Do Central Banks have Precautionary Demands for Expansions and for Price Stability?

This paper analyses the impact of asymmetric preferences with respect to inflation and output by policymakers on interest-rate reaction functions. A theoretical framework which makes it possible to identify the dominant type of asymmetry is developed and related to the precautionary demand of pol- icymakers for expansions and for low inßation. Using data for some G7 economies, the paper shows that, except for Germany, nonlinear and asym- metric behaviour is present. A main Þnding is that where credibility-building and disinflation has already been achieved, the monetary authorities develop a greater precautionary demand for output expansions than for low inflation. This may generate a new type of inflation bias. Conversely, where credibility- building is still a concern for the authorities, managing the business cycle is dominated by concerns of the monetary authorities to keep inflation expec- tations low.

Analyzing the Interaction of Monetary and Fiscal Policy: Does Fiscal Policy Play a Valuable Role in Stabilisation?

This paper provides an overview of recent papers which use estimated New Keynesian models to study the extent to which fiscal policy can beused to stabilize the economy. We use a varietyof different New Keynesian models, estimated on data for both theUS and for theEuro area, and highlight the diverse transmission channelst hrough which fiscal policy acts in these models. Although we find that fiscal policy can provide a useful complement to monetary policy, especially in models where consumers have finite horizons, there are import limitations to the value added of fiscal policy

Do Central Banks have Precautionary Demands for Expansions and for Price Stability? - Theory and Evidence

This paper analyses the impact of asymmetric preferences with respect to inflation and output by policymakers on interest-rate reaction functions and test for their existence. A modified New Keynesian framework which makes it possible to identify the dominant type of asymmetry is developed and related to the precautionary demand of policymakers for expansions and for low inflation. Using data for four G7 economies, the paper shows that, except for Germany, nonlinear and asymmetric behaviour is present. A main finding, for the US, is that after credibility-building and disinflation have been established, the monetary authority develops a greater precautionary demand for output expansions than for low inflation. This may generate a new type of inflation bias. Conversely, where, as is the case in the UK, credibility-building is still a concern for the authorities, managing the business cycle is dominated by concerns of the monetary authorities to keep inflation expectations low.

Fiscal decentralisation in Europe : a review of recent experience

In this paper we review countries' diverse experiences to draw conclusions on the pitfalls and opportunities that are open through decentralisation of governments' fiscal responsibilities to sub-central jurisdictions. We begin by reviewing the theoretical arguments for and against the decentralisation of spending responsibilities. We also provide a cross country comparison of the extent to which spending powers have been devolved in a range of European countries, putting each country's position into a wider context. Second, we review some insights from the theory of fiscal federalism on fiscal autonomy and assess the extent of autonomy at subcentral tiers of government in the same set of countries. We discuss the approaches that have been followed, and a number of the difficulties that particular countries have faced, as the fiscal autonomy of sub-central tiers of government has evolved. Our conclusions are set out in the final section

Fiscal federalism and fiscal autonomy : lessons for the UK from other industrialised countries

The purpose of this article is the following. First, we provide a comparison of the degree of fiscal decentralisation in the UK with that in other countries, and assess the extent to which different areas of public expenditure are assigned to different tiers of government. Second, we assess the degree of fiscal autonomy in the UK compared to that in other OECD countries. We also provide some insights from the theory of fiscal federalism to assess whether the current degree of fiscal autonomy in the UK is optimal, or whether there are useful lessons to be learned from other economies. One key conclusion here is that, although there would seem to be good reasons to increase the degree of fiscal autonomy in the UK, one might want to proceed with caution. We also discuss whether other OECD countries offer useful models in terms of the method of allocation of block grants, the allocation of taxation to other tiers of government, and the way in which are used to achieve the twin objectives of fiscal efficiency and equity. Finally, we consider whether the 'asymmetric nature' of UK devolution, with different national and regional units being assigned different degrees of autonomy, represents a desirable model in the light of experiences elsewhere in Europe. In the next section, we outline the division of spending responsibilities between different tiers of government in the OECD economies. Then we compare the degrees of fiscal autonomy, and assess whether further reform is warranted in the case of the UK. In subsequent sections, we consider how the mixed use of central grants, shared taxation and devolved taxation can impact on the objectives of efficiency and equity; discuss the extent to which different subcentral governments have autonomy on borrowing; and examine how fiscal federalism is evolving in different countries

Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries

We estimate forward-looking interest-rate reaction functions for the G3 economies and for a group of countries which recently adopted inflation targets. Some significant shifts in the conduct of monetary policy are detected in the G3 countries, especially in the US A and Japan. In contrast with popular wisdom, it is only since the 1990s that policies in these countries begin to look consistent with an inflation-targeting regime. In addition, the introduction of inflation targeting and central bank reforms in countries like Sweden, Canada and New Zealand has not led to major changes in the way in which central banks react to the objectives of economic policy. In all cases changes in policy behaviour pre-date the introduction of inflation targets and central bank reforms. The paper challenges the one-size-fits-all attitude towards modern central bank policymaking which permeates a great deal of the current literature.Monetary policy, inflation targets, central bank reform, reaction functions, interest rates

Fiscal and Monetary Policy Interactions: Empirical Evidence and Optimal Policy Using a Structural New Keynesian Model

This paper examines the interaction of monetary and fiscal policies using an estimated New Keynesian dynamic general equilibrium model for the US. In contrast to earlier work using VAR models, we show that the strategic complementarity or substitutability of fiscal and monetary policy depends crucially on the types of shocks hitting the economy, and on the assumptions made about the underlying structural model. We also demonstrate that countercyclical fiscal policy can be welfare-reducing if fiscal and monetary policy rules are inertial and not co-ordinated.

Whoís Afraid of the Big Bad Central Bank? Union-Firm-Central Bank Interactions and Inflation in a Monetary Union

Existing models of union-firm-central bank interaction focus on the impact which the central bank has on union behaviour in setting wages. This paper considers an alternative explanation for wage moderation, based on firm-specific factors, whereby the probability of bankruptcy and exit disciplines firms and unions. The exit of firms is a source of employment fluctuation that the union tries to stabilize. We also show that the formation of a monetary union in this model increases the probability of firm exit and may further moderate union wage demands for any given degree of central bank conservativeness.

A Simple and Flexible Alternative to the Stability and Growth Pact Deficit Ceilings. Is it at hand?

There have been widespread criticisms of EMU fiscal institutions. We consider a simple alternative to the deficit ceilings envisaged in the Stability and Growth Pact. We advocate the adoption of deficit targets. National governments should retain discretion in setting deviations from targets, but these deviations should then be reversed following a predetermined rule. This ensures fiscal discipline and leaves room for stabilisation policies. For the rule to be credible, only small changes are required to current EMU institutions. Our scheme performs well in comparison with existing reform proposals and is consistent with the golden rule of deficit financing.

Real Business Cycles or Sticky Prices? The Impact of Technology Shocks on US Manufacturing

In this paper we estimate industry-level VAR models at the 4- digit SIC level for a number of US manufacturing sectors, using TFP series which allow for variable factor utilisation over the cycle. This allows us to verify the relevance of alternative theoretical modelling approaches to the business cycle. Our results support standard RBC models, and models of nominal rigidity based on sticky wages. They oer little support to dynamic general equilibrium models based on imperfect competition and sticky prices. Our results extend those obtained recently by other researchers using aggregate data.