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

optimal disinflation in new keynesian models abstract central bankers conventional wisdom suggests that nominal interest rates should be raised to attain a lower inflation target in contrast i show that the standard new keynesian monetary model with rational expectations and full credibility predicts that nominal interest rates should be decreased to attain this goal real interest rates however are virtually unchanged these results also hold in recent vintages of new keynesian models with sticky wages price and wage indexation and habit formation in consumption

central bankers in government appointed committees abstract i study the policy choices of members of a central bank committee who are appointed by the government central bankers balance their desire to protect the central bank s reputation against their interest to be reappointed committees can be more successful than single central bankers at reducing inflation and insulating policy from government pressures these gains are only achieved if the turnover rate of committee members is low and the committee is small the former is associated with a low risk of being replaced for not supporting the government s preferred policy the latter meanwhile implies high probability that a single vote affects policy making any individual member more weary of potentially affecting the central bank s reputation through his vote

first impressions matter signalling as a source of policy dynamics we provide the first direct empirical support for the importance of signalling in monetary policy by testing two key predictions from a novel structural model first all policymaker types should become less tough on inflation over time and secondly types that weigh output more should have a more pronounced shift voting data from the bank of england s monetary policy committee strongly support both predictions counterfactual results indicate signalling has a substantial impact on interest rates over the business cycle and improves the committee designer s welfare implications for committee design include allowing regular member turnover and transparency regarding publishing individual votes

imperfectly credible disinflation under endogenous time dependent pricing the real effects of an imperfectly credible disinfl ation depend critically on the extent of price rigidity therefore the study of how policymakers credibility affects the outcome of an announced disinflation should not be dissociated from the analysis of the determinants of the frequency of price adjustments in this paper we examine how the policymaker s credibility affects the outcome of an announced disinflation in a model with endogenous time dependent pricing rules both the initial degree of price ridigity calculated optimally and more notably the changes in contract length during disinflation play an important role in the explanation of the effects of imperfect credibility we initially evalute the costs of disinfl ation in as etup where credibility is exogenous and then allow agents to update beliefs about the type of monetary authority that they face we show that in both cases the interaction between the endogeneity of time dependent rules and imperfect credibility increases the output costs of disinflation

inflation forecast errors and time variation in term premia the expectations theory of the term strueture is well known to give wrong signals as to the future course of long term interest rates one explanation involves rational time varying term premia however the anomaly may also be due to inflation forecast errors we study survey forecasts of inflation it seems that the respondents forecasts are insufficiently adaptive interest rates reflect expectations similar to the inflation forecasts as a result past survey forecast errors reliably predict premia on u s government bonds

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

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

game theoretic analysis of competitive agri biomass supply chain abstract this research aims to explore the optimal strategies for managing competitive agri biomass supply chain first a game model of a supply chain consisting of one supplier and two buyers is used to develop the optimal strategies for the supplier and buyers as well as the total equilibrium profit then the industrial coexistence conditions are analyzed and the effects of the model parameters on game equilibrium are evaluated finally the methodology is illustrated with a case study in china

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

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

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

policy convergence the exchange rate mechanism and the misalignment of exchange rates some tests of purchasing power parity and generalized purchasing power parity the paper focuses on the convergence issues and the long run credibility of the european monetary system ems and more specifically on the evaluation of the effectiveness of the exchange rate mechanism erm in generating a stabilizing effect on real exchange rates across member countries for this purpose we execute some tests of long run purchasing power parity ppp for an erm group and a non erm group of countries using both the engle and granger procedure and the more powerful johansen cointegration technique we also execute a test of generalized ppp exploiting an idea developed by enders and hurn testing for ppp in a multicountry setting may be a useful methodology to identify the optimal currency area suggested by the data generation process on the basis of the reported homogeneity of real exchange rate behaviour of the countries considered

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

intervention bias in agricultural policy abstract this paper re examines the motivation for government intervention in agriculture to support farm prices and incomes a model is outlined in which the government has a preference for higher farm incomes but fails to provide farmers with the socially optimal level of price support even when one accepts the government s income redistribution goals as a valid reflection of social preference it is shown that agricultural policy has an intervention bias government price supports generally are higher than would be socially optimal the source of the intervention bias is a time inconsistency in optimal agricultural policy formation caused by the government s inability to precommit to a rule for setting future price support levels simulation results indicate that in some circumstances the intervention bias in agricultural policy can be substantial

targeted characteristics and use of socially marketed preventive health goods evidence from condoms in sub saharan africa social marketing is a popular method for allocating targeted publicly funded preventive health goods in poor countries however low demand among targeted groups may inhibit take up relative to non

theoretical developments in the light of macroeconomic policy and empirical research macroeconomics is surveyed with emphasis on the implications of the new classical and rational expectations critiques for the keynesian paradigm and the role of macro policies at the background are the main macro developments of the 1 970s and 1 980s as well as the specific lessons of recent high chronic inflation processes a synthesis is emerging in which the basic keynesian view of the existence of market and price coordination failures as well as room for pareto improving policy intervention are maintained at the same time the theoretical underpinnings are undergoing substantial change mainly due to a rational expectations reformulation

evolutionary voter sophistication and political business cycles the concept of the sophisticated electorate is central to many contemporary political economic models however no existing studies have yet clarified how voters could develop a sophisticated way of evaluating economic performance this study suggests a transitional hypothesis that removes the constraint that voters have prior knowledge about the macroeconomic environment and the true economic intent of the incumbent government the hypothesis permits behavioral innovation from learning and predicts that the evolutionary process toward sophistication may be triggered by socially suboptimal political business cycles that reveal the self serving characteristic of the government the empirical analyses using recent japanese experiences show that japanese political support behavior shifted from naivete to sophistication in the early 1970s after political manipulation occurred in the 1969 and 1972 parliamentary elections

the role of policymakers reputation in the ems disinflations abstract it is frequently argued that the ems itself in connection with the high anti inflation reputation of the german bundesbank is responsible for the inflation reduction and convergence which member countries have experienced based on the game theoretical model of backus and driffill 1985 american economic review 75 530 538 an empirical measure of the government s reputation for fighting inflation is derived by using a bayesian learning approach time varying estimates of these counterinflation reputation measures are computed for the original ems member countries and for a control group of major non ems countries the paper finds that only the smaller ems participants have gained anti inflation reputation during the ems period

unanticipated money and the political business cycle six different series of one period forecasts for money growth are generated for each year 1960 through 1984 the prediction errors are analyzed to see whet herthe authorities attempted to expand the economy in election years by unexpectedly raising money growth while there is no evidence of attempts to fool the public throughout the entire 1960 84 period such fooling may have been tried through 1974 it is speculated that the public discussion of expectations formation and of politicians motivations since then may have signaled officials that further attempts to mislead the public would be prohibitively costly copyright 1986 by ohio state university press

cheating for the common good in a macroeconomic policy game abstract this paper presents a simple repeated game model of interaction between an optimizing government and the private sector two polar cases are considered a the private sector is represented by a single agent and b there is a continuum of heterogenous atomistic private agents in both cases the government starts each repetition by making a non binding announcement about its future actions the players have complete and perfect information with one exception the private agents do not know whether or not the government will act as announced thus each private agent i either behaves with probability i as if it trusted the announcement or plays with probability 1 i as a stackelberg leader after observing the reaction of the private sector the government implements the actual policy measures finally the private agent s update i as a function of the payoffs received we show that although the government s announcements are never respected acting as if they were true leads to an outcome that simultaneously improves the situation of the government and of those players that trust it compared to the standard equilibrium solutions an overwhelming majority of private agents very rapidly learns to behave as if the announcements were true the other agents also experience higher payoffs due to an herding effect the fact that the announcements are always reneged is crucial for the solution to be pareto improving these results are in stark contrast to the conclusions usually presented in the related economic literature

policy rules inflationary bias and cyclical stability statutory policy rules such as a k percent rule for money growth can restrain officials from pursuing their own welfare at the expense of the public good toma 1982 and barro and gordon 1983 among others have presented theoretical models showing how macroeconomic policymakers who pursue their own interests can produce policies that are biased toward too much inflation strict rules are a possible remedy to this problem yet while strict policy rules may reduce inflationary bias they also limit the flexibility of officials to respond to random shocks researchers such as canzoneri 1985 have shown that this can be an important limitation if officials possess information advantages that permit policy to modify economic disturbances effectively if the public dislikes variations in real output this loss of flexible stabilization may offset any gain from a reduction in inflationary bias there is then a potential trade off between reducing inflationary bias and cyclical stability yet to date none of the dimensions of this trade off has been documented evidence of an inflationary bias has been scarce in part because it requires identification of the socially preferred inflation rate similarly the extensive research on electorate concerns with real output has focused on the income level rather than its variance moreover since this research has not been cast in a framework that permits voters to recognize the potential inflationary cost of stabilizing output the validity of these findings is open to question indeed recent work by lucas 1987 suggests that citizens would willingly pay very little to reduce cyclical fluctuations

is transparency about central bank plans desirable a central bank with private information about its preferences has an incentive to reduce its planned inflation to increase the public s perception of its inflation aversion and lower expected future inflation a regime is said to be transparent if planned inflation is observable and reveals the central bank s preferences and to be non transparent if planned inflation is unobservable and can be only imperfectly inferred from actual inflation a central bank in the non transparent regime is said to become more transparent when actual inflation becomes a better signal of planned inflation i find several results about transparent and non transparent regimes some are novel and some contrast with the results of earlier papers in particular i demonstrate that in a non transparent regime increased transparency need not improve the public s ability to infer a central bank s private information i show that society and central banks are better off with more transparency my numerical results suggest that society and central banks prefer the transparent to the non transparent regimes

transparency reputation and credibility under floating and pegged exchange rates this paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg under which credibility is higher and inflation is lower than under a float this holds true although devaluations of the pegged rate are assumed to be costless the reason is that as realized inflation is not perfectly controllable planned inflation under a float is private information in contrast since the exchange rate can be perfectly controlled pegging resolves the private information problem is more transparent and makes reputation more effective

optimal reputation building in the new keynesian model abstract we study the optimal committed monetary policy when the private sector has imperfect information and has to infer the central banker s ability to commit the optimal policy is designed to influence learning and improve the central banker s reputation of being committed the reputation building implies that when a committed central banker first takes office he should resist the temptation to stimulate output with initially high but declining inflation he should reverse a missed inflation target rather than accommodate it and he should adopt a less accommodative inflation response to a cost push shock than a full commitment solution suggests

a theory of fed watching in a macroeconomic policy game this paper examines the phenomenon of fed watching within the context of a macroeconomic policy game following a cukierman and a h meltzer s 1986 article the policymaker s preferences are private information and noisy monetary control causes past observations of money growth to be a noisy signal of the monetary authority s future intentions individuals are allowed to acquire additional information about the monetary authority s preferences thus both past observations of money growth and costly information about the policymaker s preferences are used by agents in forming expectations about policy the public s acquisition of information alters the monetary authority s strategic calculus making noisy monetary control less desirable copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

monetary policy in economic transition lessons from the french post war experience abstract although tax and expenditure smoothing requires high deficits in transition periods this policy is difficult to implement because it leads to excess inflationary expectations and speculative attacks this forces the government to adopt a suboptimally restrictive fiscal policy it is argued that a potential explanation for this is that there is more incentive for weak governments to act as strong ones as compared to non transitional periods the model explains well the immediate post war inflation experience in france

the signaling effect of raising inflation abstract this paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to ensure the credibility of otherwise time inconsistent forward guidance policies as stable inflation in normal times either stems from central bankers desire to maintain credibility or from aversion to inflation the private sector is unable to infer the central banker s willingness to follow through on promises from observing stable inflation jeopardizing the efficiency of forward guidance policy we show that this signaling motive can justify temporary deviations of inflation from target well above 2 but also that the low inflation volatility during the great moderation was insufficient to ensure fully efficient forward guidance when needed