Rules,discretion, and international monetary and fiscal policy coordination

This paper considers the implications of international policy coordination when both monetary and fiscal policy choices are endogenous. We show that a movement from insular monetary commitment to international monetary policy coordination will, if fiscal policies are not coordinated, produce higher output and public expenditure levels at the expense of higher inflation rates. We also show that the concurrent coordination of monetary and fiscal policies raises output and inflation while lowering public expenditure relative to a regime of monetary coordination alone. We conclude that the arguments for concurrent monetary and fiscal policy coordination fail to have a clear-cut theoretical basis.     

Devaluation and monetary policy with import compression

The consequences of exchange rate and monetary policies are investigated under two foreign exchange regimes. The analysis is motivated by the experiences in sub-Saharan Africa. The supply side of the open economy model developed by Buffle (1986) is modified to take into account the import dependency of the region. In the first regime, with endogenous foreign savings, overvalued exchange rate and expansionary monetary policy tend to increase the current account deficit. In the second regime, when intermediate imports are rationed to handle the foreign exchange shortage, overvaluation and monetary expansion are shown to be likely sources of output contraction. The cost of policy reorientation is reduced investment.     

Asymmetric monetary policies? the case of Germany and France

How dissimilar are the policy objectives of the Bundesbank and the Banque de France and have those objectives converged since the conception of the EMS? We address these questions by estimating objective functions for the flexible-exchange-rate and the EMS periods. Vector autoregressions are used to characterize the economic environment and an inverse control methodology is used to infer the objectives of the central banks. We find that the Bundesbank's policy actions are compatible with its having consistently placed a high weight on the objective of price stability. The Banque de France on the other hand appears to have considered output stability to be an important target in the early EMS period. After a major French policy shift in 1982 the objectives of two Central Banks appear to be quite similar.     

Fiscal policy in monetary unions: Implications for Europe

This paper analyzes how the feasible mix of government expenditure and financing arrangements may change with the establishment of a monetary union such as that planned by members of the European Community. We find that a monetary union reduces the feasible divergence across countries in their present discounted levels of fiscal spending. Wide differences across countries in their present and future time patterns of spending are still possible, however. Examination of the empirical evidence suggests that the movement toward greater exchange rate fixity associated with the EMS and participation in quasi monetary unions havenot been accompanied by significant fiscal convergence. The experience of member states of several existing monetary unions, however, suggests that a more effective constraint to budgetary discipline arises within full-fledged unions in operation over long periods, even in the absence of binding central rules on government deficit and debt positions.     

Time consistency,asymmetric information and monetary policy design: An overview

Summary This paper surveys the literature on monetary policy in the context of asymmetric information game theory. It distinguishes between the earlier literature focusing on finding reputational equilibria, the literature analyzing the possibilities of using announcements to influence expectations, and the principal-agent approach to the institutional design of monetary policy. The focus is on the institutional implications of the various studies. The conclusion is that institutional reforms directed at independent central banks with a mandate for price stability are not in line with the recommendations from the theory.I would like to thank Willem Boeschoten and an anonymous referee for valuable comments on an earlier version of this paper.     

Review Essay: The Bank for International Settlements: An Assessment of its Role in International Monetary and Financial Policy Coordination

This article reviews the role of the Bank for International Settlements (BIS) and its adaptability to the changing international financial structure, from the gold standard to floating exchange rates. Today, the BIS has assumed the role of creator of international standards for banks and financial conglomerates through the Basel Committee on Banking Supervision. Its implied mission is to prevent international financial crises and to mitigate negative externalities when they occur. The overall assessment of the BIS is positive. Its small membership gives it a sense of purpose and minimizes free riding. Given the high degree of financial integration in the world and consequent large spillovers, the BIS would have to be created if it did not already exist.     

Bank cooperation and banking policy in a monetary union: A political-economy perspective on EMU

Why do large European banks lobby for monetary union? We show in a game-theoretic model that montary union can trigger a change in the structure of the market for international banking transactions with asymmetric effects on profits: large banks are induced to cooperate internationally and gain from European Monetary Union (EMU), while small banks are likely to lose. Monetary union can be interpreted as a device for large banks to push small banks out of the market for cross-border financial services.     

Macroeconomic stabilization through monetary and fiscal policy coordination: Implications for European Monetary Union

In a two-country model, we consider the implications of monetary and fiscal policy coordination for macroeconomic stabilization. We show that the optimal regime is one of monetary and fiscal policy coordination under flexible exchange rates. In the context of the European Community, this suggests that the desire to fix exchange rates may not be costless. In addition, we show that fiscal coordination requires a relatively high degree of flexibility in fiscal policy. This result suggests that limits on the flexibility of fiscal policies, as suggested in the Delors Report, may hinder macroeconomic stabilization.     

Monetary policy and dynamic efficiency in economies of overlapping generations

In an economy of overlapping generations, money, distinct from debt, provides liquidity and is dominated as a store of value. Nominal rates of interest that are low, but do not vanish, eliminate equilibrium allocations far from Pareto optimal allocations.     

关键货币境外余额的国际政治经济学——美国的境外美元管理及其对中国的影响

关键货币境外余额是重要的国际经济变量,它不仅会影响关键货币的国际地位和全球金融市场稳定,也关系到境外关键货币持有国的经济稳定和储备资产安全。关键货币国通过经济、外交甚至军事手段对境外货币余额的规模、资产配置、地区分布以及持有者结构实施管理,以便实现对外融资、获取经济安全和榨取财富等多重目标。在金融危机背景下,基于经济安全、国际博弈和对外融资的目的,美国大致会阶段性地吸引美元回流并调控其在国外的分布,但美元霸权地位和美国国内的两党政治体制将使其境外美元余额的规模在长期内进一步扩张,因此人民币近期仍面临升值压力,欧洲和新兴市场国家金融动荡将会持续甚至加剧。随着中国国内资产价格的下跌,美元的升值和回流在中期时段内可能会冲击中国宏观经济稳定;如果美国不能控制其财政赤字,中国将长期面临美债和美元违约的巨大风险。中国需要降低宏观脆弱性,加速调整经济发展模式,从根本上摆脱美元陷阱。     

关注调整中的国际货币体制权力结构

国际货币体系始终处于动荡之中,关键货币之间汇率冲突不断,导致这种状况的主要根源是美元危机。美元面临多方面挑战。美元体制基础弱化的征兆越来越明显。国际主导货币之间的竞争呈现新的特点。我国应注意发挥人民币潜在功能,完善外汇政策体系,维护金融稳定,在人民币国际化问题上宜立足于"不急不躁"战略。     

Toward regional financial and monetary cooperation in East Asia1

The financial and economic crisis in 1997–98 came as a dramatic shock to East Asian economies, and has prompted to institutionalize a regional financial and monetary cooperation. This paper demonstrates the strong will of East Asian countries to develop the regional financial and monetary cooperation, outlines recent developments, and provides possible prospects for the future. It points out that the option to keep consistent with the IMF system actually weakens regional solidarity, and recommends an immediate establishment of a strong regional surveillance and peer pressure mechanism for the Chiang Mai Initiative (CMI) to evolve into a common pool of foreign exchange reserves, a sort of East Asian IMF. It also argues that East Asian countries should closely coordinate their exchange rate regime to maintain intra‐regional and extra‐regional exchange rate stability.     

Fiscal Leadership and Coordination in the EMU

We analyze the role of fiscal-monetary policy interactions and fiscal coordination in EMU under the assumption of strategic wage setting in unionized labour markets. We find that production subsidies and real wage distortions are strategic complements. The literature on macroeconomic stabilisation policies and policy games usually neglects this point and reaches overoptimistic conclusions about the desirable effects of accommodating fiscal policies. Central bank preferences also affect the desirability of fiscal coordination in a monetary union. In fact, contrary to Beetsma and Bovenberg (1998), we find that fiscal coordination improves outcomes in the case of a conservative central banker, whereas it leads to worse outcomes with a populist one.

Explaining Compliance with G8 Finance Commitments: Agency, Institutionalization and Structure

Do the world’s major powers keep the international commitments they make? To provide an answer, this study constructs and tests a multilevel model of the course and causes of member country’s compliance with the finance commitments they make at the Group of Eight (G8) major democracies’ annual summit. It first examines how G8 leaders deliberatively craft their commitments in ways that embed “compliance catalysts” designed to improve the chances that their commitments will be complied with during the following year. It then explores how the work of the G8’s ministerial institution for finance improves the compliance the leaders’ commitments receive. It finally assesses the distribution of vulnerability and capability in the international system to determine if agency and institutions act autonomously, or are predetermined or overwhelmed by system structure in causing G8 “promises made” to become G8 “promises kept”. The analysis concludes that G8 agency and institutionalization matter, while system structure has only an indirect impact. When leaders at their summit embed their finance commitment with a specific timetable to be met, and with a priority placement in their declaration, greater compliance comes. When their G7/8 finance ministers remember and repeat the same commitment in the year before and in the year after the summit, compliance rises as well. A combination of increasingly equal vulnerability and capability among the G8 members inspires finance ministers to remember and repeat such commitments, but does not directly increase compliance. Thus compliance is largely endogenous to the G8, driven by agency and institutionalization, and not directly by structural forces in the wider world. The G8 remains a leader’s summit after all.     

The Feldstein-Horioka puzzle: The IS-LM model with optimal policy

The high correlations between saving and investment, which suggest a small variability of the current account, is explored within an IS-LM framework. While Feldstein and Horioka interpret this evidence to imply a low degree of capital mobility, the pattern of shocks to the model is also important. If the monetary authorities are pegging domestic rates to foreign returns, then we would expect the Feldstein-Horioka evidence even under high mobility. We explore whether such a rule is optimal when policymakers wish to avoid income variability where fiscal and monetary policy are coordinated and where monetary policy must act alone. We suggest that the Voicker Federal Reserve switched to the latter stance and created a dramatic exception to the Feldstein-Horioka paradox.     

On the hump-shaped output effect of monetary policy in an open economy

Results of empirical research have revealed a characteristic hump-shaped effect of a monetary policy shock on output: The effect of the shock builds to a peak after several months and then gradually dies out. We analyze, in the context of a ‘new open economy macroeconomics’ model, factors that imply a hump-shaped response of output to a monetary policy shock. We find that a hump-shaped effect of a monetary policy shock on output is likely to result if the model features a “catching-up with the Joneses” effect, pricing-to-market behavior of firms, and imperfect international financial market integration. We thank two anonymous referees for very helpful comments. The usual disclaimer applies.     

20世纪90年代美国货币政策及对我国目前的启示

1993～2000年的美国和目前的中国都出现了高增长、低通胀的局面,一般认为美联储的货币政策为之作出很大贡献。本文在借鉴的基础上就我国目前在高增长、低通胀下的货币政策的几个主要问题提出建议。     

The spill over effects of monetary policies and the welfare effects of the currency appreciation in an open economy -A simple discussion

Based on new open-economy macroeconomics, this paper provides simple discussions about the equilibrium conditions of labour market, goods markets and money market in a two-country world model economy. Given one-period wage sticky assumption, the following conclusions are obtained, the monetary policy can impact labour supply and thereby the equilibrium of labour market in the short run; The spill over effect of monetary policy in home and foreign countries implies an important international transmission channel in terms of equilibrium relationships between home and foreign countries, which also demonstrates the welfare effects of currency appreciation.     

International oil price changes: impact of oil prices on growth and inflation in the EU/OECD

This paper uses an open economy DSGE model to analyse the short and long run quantitative impact of a permanent oil price increase for output and inflation in the euro area and compares the results to the predictions of other models currently in use. Special emphasis is devoted to the issue of stagflation. It is found that with standard monetary feedback rules as currently estimated for the euro area, there is no severe inflation risk. The paper also addresses the issue to what extent there is a short run trade off between inflation and output with an adverse supply shock.The views expressed in this paper are entirely those of the author and should not be attributed to the European Commission.     

Strategic Interactions Among Central Bank and National Fiscal Authorities in a Monetary Union Subject to Asymmetric Country Shocks

In this paper we extend Nordhaus’ (Brookings Pap Econ Act (2):139–199, 1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that, even assuming that the monetary and the fiscal authorities share the same ideal targets, in the presence of asymmetric shocks the “symbiosis” result found by Dixit and Lambertini (J Int Econ 60:235–247, 2003) no longer obtains. Thus, fiscal rules as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact may work as monetary/fiscal coordination devices that improve welfare. The imposition of common targets, however, may work as a substitute for policy coordination only if these are made state contingent, an aspect that the recent version of the Stability and Growth Pact takes into account in a more appropriate way than its original version.