Economics,economists, and public policy☆

This article examines the role of economics and economists in shaping public policy by, first, examining the employment of economists in government, academe, and the private sector. In the United States, only a minority of Ph.D. economists (about 12 percent) are employed in government, and several important departments of the federal government employ few economists. The article goes on to illustrate the pitfalls that economists face in assisting and advising with public policy by examining the adoption of statistical profiling in Unemployment Insurance. The article concludes that, if the economics profession and economic research are to be effective in shaping public policy, then academic economists must become more directly involved with policy makers in government and decision makers in business.     

Does trade integration alter monetary policy transmission?

This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale new Keynesian model. Allowing for strategic complementarities in price setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation: a monetary contraction which appreciates the exchange rate lowers the local currency price of imported goods; this, in turn, induces domestic producers to lower their prices too. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on time series for the US relative to the euro area. Our estimation procedure yields plausible parameter values and suggests a strong role for strategic complementarities. Counterfactual simulations show that openness alters monetary transmission significantly. While the contractionary effect of a monetary policy shock on inflation and output tends to increase in openness, we find that monetary policy's control over inflation increases, as the output decline which is necessary to bring about a given reduction of inflation is smaller in more open economies.     

How does interest rate policy affect inflation? A simple general equilibrium model with the interest rate as the policy instrument

This paper analyses the connection between the assumptions often made on the utility functions of economic agents when general equilibrium is considered. Concretely, we analyse the effect of certain assumptions regarding the elasticity of marginal utility for both the existence of equilibrium and, assuming equilibrium exists, for the effect that raising the nominal interest rate has on the equilibrium inflation rate. Typical macroeconomic wisdom states that an increase in the interest rate will decrease inflation, and this seems to have been the basis for real-life macroeconomic policy in several countries. However, this wisdom is based on models in which the money supply, and not the interest rate, is the policy instrument. Using a very simple general equilibrium model of intertemporal consumption, this paper finds sufficient conditions for the negative relationship to hold (and for it not to hold) in the short run, when monetary policy is characterised by a given nominal interest rate. Above all, it is shown how the relative risk aversion characteristics that are assumed of the economic agents are important.     

Managed migration? Nurse recruitment and the consequences of state policy

This article analyses the main trends in nurse migration to the UK and highlights the importance of state policy as a major influence shaping employer utilisation of migrant nurses. The introduction of the points‐based immigration system is considered, and the consequences for migrant nurses, employers and trade unions are examined.     

Pushing the limit? Fiscal policy in the European Monetary Union

Governments are confronted with the growing realization that they face fiscal limits on the size of debt and deficits relative to GDP. These fiscal limits invalidate Bohn's criterion for fiscal sustainability, which allows explosive debt relative to GDP, eventually violating any fiscal limit. We derive restrictions on a fiscal rule, necessary for the government to eliminate explosive behavior. These restrictions require that the response of the primary surplus to debt be relatively strong, and that the primary surplus be cointegrated with both debt and output. We test these empirical implications for a panel of eleven EMU countries, and find that they are satisfied, implying that fiscal policy does not create explosive behavior.     

Is your maternity policy ready for the '90s?

The increasing number of women in the work force has forced some companies to take a critical look at their maternity policies. Direct costs for these policies are hard to measure. But, demographic, social and legislative pressures may force companies that haven't addressed this issue to do so in the '90s.     

Are central banks really breaking the (policy) rules?

• ? Looking at the strength of the global economy, it's no surprise that simple policy rules suggest that interest rates in some advanced economies are much too low and/or that several rate hikes would be needed in 2018 to avoid falling further behind the curve. Nonetheless, we expect central banks to respond cautiously and we see a slower pace of tightening than the consensus view .
• ? Policy rules, such as the Taylor Rule, have long been considered a useful guide to the potential path for policy rates. But while it suggests that current US, Eurozone and Australian central bank rates are broadly appropriate, it signals that UK, Canadian, and Swedish rates should be substantially higher. Based on our economic forecasts, Taylor Rules suggest that the central banks in the US, Eurozone, Canada and Australia will all need to raise intertest rates by around 100bps by end‐2018.
• ? However, there are several reasons not to draw strong conclusions from such point estimates. First, the Taylor Rule requires estimates of two unobservable variables – the output gap and the natural rate of interest – which cannot be estimated precisely.
• ? Second, using models that were designed to predict US policy responses in the 1990s to forecast central banks' behaviour today is likely to be misleading. Meanwhile, inferring central banks' reaction functions from recent policy rate moves to assess the future policy path is fraught with difficulties. Not only have interest rates been broadly unchanged for the bulk of the post‐financial crisis period, but policymakers have provided other forms of policy support.
• ? Third, outside the US at least, Taylor Rules have historically pointed to persistently different policy rates from those observed, yet inflation has been well anchored.
• ? The upshot of all this is that we expect central banks in the advanced economies to err on the side of caution and anticipate interest rates rising less quickly than the consensus amongst economists.

     

Local fiscal policy after a bailout: austerity or soft budget constraints?

Do higher-level governments enforce austerity after bailing out indebted subnational governments or are bailouts a free lunch for the recipients? Analyzing this question empirically is difficult because bailouts are not granted randomly. This paper suggests a method to evaluate the fiscal consequences of subnational bailouts that does not rely on institutional details to obtain quasi-exogenous variation. The main idea is to combine matching and difference-in-differences designs. In a second step, I apply this method to study how bailouts affect the fiscal policy of recipient municipalities in the German federal state of Hesse. Combining disaggregated budget data with data on bailout payments over more than a decade, I find that municipalities consolidate their budgets after they receive a bailout from the state government. While this finding is specific to the German federal context, the proposed methodology can be used, due to its flexibility, to study the fiscal consequences of bailouts in various other settings.     

The dynamics of US inflation: Can monetary policy explain the changes?

We investigate the relationship between monetary policy and inflation dynamics in the US using a medium scale structural model. The specification is estimated with Bayesian techniques and fits the data reasonably well. Policy shocks account for a part of the decline in inflation volatility; they have been less effective in triggering inflation responses over time and qualitatively account for the rise and fall in the level of inflation. A number of structural parameter variations contribute to these patterns.     

Are “bounced check loans” really loans? Theory,evidence and policy

This research addresses the controversial bank policy of paying – rather than bouncing – overdrawn checks, debits or ATM withdrawals. We argue that it should fall under lending regulations only if consumers use the program to get intentional loans. In contrast, if the program primarily applies to checking account activity then it should fall under checking account regulations. A model of precautionary balance holding and checking account customer data are used to estimate the likelihood of overdrafting. Predicted overdrafts are compared to actual overdrafts to conclude that 79% are explained by the model and thus thought to be mistakes due to the stochastic nature of household expenditures.     

International technology transfer policy: from “contract bargaining” to “sourcing”

A significant shift in the basic philosophy of international technology transfer policy has taken place which has generated new policy concerns and issues in international technology transfer. We describe this change as a change from “contract bargaining” policy context towards “sourcing” policy context. Starting from the analysis of the underlying assumptions and effects of international technology transfer policy from the 1960s/70s we briefly outline the major changes that have taken place in the world economy which made the changes in international technology transfer policy unavoidable. We analyse the main technology transfer issues created by globalized economy within, as we call it, a “sourcing framework” and compare the main policy issues in international technology transfer in the shift from “contract bargaining” to a “sourcing” context.     

Gains from international monetary policy coordination: Does it pay to be different?

In a two country world where each country has a traded and a non-traded sector and each sector has sticky prices, optimal independent policy in general cannot replicate the natural-rate allocations. There are potential welfare gains from coordination since the planner under a cooperating regime internalizes a terms-of-trade externality that independent policymakers overlook. If the countries have symmetric trading structures, however, the gains from coordination are quantitatively small. With asymmetric trading structures, the gains can be sizable since, in addition to internalizing the terms-of-trade externality, the planner optimally engineers a terms-of-trade bias that favors the country with a larger traded sector.     

Conceptualizing and measuring “industry resilience”: Composite indicators for postshock industrial policy decision-making

Can resilience be a relevant concept for industrial policy? Resilience is usually described as the ability of a socioeconomic system to recover from unexpected shocks. While this concept has caught the attention of regional economics researchers seeking to understand the different patterns behind regional recovery after a disruption, it is increasingly recognized that resilience can have policy-relevant conceptual applications in many other regards. In this paper, we apply it to industries and define the “industry resilience” concept and measurements. Our contribution is twofold. Theoretically, we frame industry resilience as a useful conceptual framework for policy-making to support the selection of industrial policy targets that are more capable of recovering after unexpected shocks. In addition, industry resilience can mitigate government failures by supporting decision-makers in promoting both economically and socially sustainable structural change. Methodologically, building on post-2008 U.S. data, we develop two composite indicators (CIs) to separately analyze quantitative and qualitative postshock variations in sectoral employment. Such CIs support policy-makers in visualizing sectoral performances dynamically and multidimensionally and can be used to compare each sector both to other sectors and to its counterfactual. Our results highlight that sectors react heterogeneously to shocks. This points to the relevance of tailoring vertical industrial policies according to sector features and the aims of industrial policy initiatives.     

The consequences of a policy of necessity: Bank regulatory forbearance, 1986–1989

While it is widely recognized that bank regulators choose the policy of forbearance because of an undercapitalized bank insurance fund, a key policy question centers on what were the effects of forbearance. This study uses a survival model to track capital deficient banks from December 1986 to December 1989, a period in which regulators explicitly used forbearance in managing troubled banks. Despite the contention that forbearance returns banks to safe-and-sound practices, this study concludes that forbearance did not enable troubled banks to return to viability. Furthermore, the evidence from the survival analysis provides negligible support, if any, for the interrelationship between forbearance and too-big-to-fail doctrine.     

The hidden costs of control revisited: Should a sanctioning policy be announced in advance?

Sanctions are widely used to enhance compliance in principal agent relationships. Although there is ample evidence confirming the predicted positive incentive effect of sanctions, it has also been shown that imposing sanctions may reduce compliance by crowding out intrinsic motivation. We add to the literature on the hidden costs of control by showing that these costs are restricted to situations where the principal actively chooses to sanction low performance and where this choice is known to the agent. In such a situation, the principal's commitment to sanction low performance might indicate that she or he is a distrustful “type” and hence conveys a negative signal. To the contrary, if (a) an agent is not informed about whether low performance will be sanctioned or if (b) the computer determines whether low performance will be sanctioned, the principal's “type” is not revealed, and we find no evidence of crowding out.     

The difficulty of discerning what’s too tight: Taylor rules and Japanese monetary policy

Observers have relied increasingly on simple reaction functions, such as the Taylor rule, to assess the conduct of monetary policy. Applying this approach to deflationary or near-zero inflation environments is problematic, however, and this paper examines two shortcomings of particular relevance to the Japanese case of the last decade. One is the unusually high degree of uncertainty associated with potential output in an environment of prolonged stagnation and deflation. Consequently, reaction function-based assessments of Japanese monetary policy are so sensitive to the chosen gauge of potential output as to be unreliable. The second shortcoming is the neglect of policy expectations, which become critically important as nominal interest rates approach zero. Using long-term bond yields, we identify five episodes since 1996 characterized by abrupt declines in Japanese inflation expectations. Policies undertaken by the Bank of Japan during this period did little to stabilize expectations, and the August 2000 interest-rate increase appears to have intensified deflationary concerns.     

A Dawn of Convergence?: Third sector policy regimes in the ‘Anglo-Saxon’ cluster

Abstract

Since the 2008 financial crisis, the third sector policy and regulatory regimes in the ‘Anglo-Saxon cluster’ have been subject to considerable policy churn. Comparing the reforms in the ‘meta-policies,’ regulations and financing in England, US, Canada and Australia, this analysis identifies both significant policy convergence and divergence. A new ideational landscape has emerged that is dominated by a focus on transparency, impact and social innovation. Convergence is not the whole story, however. In particular, the overarching meta-policies are absent, increasingly weak or divisive, suggesting a future characterized by the sporadic intervention of parochial politics and the likelihood of increased difference.     

Employment equity policy frames in the literature: ‘good practice’ versus ‘bad idea’

Work organisations considering policies against racial or ethnic discrimination and for recognising diversity can find many different and often conflicting recommendations in the literature, in particular regarding the aim of proportional representation of different ethnic groups. To better understand this controversy, this paper rigorously examines three key theories from a frame-critical and business ethics perspective. It introduces a fundamental threefold conceptualisation of ‘employment equity policy’ (EEP) as a catch-all term for related concepts such as ‘affirmative action’, ‘equal opportunities policy’ and ‘diversity management’, distinguishing between three different organisational goals: equal treatment, equal results and individual recognition. The analysis suggests that different authors emphasise some ‘facts’ rather than others and strategically interpret the limited available empirical research to support their policy positions, mixing both classical and newer ethical reasoning. In the ‘good practice’ frame, human resource management practitioners are urged to take ‘positive action’, to monitor the ethnic composition of the workforce and to formulate target figures to increase the representation of discriminated groups. In the opposing ‘bad idea’ frame, organisations are seriously advised against EEPs with ‘hard’ numerical goals: these policies supposedly are unnecessary and ineffective and have negative unintended consequences. The article draws implications from these findings for future research and practice in the field of EEPs.     

Understanding Ageing Public Sector Workforces: Demographic challenge or a consequence of public employment policy design?

In all OECD countries, populations and workforces are ageing, with public services generally being older than broader labour markets. Governments are concerned at the looming capacity crisis and identifying policy responses. However, they have generally identified the problem as a simple change in demographics. This article adds a new perspective to this policy debate. Using a study of an Australian state public service, it identifies an association between changes in public employment policies and changes in the workforce age profile. It suggests that current employment policies, which replaced the traditional focus on youth recruitment with a more open public sector labour market, have made it inevitable that public workforces would age and be older than the general labour market. Policy responses to the older public workforce need to go beyond demographic explanations, to accept the older public workforce as the new norm, and align public employment policies accordingly.