Fiscal Policy in a Monetary Union Under Alternative Labour-Market Structures.

This paper examines the welfare and stabilisation implications of alterna- tive fiscal decision rules in a monetary union with a common monetary policy, such as the European Monetary Union (EMU). We develop a two-country model under monetary union in presnece of asymmetries. Fiscal policies are assumed alternatively non-cooperative (decentralised) and cooperative (centralised) and labour markets are characterised by decentralised and centralised wage setting. The central issue of the paper is the design of the appropriate fiscal policy rule by comparing and evaluating the performance of alternative arrangements to distribute the power over fiscal authorities between the centre of the union and the individual members of the union. The main result of this paper reveals that a decentralized fiscal policy rule, where the member states conduct independent fiscal policies, with centralised wage setting in labour markets of monetary union members is the appropriate institutional design. This institutional arrangement would improve the social welfare and stabilize better than others the idiosyncratic shocks hitting the economies of the monetary union members.Policy-mix, EMU, labor market institutions.

Accountability and Transparency about Central Bank Preferences for Model Robustness.

Using a New Keynesian model subject to misspecifications, we examine the accountability issue in a framework of delegation where government and private agents are uncertain about the central bank’s preference for model robustness. We show that, in the benchmark case of full transparency, the optimal inflation targeting weight (or penalty) is decreasing with the preference for robustness. Departing from the benchmark equilibrium, the central bank has then incentive to be less transparent in order to reduce the optimal inflation targeting weight and thus to become more independent vis-à-vis the government. We also find that greater opacity will increase the sensibility of inflation and model misspecification to the inflation shock but will decrease that of output-gap. Since macroeconomic volatility could be increased or decreased under more opacity, there could exist in some cases a trade-off between the level and the variability of inflation (and output gap). Persistent inflation shocks could be associated with a higher inflation targeting weight as well as a higher sensibility of inflation and output gap to the inflation shock but a lower sensibility of model misspecification.Central bank accountability, model uncertainty, monetary policy transparency.

Walsh’s Contract and Transparency about Central Bank Preferences for Robust Control.

Within a New Keynesian model subject to misspecification, we examine the quadratic contracts in a delegation framework where government and private agents are uncertain about central bank preferences for model robustness. We show that, in the case of complete transparency, the optimal penalty is decreasing in terms of the preference for robustness. In effect, a central bank reacts more aggressively to supply shocks when the model misspecification grows larger. Furthermore, beginning from the equilibrium of perfect transparency and assuming that the average preference for robustness is sufficiently high, the central bank has then an incentive to be less transparent in order to reduce the optimal penalty. Under similar conditions, we also find that greater opacity will increase inflation and output variability.Walsh’s contract, robust control, model uncertainty, central bank transparency.

Monetary accommodation and unemployment: Why central bank transparency matters.

Recent contributions have shown that in the presence of strategic interactions be- tween non atomistic unions and the central bank, an accommodating monetary policy rule may increase equilibrium unemployment. This note demonstrates that this result can be reversed considering the case where the central bank is not fully transparent concerning its reaction to wage decisions.Monetary regime, Wage setting, Central bank transparency.

Central bank transparency about model uncertainty and wage setters

This paper addresses the issue of monetary policy transparency in a context of model uncertainty by adapting the robust control approach. We find that even if the desire of robustness induces an aggressive response of union and central bank, the central bank should reveal its preference about model robustness.central bank transparency

Monetary Policy with Uncertain Central Bank Preferences for Robustness.

In this paper,we consider the transparency of monetary policy in a New Keynesian model with misspecification doubts. Model uncertainty allows us to identify a new source of central bank opacity, which refers to a lack of information about central bank’s preference for model robustness. Thus, taking into account this lack of transparency, we study its impacts on macroeconomic variables. We show that greater transparency can reduce the variability of output gap, inflation as well as that of their expected values.

Fiscal policy, institutional quality and central bank transparency

This paper examines the issues of institutional quality and central bank transparency through the interaction of monetary and fiscal policies. We have found that the effects of transparency and corruption on macroeconomic performance and volatility depend on the relative importance of the marginal supply-side effects of distortionary tax and corruption, the degree of central bank conservativeness and/or the initial degree of opacity about central bank preferences. If the marginal effect of tax is relatively important, more opacity might induce higher level and volatility of inflation when the central bank is sufficiently conservative. Furthermore, opacity and tolerated corruption can mutually reinforce or weaken each other’s effects on the level and volatility of inflation. Transparency is generally a better strategy when the central bank is conservative. However, there could be a case for opacity in order to compensate for the undesirable macroeconomic effects of corruption when the central bank is liberal.Central bank transparency, central bank conservativeness, fiscal bias, distortionary tax, institutional quality (corruption).

Robust Monetary Policy under Model Uncertainty and Inflation Persistence.

This paper examines the relationship between the preference for ro- bustness of central bank (when it fears that its model is misspecified), the inflation persistence and the output cost of disinflation. Using a simple monetary game model in which higher preference for robustness of central bank is positively associated with the inflation persistence and thus nega- tively with the speed of disinflation, this paper shows that the output cost of disinflation is higher when the less the central bank believes that its reference model is robust.Model uncertainty, Robust control, Minmax policies, Inflation persistence, Sacrifice ratio.

Monetary policy transparency and inflation persistence in a small open economy

Using a New Keynesian small open economy model, we examine the effects of central bank transparency on inflation persistence. We have found that more opacity could reinforce the effect of persistent shocks on the level and variability of endogenous variables if the difference between the interest elasticity of domestic goods demand and the degree of trade openness is sufficient large or sufficiently low, judging on structural parameters characterising the economy, the central bank preference and its initial degree of opacity. Our result implies that, under perfect capital mobility, a high degree of domestic financial development is a good reason for increasing the transparency.Central bank’s transparency, open economy, inflation persistence, real exchange rate persistence

Monetary policy transparency and inflation persistence in a small open economy.

Using a New Keynesian small open economy model, we examine the effects of central bank transparency on inflation persistence. We have found that more opacity could reinforce the effect of persistent shocks on the level and variability of endogenous variables if the difference between the interest elasticity of domestic goods demand and the degree of trade openness is sufficiently large or sufficiently low, judging on structural parameters characterising the economy, the central bank preference and its initial degree of opacity. Our result implies that, under perfect capital mobility, a high degree of domestic financial development is a good reason for increasing transparency.Central bank’s transparency, open economy, inflation persistence.