Monetary policy and macroprudential policy: Different and separate?

The paper discusses how monetary and macroprudential policies can be distinguished, how appropriate goals for the two policies can be determined, whether the policies are best conducted separately or coordinately and by the same or different authorities and how they can be coordinated when desired. The institutional frameworks in Canada, Sweden and the UK are briefly compared. The Swedish example of monetary policy strongly “leaning against the wind” and the subsequent policy turnaround is summarized, as well as what estimates have been found of the costs and benefits of leaning against the wind.     

Does antitrust policy promote competition?

Using new measures of the scope and strength of antitrust policies, we find no evidence that more robust antitrust regimes correlate with more intense local competition or less corporate dominance. The results cast doubt on the common textbook assumption that antitrust policies improve levels of competition.     

Regret theory and policy reform ∗

This paper offers an explanation of policy reforms undertaken in times of an economic crisis. Our explanation does not depend either on conflicts of interests between different socio-economic groups, or on the informational imperfection about the effectiveness of the current policy regime. The single decision maker in our model experiences regrets when the uncertain reform outcome is worse than the status quo. We show that an economic crisis which reduces the status-quo income makes the regret-experiencing decision maker more eager to undertake reforms in times of an economic crisis, despite the higher utility costs of adjustments.     

Was Spanish fiscal policy sustainable?

Was unsustainable fiscal policy one of the reasons for the recent crisis in Spain? This is tested by examining how the government’s primary surplus is reacting to the debt-GDP ratio. Using different models for the explanatory variables and the consideration of the correct detrending method led to the result that Spanish fiscal policy reacted to higher debt by increased surpluses, and thus was sustainable. To deal with structural breaks in the models, firstly, a dummy for the recent financial crisis was added. Secondly, a Kalman (J Basic Eng 82(1):35–45, 1960) filter model allowing for time-varying coefficients was estimated to cope with remaining breaks. The reaction of Spanish fiscal policy on debt was found to be decreasing over time. However, it was still significantly positive, showing sustainability.     

Institutional constraints,double imbalances and policy option—global financial crisis and China’s fiscal policy

With the enormous development of China’s economy, we re-implement the proactive fiscal policy not only to response to the global financial crisis, but also to take advantage of the opportunity to resolve the institutional constraints, transform China’s economic growth pattern, keep stability and promote the sustainable growth of the economy. So the goal of fiscal policy should weigh easing the economic crisis against long-term stability and the development of economy. The past experiences of fiscal policy practices in China indicate that the traditional simple counter-cyclical fiscal policy may be able to pull the economy out of recession, but it has little effect on automatic recovery of the economy. Therefore, the fiscal policies need to hang on the entire reform process and the whole economic structure adjustment. This paper firstly reveals the root of “double imbalances” and institutional constraints, then analyzes the paradox between such constraints, and discusses the space of positive fiscal policy.     

Should public policy respond to positional externalities?

A nice suit is one that compares favorably with those worn by others in the same local environment. More generally, a positional good is one whose utility depends strongly on how it compares with others in the same category.¹A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated.² For example, if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient, since when all spend more, each candidate's probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful.In such cases, however, it is often impractical to negotiate private solutions. Do positional externalities then become legitimate objects of public policy concern? In attempting to answer this question, I employ the classical libertarian criterion put forth by John Stuart Mill³, who wrote the state may not legitimately constrain any citizen's freedom of action except to prevent harm to others. I argue that many positional externalities appear to meet Mill's test, causing not just negative feelings but also large and tangible economic costs to others who are ill-equipped to avoid them. I also discuss an unintrusive policy remedy for positional externalities, one modeled after the use of effluent charges to curb environmental pollution.The paper is organized as follows. Section 1 notes the deep similarity between the conditions that give rise to positional arms races and those that give rise to conventional military arms races. Section 2 follows with a review of evidence concerning the strength of concerns about relative position. Section 3 describes some of the tangible economic costs that people experience as a result of positional externalities arising from such concerns. Section 4 takes up the question of whether collective action directed against positional externalities is consistent with respect for individual rights. Section 5 describes how a progressive consumption tax could neutralize many of the most costly effects of positional externalities.     

‘Disequilibrium’ exchange rates as industrialization policy

This paper deals with a long-standing puzzle: why are developing countries so reluctant to change their exchange rates when their currencies have become blatantly overvalued? The argument developed here is the following: under circumstances that are fairly common to real economies, a policy which deliberately maintains the exchange rate at a disequilibrium level can be welfare-increasing by promoting structural change. This can come via the presence of a systematic link between the real exchange rate and the manufacturing sector's terms of trade vis-à-vis agriculture. The paper considers a model in which there exists a relationship between these two due to technological factors. Using a two-period, two-sector general equilibrium model, it demonstrates that such a link provides authorities with a tool which can be manipulated to bring about industrial growth and increase welfare in the presence of unrealized learning-by-doing effects.     

Research on spending policy for university endowment funds

University endowment funds are important capitals in many universities in China today. A lot of universities target their endowment spending at a fixed spending ratio. Because of volatile inflation, it is not optimal. In this paper, the author analyzes the importance of spending policy of university endowment funds, and suggests two models in accordance with inflation-adjusted value.     

Fiscal policy simulations – a comparison of UK models

The problem of endowing large applied general equilibrium models with numerical values for parameters is formidable. For example, a complete set of own- and cross-price elasticities of demands for the MONASH model of the Australianeconomy involves in excess of 50000 items. Invoking the minimal assumptions that demand is generated by utility maximization reduces the load to about 26000 - obviously still a number much too large for unrestrained econometric estimation. To obtain demand systems estimates for a dozen or so generic commodities at a top level of aggregation (categories like ‘food’, ‘clothing and footwear’, etc.), typically Johansen's lead has been followed, and directly additive preferences imposed upon the underlying utility function. With the move beyond one-step linearized solutions of applied general equilibrium models, the functional form of the demand system adopted becomes an issue. The most celebrated of the additive-preference demand systems, the linear expenditure system (LES), has one drawback for empirical work; namely, the constancy of marginal budget shares (MBSs) - a liability shared with the Rotterdam system. To get around this, Theil and Clements used Holbrook Working's Engel specification in conjunction with additive preferences; unfortunately both Working's formulation and Deaton and Muellbauer's AIDS have the problem that, under large changes in real incomes, budget shares can stray outside the [0, 1] interval. It was such behaviour that led Cooper and McLaren to devise systems with better regularity properties. These systems, however, are not globally compatible with any additive preference system. In this paper we specify, and estimate, at the six-commodity level, an implicitly directly additive-preference demand system which allows MBSs to vary as a function of total real expenditure and which is globally regular throughout that part of the the price-expenditure space in which the consumer is at least affluent enough to meet subsistence requirements.     

‘Talking down monetary policy’ – a note

There is a recent debate about whether ultra-expansionary monetary policy is no longer effective in stimulating demand, a concern often voiced in the euro area in light of persistently low and even negative inflation. As a response, the European Central Bank (ECB) warns against ‘talking down monetary policy’ (ECB Vice-President Vítor Constâncio, 2016). This note uses a textbook model of optimal monetary policy to study a situation in which the public misperceives the interest rate elasticity of aggregate demand, which reflects policy effectiveness. We show that as a result of underestimating policy effectiveness demand shocks can no longer be stabilized perfectly, thus resulting in inefficient inflation and output dynamics. In the presence of misperceptions, a negative demand shock leads to a prolonged period of negative inflation rates.     

Time-varying transmission efficiency of China’s monetary policy

This paper tries to investigate the time-varying characteristics of China’s monetary policy transmission from the impulse response evidence of both open-economy DSGE model and TVP-VAR model. We find that the transmission efficiency of price-based monetary policy has significantly improved over the sample period, while quantity-based monetary policy is weakening. The resume of exchange reform in 2010 also strengthens the exchange rate channel especially in terms of price-based monetary policy. Combining with the evidence from DSGE model underlines the importance of further interest rate liberalization and price-based monetary policy Taylor rule should also consider the exchange rate stability.     

Are things moving? On demographic processes and social policy

Some recent positive changes in demographic trends in the Soviet Union are described. These include an increase in life expectancy in 1986, particularly for males, and an increase in the birth rate, although fertility in European Russia is still below replacement level. The author then considers how social policy, including family policy, can be expected to influence demographic variables in accordance with the country's needs, particularly in light of major differences among regions in population dynamics. He concludes by considering the relationship between demographic factors and democracy.     

Can a comparative capitalism approach explain fiscal policy activism?

This study investigates the implications of models of capitalism for the responsiveness of countries’ fiscal policies during business cycles using new data for member countries of the Organization for Economic Cooperation and Development and China. We expand the literature by adding the category of East Asian nonliberal capitalism to the established distinction of liberal market economies and nonliberal coordinated market economies. These three differ substantially not just in their fiscal policies, but also in monetary policies, degree of financial market orientation, exchange rate regime, and labor market organization. As in previous studies, we find that governments of liberal economies adopt more countercyclical fiscal policies. Departing from existing studies, however, among the nonliberal models of capitalism, (East Asian) state-led models have more countercyclical fiscal policies than (European) coordinated market economies, perhaps as countercyclical as liberal economies, both historically and during the 2007–9 crisis. This is due to less independent central banks, managed float of exchange rates, and limited financial market orientation and financial openness in East Asia, which allow for more active fiscal policy. Among political factors, left-of-center governments, fractionalized party systems, and election years are associated weakly with countercyclical fiscal policy, as expected. Labor market coordination and welfare generosity have unclear roles in regard to fiscal policy, a topic for future research.     

How does monetary policy transmission mechanism work in Fiji?

The study aims to examine the impact of changes in policy variables namely, monetary aggregate (M1), exchange rate and interest rate on two monetary goal variables, namely output and price level in Fiji from 1970 to 2006 by applying the procedures of variance decomposition and impulse response functions. We conclude that the money channel is the most effective channel of transmission mechanism among the three channels.

Understanding China’s monetary policy: an institutional perspective

Given China’s status as a large transitional economy, analysing the country’s monetary policy requires an understanding of the institutional and policy environment within which monetary policy operates. As China’s monetary policy has multiple objectives and the central bank is subordinate to the State Council in monetary policy decisions, addressing deep-rooted structural issues and improving governance and institutions are essential so that monetary policy can be more focused and effective. Confronted with the Impossible Trinity dilemma, China faces daunting challenges in tackling the inevitable policy choice between monetary autonomy and exchange rate control as its capital account increasingly liberalises. This article analyses China’s unique and evolving monetary policy framework from an institutional perspective and evaluates the challenges to monetary management and reforms. Relevant policy implications for monetary policy implementation are also discussed.     

Host-country policy – commitment or no-commitment: a theoretical analysis

This paper develops a model of foreign entry strategy and examines welfare of the host-country under two situations - (i) where host-country government commits to the tax policy, (ii) where host-country government does not commit to the tax policy. It turns out that under the non-committed government policy the foreign firm does not prefer to hold equity share in the domestic project. The host-country welfare, however, is more under the committed government policy than the non-committed government policy when the foreign firm has sufficiently higher bargaining power. The possibility of technology choice by the foreign firm reduces the range of bargaining power of the foreign firm over which the host-country welfare is more under the committed policy compared to the non-committed policy.     

Does unconventional monetary policy affect inequality? Evidence from Japan

Inequality has been largely ignored in the literature and practice of monetary policy, but is gaining more attention recently. Here, we exclusively focus on the impact of unconventional monetary policy (UMP) on inequality. We look at how the recent UMP in Japan affected inequality, using household survey data. Our vector auto regression (VAR) results show that UMP widened income inequality after 2008Q3 as the Bank of Japan (BoJ) resumed its zero-interest rate policy and reinstated UMP. This is largely due to the portfolio channel. To the best of our knowledge, this is the first study to empirically analyse the distributional impact of UMP. Japan’s extensive experience with UMP may hold important policy implications for other countries.     

Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy

This paper examines whether monetary expansion is a beggar-thyself or beggar-thy-neighbour policy. Obstfeld and Rogoff (1995) show that monetary expansion under producer currency pricing increases domestic and foreign overall welfare, in cases where the cross-country substitutability is high. If the cross-country substitutability is low, then monetary expansion is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare (Corsetti & Pesenti 2001; Tille 2001). In this paper, we will show that regardless of whether the cross-country substitutability is high or low, monetary expansion is always a beggar-thyself policy in the short run.