Monetary union without fiscal coordination may discipline policymakers

We show that, with benevolent policymakers and fiscal leadership, monetary unification reduces inflation, taxes and public spending. These disciplining effects of a monetary union, which rise with the number of fiscal players in the union, are likely to raise welfare. Joining an optimally designed monetary union is particularly attractive if fiscal authorities do not care about inflation. Fiscal coordination offsets the disciplining effects of monetary unification. Hence, subsidiarity in fiscal policymaking may enhance welfare. Keywords: monetary union, fiscal leadership, common central bank, discipline, optimal institutions, inflation, taxation, spending, fiscal coordination.international economics and trade ;

The role of public debt in the game of double chicken

This paper explores how debt accumulation is affected by the strategic interactions between monetary and fiscal authorities. To achieve the second best with a dependent central bank, the government needs to be made both more conservative and more impatient. However, in the absence of political distortions, an optimally designed conservative, independent central bank is sufficient to establish the second best. In the presence of political distortions, however, also an optimal debt target is needed. Keywords: Central bank independence, price stability weights, (optimal) debt targets, strategic debt management, political distortions, optimal preferences.public economics ;

Partisan Public Investment and Debt: The Case for Fiscal Restrictions

The political distortions in public investment projects are investigated within a bipartisan framework. The role of scrapping and modifying projects of previous governments receives special attention. The ruling party overspends on large ideological public investment projects and accumulates too much debt to bind the hands of its successor, especially if the probability of being removed from office is large and the possibility of scrapping is not ruled out. These political distortions have implications for the appropriate format of a fiscal rule. A deficit rule, like the Stability and Growth Pact, mitigates the overspending bias in ideological investment projects and improves social welfare. The optimal second-best restriction on public debt exceeds the socially optimal level of public debt. Social welfare is boosted more by investment restrictions on ideological projects. The government then perceives a larger benefit of debt reduction. In fact, if scrapping is forbidden, optimal investment restrictions can yields the socially optimal outcome. Finally, debt and investment restrictions are not needed if investment projects only have a financial return.political economy, bipartisan, public investment, ideological projects, market projects, scrapping public investment, golden rule, investment restriction, deficit rule

Optimal Inflation Targets, “Conservative” Central Banks, and Linear Inflation Contracts: Comment.

Recently, Svensson (1997) has shown that a combination of state-contingent inflation targeting and central banker "conservatism" produces optimal monetary policy if employment is persistent. We argue that the state-contingent nature of the scheme may undermine its credibility. We then show that the optimal policy in Svensson's model can nevertheless be attained through state-independent delegation.

Voluntary participation and intergenerational risk sharing in a funded pension system

We explore the feasibility of a funded pension system with intergenerational risk sharing when participation in the system is voluntary. Typically, the willingness of the young to participate depends on their belief about the future young's willingness to do so. We characterise equilibria with voluntary participation and show that the likelihood of their existence increases with risk aversion and financial market uncertainty. We find that mandatory participation is often necessary to sustain a funded pension pillar and to let participants benefit from intergenerational risk sharing

Macroeconomic Stabilisation and Intervention Policy under an Exchange Rate Band

Macroeconomic stabilisatin and foreign exchange market interventions are investigated within the context of a stochastic small open economy. With money demand shocks a peg is optimal, but with goods demand shocks a nominal income target is best. With supply shocks the optimal degree of monetary accommodation rises with the welfare weight attached to output rather than to price stability. A nominal exchange rate band is not advisable from a stabilisation point of view, albeit that with money demand shocks no welfare losses are incurred. With goods demand shocks, narrowing the band affects the optimal coefficient of intramarginal monetary accommodation. With supply shocks and no intramarginal interventions, it is desirable to have a wider band if there is a relatively large weight on price rather than output stability.Published in connection with a visit at the IIES

Inter- and Intra-generational Consequences of Pension Buffer Policy under Demographic, Financial, and Economic Shocks

We study the inter- and intra-generational welfare consequences of alternative pension fund policies in response to unexpected demographic, financial, and macro-economic shocks. Our analysis is based on an applied OLG model of a small open economy with heterogeneous agents featuring a two-pillar pension system modelled after that in the Netherlands (with pay-as-you-go (PAYG) and funded tiers). We explore two policies to avoid underfunding of the pension funds. One emphasizes increases in the contribution rate, while the other emphasizes the reduction of indexation of pensions to price inflation and productivity growth. Our stochastic simulations show that the welfare differences between the two types of policy are generally small. They also show that the pension buffers are highly volatile when the shocks are drawn from realistically modelled multivariate shock processes. Underfunding occurs relatively frequently and in any case substantially more than anticipated by the Dutch supervisor. (JEL codes: H55, I38, C61) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: [email protected], Oxford University Press.