Bodo Herzog

Restoring Credible Economic Governance to the Eurozone

This paper discusses new institutional rules for a stable and lasting European Monetary Union (EMU). We propose a return to a strict and sustainable economic governance framework, which is mainly driven by market forces within a smart rule‐based environment. Our recommendations are: (a) ex ante conditionalities with a tough monitoring process to avoid moral hazard in the future; (b) further enhancement of the Stability and Growth Pact; and (c) ultimo ratio punishment to be able to respond to the unique constellation of fiscal–monetary interaction and new rescue facilities. Countries violating fiscal rules for more than four years in a row will thus lose their fiscal sovereignty or will have to resign from the Eurozone. After fulfilling the ex ante conditionalities as well as all required criteria, the country either will recover its fiscal sovereignty, or, in case of exclusion, will be given the option to rejoin EMU under certain conditions.

Does transparency mitigate the political budget cycle

Purpose The purpose of this paper is to study the impact of transparency on the political budget cycle (PBC) over time and across countries. So far, the literature on electoral cycles finds evidence that cycles depend on the stage of an economy. However, the author shows – for the first time – a reliance of the budget cycle on transparency. The author uses a new data set consisting of 99 developing and 34 Organization for Economic Cooperation and Development countries. First, the author develops a model and demonstrates that transparency mitigates the political cycles. Second, the author confirms the proposition through the econometric assessment. The author uses time series data from 1970 to 2014 and discovers smaller cycles in countries with higher transparency, especially G8 countries. Design/methodology/approach Mathematical model and a respective econometric model testing. Findings First, the author shows in the theoretical model that higher transparency mitigates the PBC. Second, the author confirms the theoretical proposition through the econometric model. The author confirms that the countries with higher transparency have smaller budget cycles. Or technically, the author cannot reject the null-hypothesis that the budget cycles are different due to transparency. Research limitations/implications As explained in the paper: one issue is the data limitations in respect to the transparency measures. Data for Google are just available since 2004. Data for broadband-subscription are just on annual frequency. But both limitations can be tackled in the future. Hence, the findings are first evidence and a benchmark for future studies. Practical implications First, higher public transparency implies smaller budget cycles. In the end, this enhances the stability of economic and fiscal policy. Second, policy-makers have to consider the impact of higher transparency in respect to future election pledges. In a more transparent world, all voters can easily check the commitment of previous election pledges. Social implications Transparency helps to improve democracy and thus enhances the political credibility because it allows the voters to check the commitment of the elected policy-makers. Originality/value First, the author shows – for the first time – a reliance of the budget cycle on transparency. Second, the author is the first that build a new theoretical model that extends the existing literature in respect to transparency and the size of the budget cycle. Third, the author uses for the first time – in this literature – new internet-based data such as broadband-subscription and Google search data. Fourth, the author empirically proves the new hypothesis based on the new data sources.

A Review Of ‘Brain Computation As Hierarchical Abstraction’

Abstract This article is a review of the book ‘Brain Computation As Hierarchical Abstraction’ by Dana H. Ballard published by MIT press in 2015. The book series computational neuroscience familiarizes the reader with the computational aspects of brain functions based on neuroscientific evidence. It provides an excellent introduction of the functioning, i.e. the structure, the network and the routines of the brain in our daily life. The final chapters even discuss behavioral elements such as decision-making, emotions and consciousness. These topics are of high relevance in other sciences such as economics and philosophy. Overall, Ballard’s book stimulates a scientifically well-founded debate and, more importantly, reveals the need of an interdisciplinary dialogue towards social sciences.

The EMU Is No One-Way-Street: Back to the Roots!

The European Monetary Union (EMU) is in a crisis. Without doubt the recent rescue packages of the past years were necessary to stabilize the Euro area and the financial markets. However, it remains questionable whether this rescue path will lead to a sustained framework of economic governance. There is a danger that the policymakers will follow the wrong path which may lead to a future break-up of the Euro area. The current rescue philosophy of helping the indebted countries with guarantees on the one hand and demanding austerity on the other hand is rather limited to short-run stabilization. This way of thinking does not solve the structural problems in the medium- and long-term (Herzog, 2011, 2012). An effective economic therapy requires a profound analysis of the structural and hidden issues of the so-called ‘Euro Crisis’.

Analyzing Inflation Expectations and the Impact of Target Credibility in Monetary Policy

This paper provides new evidence on the formation and anchoring process of expectations. We conduct a game experiment and measure the convergence of inflation expectations as well as the impact of credible targets in central banking. In addition, we evaluate the idiosyncratic variables of our participants on the inflation formation process. The analysis reveals five results: First, we find evidence that long-term inflation expectations are firmly anchored to a credible target. Second, the monetary policy response on the financial and sovereign debt crisis might trigger a decline in credibility, and therefore de-anchor expectations due to higher uncertainty. Third, participants change their expectations rather little if a credible target exists. Fourth, expectations exhibit a large degree of time-variance only in environments without a target. Fifth, the dynamic adjustment to a quasi-equilibrium, which is theoretical unstable, turns out to be incredibly fast and stable in case of a credible target. All in all, this paper applies a unique game experiment which contributes in several ways to an even established literature on monetary economics.