INFORMAL CENTRAL BANK INDEPENDENCE: AN ANALYSIS FOR THREE EUROPEAN COUNTRIES

Changes in formal and informal central bank independence (CBI) in France, Italy and the United Kingdom in the period from the mid-1970s to the 1990s are examined; the major changes occurred in the 1990s, after the disinflations of the 1980s. Broad trends in the informal independence of central banks (CBs), defined as the ability to pursue price stability regardless of the government's preferences, are identified on the basis of a monetary policy narrative and an analysis of a set of qualitative determinants of informal independence. The most important determinants are the social/political acceptance that monetary policy is the sphere of the CB, the existence of anti-inflationary commitments in the form of intermediate targets for monetary policy, the degree of social consensus on the means and ends of macroeconomic policy, and the relative technical expertise of the CB. These broad trends help to explain some of the inflation experience of the 1980s and 1990s, which cannot be understood in terms of changes to formal CBI.     

Cabinet Formation in Coalition Systems

Theoretical and empirical issues concerning the political bargaining process over cabinet formation in coalition systems are addressed in this paper. A set of theoretical predictions is tested using a sample of 13 western European countries observed throughout the period 1950–1995. It appears that the formation delay is increasing in the degree of ideological heterogeneity of coalition partners and that the share of portfolios secured by the formateur is decreasing in the degree of complexity of the bargaining environment. A few factors affecting the degree to which the outcome of the negotiation process can be defined as balanced are also identified.     

A geometric property of indifference curves in the (mean-standard deviation) plane

We prove that the slope of the indifference curve through point (m σ) of the (meanstandard deviation) plane must be smaller than the ratio (1+m)/σ. We show that the indifference curves corresponding to a quadratic utility function do actually satisfy that inequality; and prove, by the way, that these curves are not quarters of circles (as it is usually asserted), but smaller parts of them.

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Riassunto Si prova che, nel piano (media-scarto quadratico medio), l'inclinazione della curva d'indifferenza per il punto (m, σ) deve essere minore del rapporto (1+m)/gs. Si mostra che le curve d'indifferenza corrispondenti ad una funzione d'utilià quadratica soddisfano di fatto tale limitazione; e si prova, a questo proposito, che tali curve non sono — come generalmente asserito — quarti di circonferenze, ma archi più piccoli delle medesime.

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The second part of this article was stimulated by an observation of E. Castagnoli. The author gratefully acknowledges this to him.     

Competition and the signaling role of prices

In a market where sellers are heterogeneous with respect to the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price-setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.     

WAGE CONTROLS DURING THE TRANSITION FROM CENTRAL PLANNING TO A MARKET ECONOMY

Wage controls have been integral to the stabilization programsof the formerly socialist countries of Central and Eastern Europethat are now moving toward market economies. The usual rationalefor such restraints in "heterodox" stabilization efforts hasbeen the need to break the momentum of inflationary expectations.In economies in transition the pervasive weakness of governanceof state enterprises supplies an added imperative: the controlsare needed to hold the line against pressures for excessivewage increases, which must ultimately be paid for by decapitalizationof firms, reduction of tax revenues, or accumulation of enterprisedebt. Examination of the design and enforcement of various systemsof wage control leads to the conclusion that wage controls inevitablydistort decisions on employment and work effort. These distortions,moreover, are the result of the same features of state enterprisesthat necessitate wage controls in the first place. Ultimately,the only way to avoid such distortions is to remove uncertaintyabout the timing of privatization, to ensure that workers andmanagement have a well-defined stake in the newly privatizedfirms, and to establish financial discipline over the enterprises.      

Public versus private risk sharing

Can public income insurance through progressive income taxation improve the allocation of risk in an economy where private risk sharing is incomplete? The answer depends crucially on the fundamental friction that limits private risk sharing in the first place. If risk sharing is limited because insurance markets are missing for model-exogenous reasons (as in Bewley (1986) [8]) publicly provided risk sharing improves on the allocation of risk. If instead private insurance markets exist but their use is limited by limited enforcement (as in Kehoe and Levine (1993) [23]) then the provision of public insurance interacts with equilibrium private insurance, as, by providing risk sharing, the government affects the value of exclusion from private insurance markets and thus the enforcement mechanism of these contracts. We characterize consumption allocations in an economy with limited enforcement and a continuum of agents facing plausible income risk and tax systems with various degrees of progressivity (public risk sharing). We provide conditions under which more publicly provided insurance actually reduces total insurance for agents (excess crowding-out), or under which more public insurance increases total insurance (partial crowding-out).     

The spillover of war in time and space: exploring some open issues

In spite of a voluminous empirical literature, the diffusion of civil war in time and space is still not fully understood and several issues remain open for debate. This article sheds new light on some of these issues. First, we assess the robustness of results to changes in the definition of neighbourhood (spatial dimension) and in the lag structure (temporal dimension). Second, we investigate the factors that determine the strength of civil war diffusion, focusing in particular on (i) the type of war (e.g. its intensity and scope), (ii) the quality of domestic polity, and (iii) interaction opportunities (e.g. ethnic ties and refugee flows). Third, we look at how the occurrence of war in a neighbouring country affects the duration (and not just the onset) of domestic civil war.     

Mind the Gap: Inconsistencies Between Subjective and Objective Financial Risk Tolerance

Investors' financial risk tolerance is crucial in the formulation of suitable financial advice; in the past, assessment efforts relied on multiple approaches and techniques, but their consistency is still an issue. The authors focus on 2 metrics traditionally proposed (self-assessment and portfolio composition) and test their mutual consistency on a sample of 2,374 investors. The approach allows them to discriminate between inconsistencies due to wrong portfolio compositions and those arising from wrong self-assessments. The authors show that low financial literacy, high income, no children, and incautious economic behavior are commonly associated with such inconsistencies.     

Do international labor standards contribute to the persistence of the child-labor problem?

In recent years, a number of governments and consumer groups in rich countries have tried to discourage the use of child-labor in poor countries through measures such as product boycotts and the imposition of international labor standards. The purported objective of such measures is to reduce the incidence of child-labor in developing countries and thereby improve children’s welfare. In this paper, we examine the effects of such policies from a political-economy perspective. We show that these types of international action on child-labor tend to lower domestic political support within developing countries for banning child-labor. Hence, international labor standards and product boycotts may delay the ultimate eradication of child-labor.