing inflationary expectations since inflationary expectations have a significant influence on current wage and price decisions a reduction in actual inflation may result to the extent that it is quantitatively significant this expectations effect of credibility the expectations bonus puts a premium on establishing the credibility of a monetary disinflation program the purpose of this paper is to consider the problem of establishing the credibility of such a program from the perspective of a rational expectations approach to macroeconomic policy evaluation that credibility would have significant disinflation effects once established is closely associated with the rational expectations hypothesis and has been demonstrated both in the context of market clearing and contract based rational expectations models a summary of the results from the different models is contained in my 1980 review paper from macroeconomic research completed during the last ten years it now seems clear that a rational expectations approach to policy evaluation should not be confined to market clearing situations where all prices and wages adjust instantaneously nullifying the real effects of anticipated policy and leaving only unanticipated policy to matter in fact much rational expectations research in macroeconomics has given explicit attention to contracts and other rigidities which lead to infrequent adjustment of most wages and prices in this paper however i will only touch on this technical research and instead attempt to apply some of the more general principles of rational expectations to the problem of establishing credibility of macroeconomic policy at this time in the united

price elasticity of expenditure across health care services policymakers in countries around the world are faced with rising health care costs and are debating ways to reform health care to reduce expenditures estimates of price elasticity of expenditure are a key component for predicting expenditures under alternative policies using unique individual level data compiled from administrative records from the chilean private health insurance market i estimate the price elasticity of expenditures across a variety of health care services i find elasticities that range between zero for the most acute service appendectomy and 2 08 for the most elective psychologist visit moreover the results show that at least one third of the elasticity is explained by the number of visits the rest is explained by the intensity of each visit finally i find that high income individuals are five times more price sensitive than low income individuals and that older individuals are less price sensitive than young individuals

reputation and competition this paper shows how competition generates reputation building behavior in repeated interactions when the product quality observed by consumers is a noisy signal of firms effort level there are two types of firms and good firms try to distinguish themselves from bad firms although consumers get convinced that firms which are repeatedly successful in providing high quality are good firms competition endogenously generates the outside option inducing disappointed consumers to leave firms this threat of exit induces good firms to choose high effort allowing good reputations to be valuable but its uncompromising execution forces good firms out of the market jel c7 d8

the clash of central bankers with labour market insiders and the persistence of inflation and unemployment this paper analyses the implications of monetary policy for the dynamic behaviour of inflation in a natural rate model characterized by endogenous unemployment persistence we present evidence for the main industrial economies that suggests that inflation displays persistence which is of the same order of magnitude as the persistence of deviations of unemployment from its natural rate we provide a theoretical explanation of this fact based on a model of the dynamic interactions between central bankers and labour market insiders the clash in the objectives of central bankers and labour market insiders is what causes both inflation and unemployment to display the same persistence in this model the analysis suggests that inflation persistence could be addressed in a welfare improving way if central banks adopted monetary policy rules that targeted unanticipated changes in unemployment rates instead of deviations of unemployment from its natural rate

optimal interest rate smoothing this paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions it shows in the context of a simple model of optimizing private sector behaviour that assignment of an interest rate smoothing objective to the central bank may be desirable even when reduction of the magnitude of interest rate changes is not a social objective in itself this is because a response of policy to irrelevant lagged variables may be desirable owing to the way it steers private sector expectations of future policy

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

family health care spending in latin america household budget data from surveys in six latin american countries 1966 75 are used to estimate income elasticities of private health care spending for ten cities in five countries the elasticity is constant at 1 5 for metropolitan other urban and rural areas of brazil it is constant at 1 17 the brazilian data also show 30 percent higher spending in small than in large cities and 50 percent higher in the countryside these results are consistent with supposing that private care is a luxury compared to public care and that more is spent on the former when the latter is not available geographic differences may be exaggerated by differences in payment mechanisms since reported out of pocket expenditure is not net of public reimbursement different components of spending such as drugs and hospitalization show very different behavior from the total

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

committees with supermajority voting yield commitment with flexibility abstract a fundamental problem for government is how to combine commitment to certain policies with the flexibility required to adjust them when needed rogoff 1985 rogoff k 1985 the optimal degree of commitment to an intermediate monetary target q j econ 100 4 1169 1189 showed that a way to strike the right balance is to appoint an optimally conservative policy maker in real life however policy makers also have power over decisions where optimal plans are time consistent so delegating to a conservative person could be undesirable a flexible delegation device can be found in a large committee of randomly appointed members voting over policy after observing a shock when facing dynamic inconsistency under a single crossing property there exists a supermajority rule that implements the population median s optimally conservative policy maker with certainty another single crossing property guarantees that if simple majority voting is used to select the voting rule that will govern policy choice the supermajority preferred by the median is chosen for problems where dynamic inconsistency vanishes the committee will choose to make decisions by simple majority implementing median outcomes an application to monetary policy is developed we show that the optimal supermajority is higher when dynamic inconsistency is more severe when preferences are more homogeneous and when the economy is less volatile

policy delegation and fixed exchanges rates recent literature interpreting the european monetary system emphasizes credibility gains from delegating monetary policy to a low inflation country through fixed exchange rates this paper presents a model of an exchange rate system as a device for policy delegation in the context of a repeated monetary policy game in contrast to single shot games it generates credibility gains for the high inflation and low inflation countries in the system credibility gains neither require nor imply hegemony of the low inflation member stochastic realignments enable the members to adopt different inflation trends without destroying the credibility benefits from policy delegation copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

who wants a good reputation we examine a market in which long lived firms face a short term incentive to exert low effort but could earn higher profits if it were possible to commit to high effort there are two types of firms inept firms who can only exert low effort and competent firms who have a choice between high and low effort there is occasional exit and competent and inept potential entrants compete for the right to inherit the departing firm s reputation consumers receive noisy signals of effort choice and so competent firms choose high effort in an attempt to distinguish themselves from inept firms a competent firm is most likely to enter the market by purchasing an average reputation in the hopes of building it into a good reputation than either a very low reputation or a very high reputation inept firms in contrast find it more profitable to either buy high reputations and deplete them or buy low reputations

who should control the money supply this paper develops a model determining some motivational peculiarities of an optimal monetary authority an authority inducing a socially optimal inflation rate the model initially assumes that discretionary policy is desirable and that all possible authorities have the same information section ii rationalizes the assumption of the desirability of discretionary policy under rational expectations the assumption of rational expectations is seen to strengthen rather than weaken as its proponents are wont to assume the case for discretionary monetary policy section iii relaxes the assumption that all possible monetary authorities have the same information and thereby immediately exposes a dilemma unique to problem of finding an optimal monetary authority individuals possessing the efficient motivation are so peculiar that it is unlikely to find one that also possesses anything close to the information required to carry out first best discretionary policy the model serves to rationalize both the unusual motivational characteristics and the poor performance of observed monetary authori

delegating optimal monetary policy inertia abstract in a forward looking business cycle model central banks can achieve the timeless optimal commitment equilibrium even in the absence of a commitment technology if they are delegated with an objective function that is different from the societal one the paper develops a general linear quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a markov perfect equilibrium and studies the optimal design of some policy regimes that are nested within this framework the squared optimal targeting rule inflation output gap growth and nominal income growth targeting and inflation and output gap contracts

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

central bank independence economic freedom and inflation rates william a luksetich measures of central bank independence combine many attributes that may or may not affect inflation central bank attributes are chosen as a result of political calculations over the distribution of resources between competing interest groups simultaneity bias results from regressions of central bank independence or of economic and political freedom on inflation or growth our estimates demonstrate the connections between economic and political freedom and central bank attributes that lead to inflation countries showing high degrees of economic freedom adopt structures that lead to lower inflation those that show high degrees of political freedom do not adopt inflation reducing institutional structures jel e0 e5 i introduction the relationship between inflation rates and central bank independence from political control has been the subject of a number of recent studies generally these studies provide evidence that greater central bank cb independence is associated with lower inflation rates banaian et al 1983 1995 1997 burdekin and willett 1991 masciandaro and spinelli 1993 alesina and summers 1993 this relationship appears to be weaker when developing countries are included in the analysis cukierman 1992 all of these draw rather strong conclusions about the importance of cb independence as a force constraining the political system from using the monetary system to achieve political goals that are likely to be hostile to price stability supporting evidence is not strong however and the indices used to measure cb independence are far from perfect moreover even if the cb independence measures were accurate they may simply be proxies for political and economic freedoms that are the more important checks on political manipulations of the economic system others question the evidence and draw different conclusions lohmann 1994 1997 and posen 1993 1995 1997 argue that the correlation between inflation and central bank independence is spurious lohmann argues that the federalist nature of the german government and its frequent use of coalitions in forming governments limit the number of threats to bundesbank independence posen 1995 finds that political support for independence comes from the financial sector if they effectively lobby for price stability an independent central bank tends to accompany that lobbying miller 1998 provides a framework for understanding the behavior of various interest groups in controlling the rate at which governments inflate their currencies cukierman s 1992 gb independence indices have been widely used in empirical studies to assess the effects of cb independence on inflation rates 1 the term of office of the head of a cb which we will call the central banker is one measure of bank independence he assigns a ranking of 1 if the term of office too is greater than eight years 0 75 if the too is great than or equal to six years and less than or equal to eight years 0 50 if the too is equal to five years 0 25 if it equals four years and 0 if it is less than four years he does this for numerous measure of bank independence since the publication of cukierman s index nearly all the aforementioned researchers have either used these individual rankings or a weighted average of these rankings in their efforts to determine the importance of cb independence on inflation rates in this article we extend the research in this area in three ways first the use of a multipoint ranking of central bank attributes imposes restrictions on the marginal impact of changing structures or attributes of the cb law that have no a priori basis moreover the weights within the aggregate cukierman index are quite arbitrary and do not hold up under any reasonable degree of scrutiny see banaian et al 1998 hereafter referred to as bbw constructing dummy variables for each of the classifications would be more appropriate than using the classification scheme cukierman devised as a continuous variable