Carsten Hefeker

Political Risk, Institutions and Foreign Direct Investment

The paper explores the linkages between political risk, institutions and foreign direct investment inflows. Using different econometric techniques for a data sample of 83 developing countries and the period 1984 to 2003, we identify those indicators that matter most for the activities of multinational corporations. Overall, 12 different indicators for political risk and institutions are employed in the empirical analysis. The results show that government stability, the absence of internal conflict and ethnic tensions, basic democratic rights and ensuring law and order are highly significant determinants of foreign investment inflows.

How Will EMU Affect Inflation and Unemployment in Europe

This paper explores how European Monetary Union will change the wage setting behavior of national labor unions. The authors derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements. A common central bank raises inflation and unemployment if it acts as conservatively as national central banks. However, unemployment falls in countries that previously tied their monetary policy to the Bundesbank. The authors also examine the composition of EMU and the influence of national labor market legislation. Copyright 1999 by The editors of the Scandinavian Journal of Economics.

Reconsidering central bank independence

In this paper, we survey the case for central bank independence (CBI). We conclude that CBI is neither necessary nor sufficient for monetary stability. CBI is just one potentially useful monetary policy design instrument among several, and CBI should not be treated as an exogenous variable. Instead the question that should be addressed is why societies decide to make their central banks independent? The reasons why CBI is chosen are related to legal, political, and economic systems. A number of empirical studies find correlations between CBI and low inflation rates. Endogeneity of CBI suggests, however, that the correlation has no implications for causality.

One Size Must Fit All: National Divergences in a Monetary Union

Abstract Should a common central bank in a heterogeneous monetary union base its decisions on EU-wide averages of economic variables or on national welfare losses? A central bank that minimizes the sum of national welfare losses reacts less to common shocks. Under certain parameter constellations this leads to higher average union-wide expected welfare and it might thus be preferable that decision-making is dominated by national representatives. Countries with a transmission mechanism far from the average benefit from an orientation on national welfare losses. For countries with a transmission mechanism close to the average, welfare can be lower in this case.

Taxation, Corruption and the Exchange Rate Regime

The paper analyzes the relation between institutional quality, such as corruption, in a country and its monetary regime. It is shown that a credibly fixed exchange rate to a low inflation country, like a currency board, can reduce corruption and improve the fiscal system. A monetary union, however, has ambiguous effects. I find that there is convergence between countries with regard to the level of corruption.

One Country, one Vote? Labor Market Structure and Voting Rights in the ECB

The pending enlargement of the European Monetary Union (EMU) has brought to the fore the discussion of the voting right distribution in the European Central Bank (ECB) council. We show that, in a model where labor unions internalize the inflationary consequences of wage setting, deviating from a voting scheme based purely on economic size can be beneficial. Preliminary evidence on unemployment and voting rights in the ECB council seems broadly in line with this idea. We also point to possible policy implications for EMU enlargement and ECB restructuring.

Unions, Wage Setting and Monetary Policy Uncertainty

Recent theoretical research has studied extensively the link between wage setting and monetary policymaking in unionized economies. This paper addresses the question of the role of monetary uncertainty from both a theoretical and empirical point of view. Our analysis is based on a simple model that derives the influence of monetary uncertainty on unionized wage setting. We construct an indicator of monetary policy uncertainty and test our model with data for the G5 countries. The central finding is that monetary policy uncertainty has a negative impact on nominal wage growth in countries where wage setting is relatively centralized.

Do We Really Need Central Bank Independence? A Critical Re- examination

In this survey, we critically review the argument for central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, CBI should not be treated as an exogenous variable, but instead attention should be devoted to the question of why central banks are made independent. CBI is chosen by countries under specific circumstances, which are related to their legal, political, and economic systems. Third, in a number of empirical studies, researchers found CBI is correlated with low inflation rates. By taking the endogeneity of CBI into account, however, there is no reason to believe the correlation between CBI and low inflation tells us anything about causality.

Project Aid or Budget Aid? The Interests of Governments and Financial Institutions

The paper compares different aid policy instruments and their effect on the target group. Starting from a situation where interest groups compete for the resources of the government, international financial institutions aim to change the policy outcome. They can either directly support one group or condition their financial help to the government on its policy. Apart from a normative analysis which policy is more adequate to help one group, the paper also asks what happens if the IFI is driven by bureaucratic self-interest, and whether this distort policies.

The agony of central power: Fiscal federalism in the German Reich

This article revisits the German system of fiscal federalism between unification in 1871 and hyper-inflation in 1923. I argue that the ill designed fiscal system led to systematically excessive debt for the Reich. The system was the outcome of overlapping distributional conflicts between centre and states, and between capital and labour. It was also responsible for the debt problems arising in World War I and the unsuccessful attempts at fiscal reforms during and after the war. Ultimately, these distributional conflicts contributed to the hyper-inflation in Germany. The German example also has implications for the debate about fiscal federalism in the European Union.