Implementing optimal monetary policy: Objectives and rules

The inconsistency of optimal policy comes from inconsistency between the social loss function and the economic structure. Accordingly, this paper designs a central bank loss function, which proves consistent with the economic structure. Under the designed central bank loss function discretionary policy proves optimal for social welfare. Optimal discretionary policy emerges because the implied behavioral equation is identical with that under commitment to the social loss function. Consequently, this paper also designs policy rules. To some extent, policy rules appear more basic, flexible, and operational than social and central bank loss functions, but the social loss function serves as an ultimate objective and the central bank loss function explicitly identifies the attainable targets and appropriate weight to achieve the social optimum.     

Preplanned exit strategies in venture capital

This paper empirically considers the role of preplanned exits (the investor's initial strategy to sell the investee firm via an acquisition or an initial public offering (IPO) at the time of initial contract with the entrepreneur), legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance. We introduce a sample of 223 entrepreneurial investee firms financed by 35 venture capital funds in 11 continental European countries, and these data indicate the following. First, preplanned acquisition exits are associated with stronger investor veto and control rights, a greater probability that convertible securities will be used, and a lower probability that common equity will be used; the converse is observed for preplanned IPOs. Second, investors take fewer control and veto rights and use common equity in countries of German legal origin, relative to Socialist, Scandinavian, and French legal origin. Third, more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity, while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity.     

Central Bank Balance Sheets and the Transmission of Financial Crises

Central banks usually “park” their foreign exchange reserves in safe or highly liquid foreign assets. The paper illustrates that when central banks invest instead in risky foreign assets, then domestic banking crises can cause a crisis in the market for the foreign asset and vice versa. The paper takes its motivation from Asian central banks’ recent appetite for US government agency-debt securities such as those issued by Fannie Mae and Freddy Mac.     

On the decision to go public with dual class stock

Why do firms deviate from a one share-one vote regime when going public? This question raises considerations that are at the core of many corporate governance issues. We consider three arguments for this choice. Examining data on IPOs from 1980 through 2008, we do not find that firms go public with dual class stock so managers have more incentive to invest in hard to monitor projects nor to gain more when selling control of the firm. Rather, managers appear to take their firms public with dual class stock in order to retain control of their firms while reducing their lack of diversification costs.     

Do Wall Street economists believe in Okun’s Law and the Taylor Rule?

We use data from the Wall Street Journal’s semi-annual survey of professional economists to test whether individual economists’ six-month-ahead predictions of real GDP growth, unemployment, short-term interest rates and inflation reflect Okun’s Law and the Taylor Rule. We conclude the economists believe real growth is less responsive to unemployment-rate changes than the textbook version of Okun’s Law; we also find the economists believe the Federal Reserve sets short-term interest rates by placing more weight on unemployment and less weight on inflation than the Taylor Rule prescribes.     

Consumerism in Sustainable Tourism: A Survey of UK Consumers

This article presents the results of a survey of tourism consumers from the Destinations Travel Show in the UK in 2000. Four hundred and eleven tourism consumers were interviewed over four days at the show on the type of information that they used in the selection of their holiday destination. This article posits that the power of the consumer can be a major force for progress towards greater sustainability by the tourism industry, acting as a rationale for change, which is often missing from more traditional planning, management or regulatory techniques. The research shows consumers are already making decisions based on environmental, social and economic quality for day-to-day products and are keen to transfer these habits to the purchase of tourism products. Recommendations are made, highlighting the need for the tourism industry to capitalise on this demand for a wider range of product information and so promote moves towards greater levels of sustainability in the industry.     

Individually selecting among conventions - an evolutionary and experimental analysis

Conventions can be narrowly interpreted as coordinated ways of equilibrium play, telling all players which of possibly several equilibria to play or more broadly how to choose in a game without imposing the equilibrium property. Since coordination often takes place before learning about the game, one has to coordinate on a prescribing principle. For the subclass of 2×2-bimatrix games with two strict equilibria, we analyze the evolutionary stability of various such principles. In our experiment, we allow participants to coordinate on principles before playing various games. Based on between-subjects treatments, participants do so being completely (they know neither their role nor the game parameters), partially (they know either their role or the game parameters) ignorant, or with no veil of ignorance (they know their role and the game parameters).     

Introduction to the Special Issue: The Bank Structure Conference through the years

This is a special issue dedicated to the Federal Reserve Bank of Chicago’s annual Conference on Bank Structure and Competition. Invited articles are from financial economists that have had long standing relationships with the conference. Additionally, the effectiveness of the conference in influencing public policy and the financial and economic literature is evaluated.     

Capital budgeting,valuation and personal taxes

This paper examines the relationship between before tax and after tax valuation and uses this to examine the literature on capital budgeting and capital structure in the presence of corporate and personal taxes, a literature which features a bewildering array of valuation formulae. Some of the variation between such formulae naturally arises out of variations in underlying model assumptions; however, in several cases, it arises because there are (by no means obvious) internal inconsistencies. The potential magnitude of the errors that might arise in a capital budgeting context is then explored through sensitivity analysis.