Policy in the wake of the banking crisis: taking pluralism seriously

This paper explores a pluralist approach to policy with respect to the financial system in the wake of the crisis. We consider first what is involved in a pluralist approach to policy more generally, and how this may be justified. This includes a pluralist stance with respect to different approaches to economic theory, pluralism in the sense of interdisciplinary enquiry, pluralism in terms of the range of methods employed, and pluralism with respect to recognition of the plurality of culture and values in society. Implications are drawn for how the banking crisis is framed, how it is explained by theory and thus how policy is designed. In addressing these issues, current mainstream theory focuses on a narrow definition of rational behaviour which, within competitive markets, generates a socially-optimal outcome. This approach is governed by a mathematical formalist methodology, and encourages policy to incentivise this kind of rational behaviour, with respect, for example, to inflation targeting and addressing moral hazard. Pluralist theory would instead recognise the socio-psychological and institutional/evolutionary foundations of money and banking, such that policy needs to focus on rebuilding confidence and addressing moral (including distributional) issues. The relevant analysis would require a range of methods and would address pluralities within society.     

Activist Macroeconomic Policy, Election Effects and the Formation of Expectations: Evidence from OECD Economies

We examine the explanatory power of a political—business cycle theory in which governments practice short-run policy to lessen the impact of exogenous shocks. Governments have ideological objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. The most prominent version, the rational partisan model, incorporates forward-looking expectations. This model can be compared to a competing model based on backward-looking expectations. Alesina and Roubini's recent advocacy of the rational model uses OECD data. Our reconsideration of the same data, updated to 1995, suggests that the adaptive expectations version offers a better explanation than the rational one.     

The neutrality of systematic monetary policy in models with a disequilibrium price level

A condition is offered which is necessary and sufficient for the neutrality of aggregate output and the real rate of interest with respect to systematic monetary policy in a general class of stochastic macroeconomic models with rational expectations, additive disturbances, lagged information and a disequilibrium price sequence.     

HARM REDUCTION, RATIONAL ADDICTION, AND THE OPTIMAL PRESCRIBING OF ILLEGAL DRUGS

Harm reduction (HR) policy is designed to reduce the social, medical and economic cost of illegal drug use to users and to society at large. It is the most important recent development in international drug policy. However, in the United States and elsewhere, some fear that HR facilities such as needle exchanges and methadone maintenance programs may increase drug consumption and the risk of addiction. This is most likely if users are rational, forward-looking utility maximizers as in the Becker-Murphy model (1988). The tendency for HR policy to increase drug consumption may be strong or weak, depending on the type of drug and the elasticity of demand with respect to the full cost of drug use. The model predicts that the effects will differ between social groups and that there is an optimal prescribing policy for addicts who legally receive drugs in treatment programs. Evidence suggests that clinicians tend to prescribe sub-optimally .     

Macroeconomic equilibrium and welfare under simple monetary and switching fiscal policy rules

Using a standard forward-looking New Keynesian model, this paper investigates rational expectation equilibrium determinacy and macroeconomic performance of simple monetary policy rules under exogenous versus endogenous tax policies when there is tax uncertainty. Under the endogenous tax framework, we found: 1. responding to tax allows monetary policy to have control on the determinacy region, hence higher policy flexibility with respect to the fiscal policy conduct; 2. welfare improvement may come at the expense of cycling. The risk minimizing monetary policy behavior may become problematic since loss function values display huge variations depending on the probabilities given to future tax policy outcomes.     

Endogenous business cycles and systematic stabilization policy*

We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation. We show that policy rules that let the GNP share of government spending depend sufficiently negatively on increases in GNP stabilize the economy with respect to endogenous fluctuations for arbitrarily little distortion of the steady state at which stabilization occurs. The rules do not involve lump‐sum taxation, negative income taxation, or exact knowledge of the economy's laissez‐faire steady state.     

Bank competition and optimal monetary policies under alternative reserve accounting schemes

The purpose of this paper is to provide a theoretical analysis of the implications of increased competition among depository financial institutions for the optimal conduct of monetary policy with respect to the ultimate goals of price and output stability. In the context of a general equilibrium model which includes rational expectations and a market for bank deposits, it is shown that a rise in bank rivalry for deposits produces a more steeply sloped LM schedule. Under a system of lagged required reserve accounting, this fact has no effect on the optimal conduct of monetary policy, which requires an operating procesure designed to target a market interest rate. However, under a system of contemporaneous reserve accounting, this fact implies that less emphasis should be placed on a market interest rate as a variable upon which the Fed's setting of reserves should be conditioned.     

Theoretical Issues of Gender in the Transition from Socialist Regimes

Institutional economics is often presented by its critics as a tradition in political economy purporting a mechanistic, robot-like, view of the human agent. In this paper this portrayal of institutional economics is rejected and choice is reclaimed for institutionalism. In fact, institutional economics is not committed to an understanding of behavior as mere stimulus-response. Notwithstanding the fact that institutionalism places great emphasis on habit in human conduct, this does not mean that it excludes autonomy, volition or rationality.

The paper addresses the notion of habit within the pragmatist-institutionalist tradition with the aim of clarifying this concept, disentangling it from current misconceptions. With the intention of contributing to the development of a theory of choice in institutionalism, it then deals with deliberation and choice in the pragmatist literature, namely in John Dewey's Human Action and Conduct. Finally, the implications of deliberation thus conceived, namely in respect to collective action and institutional change, are highlighted.     

The length of the production period and effective stabilization policy

This paper presents an example of policy relevance in a simple macroeconomic model with continuous market clearing and rational expectations. When the length of the production period is non-zero, the real interest rate enters as an argument of the aggregate supply function. Hence any aggregate demand policy which manipulates the real rate of interest may have direct effects on the evolution of output and employment. In these circumstances, fiscal policy may well be an effective stabilization policy tool. However, the optimal setting of the fiscal policy instrument may not correspond to that suggested by the Keynesian conventional wisdom.     

Examining the role of expectations in a macromodel: Some results with the Finnish QMED model

This paper reports some policy experiments carried out with the QMED model of the Bank of Finland. The main issue in these experiments is the role of expectations. Thus, we compare an autoregressive expectations version with a rational expectations version of the model. When various policy simulations are carried out with these different versions – both in terms of anticipated and unanticipated shocks – it turns out that the whole short-run dynamics are crucially affected by the way in which expectations are modelled. In particular, we find the advance effects in the case of the rational expectations version can be of considerable magnitude.     

Expectations and the theory of macroeconomic policy: Some recent developments

This paper reviews recent developments in the theory of stabilization policies since the rational expectations revolution. The debate about the neutrality proposition is omitted, and attention is directed at the policy evaluation and the time-inconsistency propositions. It is argued that the open-loop rule of the Friedman type is justifiable only with neutrality, since the techniques of policy evaluation can take into account the restrictions implied by rational expectations. The game-theoretic analyzes by Robert Barro and Donald Gordon support the idea of rules rather than discretion in a novel way, but it is shown that a different reputation mechanism can lead to the “ideal” outcome which is not an equilibrium in the Barro-Gordon analysis.     

Is Pragmatism Good for Anything? Towards a Theory of Impractical Economics

This article discusses the relationship between classical pragmatism, political economy and economic policy. Classical pragmatism is contrasted with vulgar meanings and uses of the term pragmatism. Classical pragmatism aims at a deep, substantive theoretical understanding of real-world economic systems and supports application of well-warranted claims to knowledge to improve the human condition. The article reviews the contributions of the founder of pragmatism, Charles Sanders Peirce, to the areas of ontology and epistemology as well as their further development by contemporary classical pragmatist philosopher Susan Haack. Hilary Putnam’s argument that we can have ethics without ontology and objectivity without objects is then critiqued. We need ethics based on an ontology that is rooted in actual human experience; this provides better guidance for evaluating policy proposals. The paper concludes by discussing the affinity of classical pragmatism with different approaches to political economy and policy.

Qualitatively Rational Expectations and Adjustment in the Specific-Factors Model

This paper considers adjustment in a dynamic specific-factors model with endogenous capital stocks. Investment is analyzed under the assumption that expectations are rational with respect to qualitative aspects of the adjustment process (qualitatively rational expectations, QRE). QRE leave considerable scope for systematic errors in expectations formation. Adjustment under rational expectations is similar to QRE adjustment; however, only in the former case is the speed of adjustment optimal. Overshooting of capital stocks is possible and may be optimal. Comparative-static analysis shows an asymmetry between inflows of labor and capital: only capital inflows may cause a Rybczynski effect.     

ANTICIPATED UTILITY AND RATIONAL EXPECTATIONS AS APPROXIMATIONS OF BAYESIAN DECISION MAKING*

We study a Markov decision problem with unknown transition probabilities. We compute the exact Bayesian decision rule and compare it with two approximations. The first is an infinite‐history, rational‐expectations approximation that assumes that the decision maker knows the transition probabilities. The second is a version of Kreps' anticipated‐utility model in which decision makers update using Bayes' law but optimize in a way that is myopic with respect to their updating of probabilities. For several consumption‐smoothing examples, the anticipated‐utility approximation outperforms the rational expectations approximation. The rational expectations approximation misrepresents the market price of risk.     

Price stabilizing, Pareto improving policies

One possible justification for a stabilization policy is that there is volatility in macro variables that individual agents cannot insure against. We study the simplest possible extension of the stochastic two-period, one agent and one commodity OLG model, where we have added one more period, with only one potential activity, namely, trading of contingent commodities. We assume, however, that markets are incomplete. In this case the Monetary equilibrium is not Pareto Optimal and for an open set of economies an allocation where fluctuations in realized savings are removed, Pareto dominates the monetary equilibrium. This allocation may be implemented by means of a monetary/fiscal policy. The policy considered has a simple rationale, namely that it removes some of the uncertainty that agents face by reducing price, i.e interest rate volatility. We consider two fundamental sources of such volatility, namely, respectively an objective and a subjective signal about the distribution of future endowments. The first case is when agents have rational expectations while the second case is studied in the context of agents having rational beliefs, beliefs which are consistent with empirical observations but not (necessarily) correct.     

Policy persistence in environmental regulation

We study the optimal emission standards under uncertain pollution damages and transaction costs associated with policy changes in a dynamic setting. We consider three alternative forms of transactions costs and show that they can lead to different kinds of delays of policy changes or smaller scales of these changes. Thus, policy persistence can be a rational response of forward-looking policy makers to future transaction costs, rather than an inefficient outcome of the current political process.     

On the neutrality of fiscal policy

The paper explores the relationships between fiscal policy and real economic activity and prices for the six largest industrialized economies. Fiscal policy variables are shown to be consistent and rational functions of the behaviour of the economy. It is also confirmed that fiscal policy seems to have a consistent impact on subsequent real economic activity and prices. When multivariate time series analysis is used to breakdown overall fiscal policy into anticipated and unanticipated components, the anticipated components are shown generally to have just as much forecasting ability for subsequently realized economic variables as the unanticipated components. This does not appear to be consistent with the implications of pure rational expectations models.     

Fiscal policy,welfare, and employment with perfect foresight

The long-run feasibility of expansionary fiscal policy is analyzed in a “fix price” economy under the assumption that individuals are altruistic and have rational expectations. It is found that exclusive reliance on interest bearing debt is a feasible policy only if money is an inferior good. However, feasibility is ensured if the bonds to money ratio is not higher than a certain critical level.     

江苏建立稳态循环经济体系的政策研究

文章在介绍稳态循环经济的基础上,运用博弈理论说明,在缺乏合理政策机制的前提下,自利性的经济个体往往不会自觉地参与稳态循环经济体系的建设,因此政府的政策激励是必须的。文章以江苏省为例,研究了如何制订促进区域稳态循环经济体系建设的政策机制。     

Are speed limit policies robust?

Both price level targeting and speed limit policies have been suggested as alternatives to inflation targeting that may confer benefits when a central bank operates under discretion, even if society’s loss function is specified in terms of inflation volatility. Here we show that price level targeting dominates a speed limit policy under perfect credibility and rational expectations. However, a speed limit policy is more robust than a price level target. Even for small deviations from either rational expectations or perfect credibility, a speed limit policy dominates a price level target.