Hans-Werner Wohltmann

Monetary and fiscal policy dynamics in an asymmetric monetary union

This paper investigates the dynamic effects of monetary and fiscal policy in a monetary union, which is characterized by asymmetric interest rate transmission. This asymmetry gives rise to intertemporal reversals in the relative effectiveness of policy on member country outputs. The direction and the number of these reversals depend on whether policies are unanticipated or anticipated. We also study the coordination between monetary and fiscal policy in a monetary union. Monetary policy may completely stabilize European output after unanticipated fiscal policy shocks. With anticipated fiscal policy shocks, complete stabilization throughout the overall adjustment process requires monetary policy to be time-inconsistent.

The impact of Basel III on financial (in)stability: an agent-based credit network approach

The Basel III accord reacts to the events of the recent financial crisis with a combination of revised micro- and new macroprudential regulatory instruments to address various dimensions of systemic risk. This approach of cumulating requirements bears the risk of individual measures negating or even conflicting with each other which might lessen their desired effects on financial stability. We provide an analysis of the impact of Basel III’s main components on financial stability in a stock-flow consistent agent-based computational economic model. We find that the positive joint impact of the microprudential instruments is considerably larger than the sum of the individual contributions to stability, i.e. the standalone impacts are non-additive. However, except for the buffers, the macroprudential overlay’s impact is either marginal or even destabilizing. Despite its simplicity, the leverage ratio performs poorly, especially when associated drawbacks are explicitly taken into account. Surcharges on SIBs seem to rather contribute to financial regulations complexity than to the resilience of the system.

Sufficient conditions for dynamic path controllability of economic systems

Abstract In this paper sufficient conditions for target path controllability of dynamic economic systems in state-space representation are discussed. These conditions, though stronger than necessary, are much easier to verify than the well-known (but complicated) necessary and sufficient conditions for target path controllability. It is demonstrated that the computational gain in terms of practical application of the technical conditions is substantial. For example, by means of these conditions it is possible to prove the target path controllability of Buiters 1979 rational expectations model of an open economy — a problem which has been an unresolved one up to now.

Complete, perfect, and maximal controllability of discrete economic systems

SummaryThe purpose of this paper is to discuss three different concepts of controllability of discrete economic systems. Necessary and sufficient conditions for complete, perfect and maximal controllability are presented. The author demonstrates the logical interconnections between the dynamical and static theories of economic policy and shows that the concept of maximal controllability is of special interest for the theory of economic policy. Applications of the theoretical results to a macroeconomic decision model are presented at the end of this paper.

Target path controllability of linear time-varying dynamical systems

The purpose of this paper is to derive necessary and sufficient conditions for target path controllability (TPC) of time-varying dynamical systems, and to relate the results to those of Brockett and Mesarović in 1965. It is shown that conditions for TPC inW^{p}_{1}by means of Lp-controls are easy to verify, but are very strong. TPC implies that the number of target variables is less than or equal to the number of control variables.

On the controllability of continuous-time macroeconomic models

Summary (Abstract)It is argued in this paper that an independent control of target variables over time in continuous dynamic macroeconomic systems may not be achievable even though Aokis well-known rank test for target path controllability is satisfied. It is shown that in many dynamical systems impulse controls are needed to steer the targets along arbitrarily given time paths. Such controls are not admissible from the macroeconomic point of view. By means of the structure algorithm by Silverman and Payne (1971) conditions for target path controllability that depend on the choice of the admissible spaces for the target and the instrument variables, are derived.

On the notion of time-consistency: A comment

Abstract It is the purpose of this paper to show that the concept of time-consistency is not uniquely defined in the economics literature. In non-causal models Holly and Zarrops (1983) time-consistency concept differs from the corresponding concept by Kydland and Prescott (1977). A policy sequence, which according to Kydland and Prescott is time-consistent, is time-inconsistent in Holly and Zarrops terms, whereas a plan, which is consistent in the sense of Holly and Zarrop, is inconsistent in the sense of Kydland and Prescott.

A note on Buiter's sufficient condition for perfect output controllability of a rational expectations model

The purpose of this note is to show that Buiters ‘sufficient’ rank condition for perfect output controllability, which he applies to a dynamical system of an open economy with rational expectations, is in general not sufficient for perfect output controllability. For demonstration a counter-example is presented. Only in special cases Buiters rank condition is sufficient for perfect controllability. Since Buiters dynamical system satisfies none of these special cases, it is not clear whether his main result holds, i.e., whether his target vector consisting of the unemployment rate, the inflation rate and the external surplus, is perfectly controllable.

Foreign Price Shocks and Monetary Policy in an Asymmetric Monetary Union

This paper analyzes the dynamic effects of anticipated and unanticipated foreign price increases of imported raw materials for a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. It is shown that both types of input price disturbances lead to temporary divergences in output developments across the monetary union. In the case of anticipated materials price increases the relative cyclical position of output effects is reversed in the course of the adjustment process. With anticipated input price increases complete stabilization of the output variables throughout the overall adjustment process requires restrictive monetary policy to be time-inconsistent from a quantitative but time-consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of nominal money stock but actually realizes a decrease in the monetary growth rate, which is less restrictive than the announcement.

A Note on Aoki's Conditions for Path Controllability of Continuous-Time Dynamic Economic Systems

In this note we discuss necessary and sufficient conditions for dynamic path controllability, and show that the rank condition in Aoki (1975) is necessary but not sufficient unless impulse controls are admissible. It is demonstrated that in the special case of state space targets Tinbergens concept of static controllability is equivalent to the dynamic concept of path controllability. For general linear systems conditions for path controllability depend on the choice of the admissible target and instrument space. In contrast to discrete-time models Tinbergens original counting rule is necessary for path controllability for any target and instrument space in the continuous-time framework.