Daniel J. Richards

Policy Rules, Inflationary Bias, and Cyclical Stability

STATUTORY POLICY RULES, such as a k-percent rule for money growth, can restrain officials from pursuing their own welfare at the expense of the public good. Toma (1982) and Barro and Gordon (1983), among others, have presented theoretical models showing how macroeconomic policymakers who pursue their own interests can produce policies that are biased toward too much inflation. Strict rules are a possible remedy to this problem. Yet while strict policy rules may reduce inflationary bias, they also limit the flexibility of officials to respond to random shocks. Researchers such as Canzoneri (1985) have shown that this can be an important limitation if officials possess information advantages that permit policy to modify economic disturbances effectively. If the public dislikes variations in real output, this loss of flexible stabilization may offset any gain from a reduction in inflationary bias. There is then a potential trade-off between reducing inflationary bias and cyclical stability. Yet to date, none of the dimensions of this trade-off has been documented. Evidence of an inflationary bias has been scarce, in part because it requires identification of the socially preferred inflation rate. Similarly, the extensive research on electorate concerns with real output has focused on the income level rather than its variance. Moreover, since this research has not been cast in a framework that permits voters to recognize the potential inflationary cost of stabilizing output, the validity of these findings is open to question. Indeed, recent work by Lucas ( 1987) suggests that citizens would willingly pay very little to reduce cyclical fluctuations.

Product Differentiation, Cost-Reducing Mergers, and Consumer Welfare

Cost synergies are an explicitly recognized justification for a two-firm merger, and empirical techniques are now widely used to assess the impact of cost-reducing mergers on prices and welfare in the post-merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre-merger empirical estimates. Indeed, we further show that in such markets, two-firm mergers will typically lead to higher prices regardless of the mergers cost savings.

Wage Inflation, Unionization, and Monopoly Power

This paper uses panel data from 301 four-digit manufacturing industries over the years 1959 to 1980 to examine how market structure affects the wage response to aggregate demand disturbances. The authors use a new classical macroeconomic framework in which such shocks are identified with the unexpected component of money growth. They find that product market power does not affect the response of wages to such shocks, but that unionization does. To be specific, greater unionization leads to a faster wage response. They also find that wages rise equiproportionately with expected money growth, i.e., expected money is neutral. Copyright 1990 by Blackwell Publishing Ltd.

Some evidence on the inflationary bias of macroeconomic policy

Abstract This paper tests for the existence of an inflationary bias in macroeconomic policy. A model is developed to illustrate the possibility that government officials pursuing their own goals may set inflation at a rate higher than society desires. Economic and Gallup Poll data are then used to estimate both the inflation rule preferred by the public and that which guides actual policy. Comparison of these two rules indicates that a pro-inflation bias of about two or three percentage points per year does exist. This suggests a need for institutional reform to insure a policy more in line with public preferences.

A note on the importance of cost structures for the behavior of Political Action Committees

ConclusionIn sum, the cost environment in which PACs operate will directly influence both their behavior and their ability to ‘buy’ political benefits. Recognition of these effects implies that the conclusions of earlier studies that different PACs follow inherently different strategies, or that PACs are not rational in their contributory allocations are premature, and indeed, insupportable in the absence of cost analysis. Attention to costs also suggests that some important econometric problems may attend the investigation of PAC behavior.The real lesson to learn, however, is not that there are a number of pitfalls in past or perhaps future research. Rather, the key point is the need for an analysis of the cost side of political participation. Such work is necessary if a satisfactory model of PAC behavior is to be developed. Moreover, it would constitute an important step in building a general equilibrium model of policy outcomes in which the level of political activity is itself endogenous.

Mergers and Deterrence

Abstract Changes in technology or policy create opportunities for industry restructuring and are frequently accompanied by both numerous mergers and potential entry. In the case of mergers, the combining firms have inside information regarding the strength of the surviving entity. In turn, such strength may be signaled to potential rivals or entrants by means of the acquisition price paid for the target firm. A pooling equilibrium is then possible in which even weak mergers are associated with a high acquisition price meant to deter post-merger rival aggression. The implications of such strategic behavior are consistent with much empirical evidence on mergers.