Independent Utility Regulators: Lessons from Monetary Policy

This paper explores the similarity of the underlying economic problems that lead to the establishment of (a) independent central banks to operate national monetary policies and (b) independent regulatory agencies for telecommunications and other utility service industries. We show that, in both cases, the adoption of agencies inde- pendent of government results from the need to achieve credibility and a reputation for economically sound long-run behaviour while preserving signi¯cant discretion to handle unanticipated events. We show that this solution is superior to policy rules that are ¯xed in advance. Both for central banks and regulatory agencies, what is re- quired are institutions that provide limited and accountable discretion within a clear policy framework, for example via high levels of accountability and transparency in their decision making processes. On the basis of a review of the empirical literature, we argue that central banks with superior governance arrangements, particularly on accountability and transparency, out-perform those with inferior arrangements and we discuss how this work might be extended to utility regulatory agencies.Monetary policy, credibility, regulation, under-investment, delegation.

Monetary policy in an uncertain world: Probability models and the design of robust monetary rules.

The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE models estimated by Bayesian-Maximum-Likelihood methods I argue that they can be considered as probability models in the sense described by Sims (2007) and be used for risk-assessment and policy design. This is true for any one model, but with a range of models on offer it is possible also to design interest rate rules that are simple and robust across the rival models and across the distribution of parameter estimates for each of these rivals as in Levine et al. (2008). After making models better in a number of important dimensions, a possible road ahead is to consider rival models as being distinguished by the model of expectations. This would avoid becoming `a prisoner of a single system' at least with respect to expectations formation where, as I argue, there is relatively less consensus on the appropriate modelling strategy.Structured uncertainty, DSGE models, Robustness, Bayesian estimation, Interest-rate rules

Can Risk Aversion in Firms Reduce Unemployment Persistence?

This paper contributes to the growing literature that attempts to explain unemployment persistence. We show that when the economy is struck by a negative transitory (or permanent) demand or supply shock, firms can find their way back quicker to the pre-shock (or new) employment levels if they are risk-averse. The reason is that risk aversion in firms creates a self-adjusting mechanism whereby cautious firms adjust hiring and wage-setting decisions to try to regain the pre-shock employment levels and minimize fluctuations in profits. Therefore, perhaps surprisingly, risk aversion in firms is seen as a stabilizing macroeconomic force that reduces unemployment inertia.Unemployment, Persistence, Risk Aversion

The 24/7 Society and Multiple Habits

We examine a model where households develop external habits by following norms and therefore have multiple habits in both consumption and labour supply. In doing so, they contribute to habit formation and hence pose an externality effect on others. Our findings are: first, that consumption and work habit (‘work ethic’) drive us towards a 24/7 society; both forms of habit increase the labour supply of households. Second, the two externalities involved in external habit work in opposite directions. For consumption, external habit is a negative externality as it reduces the utility of others in the economy. By contrast work ethic reduces the disutility and is therefore a positive externality. Third, as a result of our second finding, multiple habits can involve both a consumption tax and subsidy to correct for these externalities. Fourth, with plausible parameter values, the welfare consequences of multiple habits are far greater where there are long-run inefficiencies compared with only transitional inefficiency.Catching-up with the Joneses, Work Ethic, Savings, Output Inefficiency and Taxation

Military Expenditure and Economic Growth: A Meta-Analysis

Meta analysis is conducted to review 32 empirical studies with 169 estimates to find the combined overall effect of military expenditure on economic growth. Using a meta fixed and random effects and regression analysis, our results show that there exists a "genuine" net effect of military expenditure on economic growth. The net combined effect is positive, and the magnitude is very small. The main sources of study-to-study variation in the findings of military expenditure and economic growth literature are attributable to the sample, time periods, and functional forms.military expenditure, economic growth, meta analysis

Robust Control Rules to Shield Against Indeterminacy

We address robustness of inflation targeting rules in a New Keynesian model using two approaches. Firstly we use the Hansen-Sargent method, borrowed from the control theory literature, to design robust rules on the basis of the policymaker playing a game against malign nature. This welfare-based approach is intended to deal with worst case scenarios, but does not directly address stability robustness. Furthermore, in the case of forward-looking systems, it does not address indeterminacy robustness; thus a system may have good stability properties, but a small parameter change could lead to indeterminacy. Secondly, we address this latter issue by imposing a probability distribution on problematic parameters, and investigate both the probability of instability and the probability of indeterminacy of the robust rule. For comparison, we apply the same idea to inflation forecast based rules, which have the potential to perform well provided that there is enough interest rate smoothing and that the forecast horizon is not too far aheadInflation Targeting, Indeterminicy

Growth, Debt and Public Infrastructure

The paper presents a closed economy model of endogenous growth driven by capital externalities arising from both private capital and public infrastructure. The model is calibrated to fit data for India, an approxmiately closed economy. Simulations suggest that fiscal policy certainly matters and the choice of the income taxation rate, the mix of government spending between infrastructure and public consumption goods, and the long-run government debt/GDP ratio can all significantly affect the long-run growth rate. Intertemporal aspects of fiscal policy are also important and the precommitment and non-precommitment policies differ substantially.endogenous growth, fiscal policy, time inconsistency.

Do Drug Plans Matter? Effects of Drug Plan Eligibility on Drug Use Among the Elderly, Social Assistance Recipients and the General Population

The 1984 Canada Health Act does not require that the provinces subsidize prescription drugs. Many provinces do, however, provide categorical coverage to the elderly, social assistance recipients and others, although the generosity of coverage is highly variable. A system of parallel private insurance covers the non-elderly ineligible for social assistance. In this study, we assessed the socio-economic, health and demographic determinants of private drug insurance. We also assessed the effect of inter- provincial variations in drug insurance coverage for the elderly and low income on variations in drug insurance coverage for the elderly and low income on their drug use. In addition, using instrumental variables methods, we considered the effect of prescription drug insurance coverage status on drug use in the non-elderly population ineligible for social assistance. Consistent with the previous literature, we find that for most seniors and non-indigent, drug coverage has only minor effects on drug use. The drug use of social assistance recipients was, however, sensitive to even relatively modest copayments of $0-$6.prescription drug utilization, copayments, user fees, pharmaceutical cost control

Channel Trading and Imperfect Competition: Good Trades and Bad Trades

We investigate the potential economic effects of spectrum trading amongst firms who require spectrum licences as part of their activities. Trading takes place within the technical interference constraints enforced by a regulator. The model accommodates a variety of markets and firms, as well as both chan- nel exchange and channel re-use (i.e. sharing across different markets). Our most detailed analytical results have focused on trade amongst oligopolists in a given (geographical) market. In this context, our results suggest that trade can enhance productive efficiency by placing licences in the hands of firms who value them most (i.e. low-cost firms). These are the ‘good trades’. However, there is a danger that this process may cause higher consumer prices which, in turn, could offset the welfare effects of lower cost production, the ‘bad trades’. An important outcome of our modelling is to make clear a role played by licences: they provide credible commitment mechanisms to restrict output.radio spectrum, spectrum trading, imperfect competition

Getting Normalization Right: Dealing with 'Dimensional Constants' in Macroeconomics

We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES 'share' parameters are not in fact shares, but depend on underlying dimensions - they are 'dimensional constants' in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, 're-parametrization', expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our 're-parametrization' method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.