Observing and Shaping the Market: The Dilemma of Central Banks

While the central bank observes market activity to assess economic fundamentals, it shapes the market outcome through the conduct of monetary policy. A dilemma arises from this dual role because the more the central bank shapes the market, the more it influences the informational content of market outcomes. This paper analyzes how accounting for the endogeneity of information affects optimal monetary policy. By reducing the accuracy of central bank information, endogenous information calls for a higher degree of opacity, weakens accommodation policy to shocks, and broadens the range of parameters for which taking a signaling action is detrimental to welfare.     

Motorcycle Helmet Laws: A Case Study of Consumer Protection

This study examines the losses to society from federal legislation in 1976 on state motorcycle helmet laws. Two major responses were (1) repeal of helmet laws or failure to enact laws and (2) modification of helmet laws. Losses ranged from $75 million to $244 million for states without helmet laws and from $71 million to $229 million for states with modified helmet laws. Comprehensive state helmet laws would have been cost effective with cost-benefit ratios ranging from 0.05 to 0.18. The fact that thirty-one states did not have comprehensive helmet laws in 1981 raises questions concerning the degree that society should intervene on behalf of consumers.