Seigniorage, Inflation, and Reputation

This paper derives a reputational equilibrum for inflation in a model in which the government obtains valuable seigniorage by issuing fiat money in echange for real resources. One insightful result is that , with contemporaneous perceptionof actual government behavior and immediate adjustment of real cash balences to new information , the Friedman elasticity solution for maximal seigniorage is the reputatoinal equilibrium. More generally , the analysis shows that the objective of maximal seigniorage produces an equilibrium inflation rate equal either to a generalization of the Friedman elasticity solution or to the rate at which the government discounts future seigniorage adjusted for the growth rate, whichever is larger. Thus, the model formalizes the conjecture that epizodes of inflation rates in excess of the Friedman solution are attributable to high discounts rates for future seigniorage. Adding aversion to high expected inflation to the model, this analysis also rationalizes the observation that inflation rates are usually less than Friedman's elasticity solution.

Central Bank Reputation in a Forward-Looking Model.

This paper examines whether reputation concerns can induce the central bank to implement the time-inconsistent optimal monetary policy in a standard New Keynesian model. The forward-looking nature of this model is in this respect interesting on two accounts: first, it worsens the time-inconsistency problem of optimal monetary policy by adding a stabilization bias to the possible inflation bias; second, it enables us to model more satisfactorily the reputation of the central bank by accounting for the coordination of the private agents on the punishment length. Our results suggest that the inflation bias and the stabilization bias can be overcome for the calibrations used in the literature. These results enable us to endogenize Woodford's timeless perspective and weaken the case for monetary policy delegation.Commitment ; Discretion ; Inflation bias ; Reputation ; Stabilization bias ; Timeless perspective.

Reputation in a Model of Monetary Policy with Incomplete Information

Previous models of rules versus discretion are extended to include uncertainty about the policymaker's "type." When people observe low inflation, they raise the possibility that the policymaker is committed to low inflation (type 1). This enhancement of reputation gives the uncommitted policymaker (type 2) an incentive to masquerade as the committed type. In the equilibrium the policymaker of type 1 delivers surprisingly low inflation -- with corresponding costs to the economy -- over an extended interval. The type 2 person mimics this outcome for awhile, but shift seventually to high inflation. This high inflation is surprising initially, but subsequently becomes anticipated.

Gradualism vs Cold Turkey

The paper analyzes the incentive for the ECB to establish reputation by pursuing a restrictive policy right at the start of its operation. The bank is modelled as risk averse with respect to deviations of both inflation and output from her target. The public, being imperfectly informed about the bank’s preferences uses observed inflation as (imperfect) signal for the unknown preferences. Under linear learning rules - which are commonly used in the literature - a gradual build up of reputation is the optimal response. The paper shows that such a linear learning rule is not consistent with efficient signaling. It is shown that in a game with efficient signaling, a cold turkey approach - allowing for deflation - is optimal for a strong bank - accepting high current output losses at the beginning in order to demonstrate its toughness.Die Arbeit untersucht die Anreize der Europäischen Zentralbank, in der Startphase durch restriktive Politik Reputation aufzubauen. Die Öffentlichkeit kennt die Präferenzen der Zentralbank nicht; sie verwendet die beobachtete Inflationsrate als (imperfektes) Signal. Wird eine lineare Lernregel unterstellt - der Standardfall in der Literatur - erweist es sich als optimal, hohe Inflationserwartungen zumindest teilweise zu akkommodieren und so Reputation nur schrittweise aufzubauen. Die Arbeit zeigt aber, daß eine solche lineare Lernregel mit effizientem Signalverhalten nicht konsistent ist. Bei effizientem Signalisieren kann es für eine harte Zentralbank optimal sein, in der Startphase durch eine sehr restriktive, deflationäre Politik ihre Präferenzen zu offenbaren

Optimal Inflation Targets, Inflation Contracts and Political Cycles

It has been widely accepted that politically induced variance can be generated when the wage contract is written before an election. In this paper, we show that inflation contracts and inflation targets can eliminate both the inflation bias and politically induced variance, if electoral uncertainty is merely due to different preferences. In contrast to the independent central bank that is based on cooperation between competing parties prior to the target can be delegated by the winning party after election. Concern for reputation can lead to the convergence of the inflation targets assigned by different parties. We also consider the case where uncertsinty is caused not only by different preferences, but also by different desired rates inflation. We show that it is quite possible to reduce inflation but increase the variances of inflation and output by adopting the inflation target regime.central bank independence; inflation contract; inflation target; and electoral uncertainty.

Gradualism vs Cold Turkey : how to establish credibility for the ECB

The paper analyzes the incentive for the ECB to establish reputation by pursuing a restrictive policy right at the start of its operation. The bank is modelled as risk averse with respect to deviations of both inflation and output from her target. The public, being imperfectly informed about the bank’s preferences uses observed inflation as (imperfect) signal for the unknown preferences. Under linear learning rules - which are commonly used in the literature - a gradual build up of reputation is the optimal response. The paper shows that such a linear learning rule is not consistent with efficient signaling. It is shown that in a game with efficient signaling, a cold turkey approach - allowing for deflation - is optimal for a strong bank - accepting high current output losses at the beginning in order to demonstrate its toughness. JEL classification: D 82, E 58Die Arbeit untersucht die Anreize der Europäischen Zentralbank, in der Startphase durch restriktive Politik Reputation aufzubauen. Die Öffentlichkeit kennt die Präferenzen der Zentralbank nicht; sie verwendet die beobachtete Inflationsrate als (imperfektes) Signal. Wird eine lineare Lernregel unterstellt - der Standardfall in der Literatur - erweist es sich als optimal, hohe Inflationserwartungen zumindest teilweise zu akkommodieren und so Reputation nur schrittweise aufzubauen. Die Arbeit zeigt aber, daß eine solche lineare Lernregel mit effizientem Signalverhalten nicht konsistent ist. Bei effizientem Signalisieren kann es für eine harte Zentralbank optimal sein, in der Startphase durch eine sehr restriktive, deflationäre Politik ihre Präferenzen zu offenbaren. JEL classification: D 82, E 5

The commodity-consumer price connection: fact or fable?

The recent surge in commodity prices has rekindled interest in their power to predict consumer price inflation. But is this interest warranted? In examining the empirical relationship between commodity prices and consumer price inflation, this article finds that commodities' reputation as useful leading indicators of inflation is actually based more on fable than fact. Testing eight commonly used indexes, the authors conclude that although commodities had some predictive power in the past, the commodity-consumer price connection has broken down in the more recent period. They argue that this shift primarily reflects the diminished role of traditional commodities in U.S. production and the "sterilization" of some inflation signals by offsetting monetary policy actions.Prices ; Consumer price indexes ; Inflation (Finance)

Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetised Debt?

The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank (CB sets the nominal interest rate and responds to rising government debt/GDP ratios by monetisation. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the CB removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.monetary union, fiscal policy coordination, monetary and fiscal policy interdependence, reputation.

Pengaruh Informasi Keuangan, Non Keuangan dan Ekonomi Makro terhadap Underpricing pada Perusahaan yang Melakukan Initial Public Offering (Ipo) Periode 2011 2013 di Bursa Efek Ondonesia

This study aims to examine the variables that influence of underpricing stock price when the companys initial public offering in Indonesia Stock Exchange 2011 - 2013 period. The dependent variable in this study is underpricing measured by value of initial returns, while the independent variable is the financial leverage, return on equity, proceeds underwriter reputation, auditor reputation, firm age, inflation, BI rate. The data used in this study is a secondary data that collected by using purposive sampling method. Sample of 45 companies from 77 populations companies doing IPOs from 2011 - 2013 in Indonesia Stock Exchange. This study used multiple regression for data analysis. The results of this study showed that the variable underwriter reputation and auditor reputation negatively influence of underpricing is proven. Other variables such as financial leverage, return on equity, proceeds, firm age, inflation, and BI rate influence of underpricing is not proven. In this research model, shows the variable financial leverage, return on equity, proceeds, underwriter reputation, auditor reputation, firm age, inflation, and BI rate can only explain the variation of underpricing of 32.4 %.Keywords: Financial Information, Non Financial, Macro Economy, and Under-pricing