Marco Lossani

Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker

Time inconsistency in monetary policy can be addressed appointing a conservative central banker. But incomplete information about the central bankers preferences impairs the performance of delegation schemes. Firstly, the ensuing ex ante variability of monetary response lowers welfare. Secondly, partial independence schemes may prove inadequate because reputation--not only legal arrangements--defines the actual degree of independence. The incumbent may exploit his reputation to impose too conservative policies, whereas if he lacks reputation, partial independence forces him to accommodate. As a result, simple rules may be preferred. Copyright 1998 by Scottish Economic Society.

Macroeconomics and Politics Revisited. Do Central Banks Matter

This paper provides a model encompassing both partisan influences on monetary policy and the issue of central bank independence. In a regime of partial independence, central banks policy responses are not immune from partisan influences. Still, the latter fail to affect systematically the expected output level in election years. The predictions of the model are consistent with the empirical literature on partisan cycles and account for some of its controversial findings. Copyright 2000 Blackwell Publishers Ltd..

A nominal income growth target for a conservative ECB? When the policy mix matters

This paper contributes to the goal-versus-instrument independence debate for the ECB, exploring how alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is countercyclical, a constant nominal income growth target should be assigned to a conservative central banker. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation.

Financial Instability in the Transition Economies: Lessons from East (Asia) for (East) Europe

The design of an appropriate regulatory framework for banks is one of the crucial aspects for the development of financial markets in transitional economies. Banking policies are usually invoked to deal with moral-hazard problems. We believe that banking policies (and the exchange rate regime) should also be designed with the aim of ensuring an adequate provision of liquidity in the event of self-fulfilling bank runs. We reconsider some of the issues discussed in Chang and Velasco (1998a; 1998b) within a different version of the Diamond and Dybvig model (1983). We argue that the stability of the domestic banking sector should be treated as an issue distinct from that of capital account liberalisation. Fixed exchange rates are vulnerable to sudden capital reversals but benefit from long-term inflows. By contrast a deregulated domestic bank sector remains illiquid even when foreign debt is entirely long-term. We also discuss the impact of an external (interest rate) shock on the fragility of the domestic banking system. Our basic point is that the choice of the exchange rate regime and of the policy mix cannot neglect the need to ensure the financial stability issue. More precisely an external shock requires a redistributive policy that subsidises banks Under a fixed exchange rate system an appropriate fiscal intervention must be designed. The same result can be obtained by means of a monetary surprise if the exchange rate is flexible and the deposit contract is not indexed.

Quantitative easing, financial risk, andportfolio diversification

In the second half of 2008 the US monetary authority tackled the economic slowdown with an extraordinary expansion of money supply; as a consequence, the federal funds rate approached the zero level at the end of the year. However, such an effort has failed in stimulating aggregate spending and curbing the rocketing rate of unemployment. Hence, reducing term premia by managing the supply of long-term bonds seemed to be the only reasonable option for the Federal Reserve. Although long-term yields have decreased over time, the effects on the real economy have been weak. Traditional asset pricing models and portfolio strategies have been revised in light of the new monetary environment. In this chapter, we analyze the impact of quantitative easing on the relationship between financial markets and the leading macro-finance indicators. In addition, we examine whether the cyclical variation of risk aversion is related to risk premia and asset pricing. We find significant evidence that changing risk aversion affects the discounting process that governs the dynamics of asset prices across the business cycle. Moreover, we find evidence that the effect on asset pricing determined by the cyclical fluctuations of unemployment is similar to the effect generated by the countercyclical movements of risk premia.

Disegno delle istituzioni e stabilità finanziaria nell'Unione Monetaria Europea

In this paper, the consequences on financial stability of the institutional design envisaged in the Maastricht Treaty - which implicitly assigns the objective of financial stability to the National Central Banks (NCBs) - are assessed. The Maastricht Treaty spells out precisely the role of the European Central Bank (ECB) and NCBs within the European System of Central Banks (ESCB) as to achieve the objective of price stability, but it is not equally clear as far as the objective of financial stability is concerned. In an area like EMU with a high degree of financial and economic integration, the actions undertaken by NCBs in the fields of regulation, prudential supervision and Lending of Last Resort are characterized by relevant externalities across jurisdictions. The present institutional design does not allow EMU to benefit from the internalization of these spillovers since NCBs do not face incentives to undertake properly banking policy activities. Applying the principle of subsidiarity to the problem of power sharing between ECB and NCBs, the following suggestions for a revision of the institutional design are obtained: i) ECB should be assigned the task of coordinating regulation activities to avoid regulatory arbitrage, while prudential supervision should be managed jointly in a two-tier system by ECB and NCBs; the decision process pertaining the use of discount window and the Lending of Last Resort function should be centralized; ii) the rules pertaining the working of TARGET and EMS 2 should be changed in order to limit the risk of a financial crises imported from preins countries.

Monetary Regimes as Insurance Schemes. Old Wine in New Bottles

This paper applies the tools of insurance economics to address the trade-off between commitment and flexibility arising in monetary policy. Monetary regimes are considered as alternative insurance policies designed to stabilize output. This approach provides a simple and straightforward reinterpretation of some seminal contributions to the literature on time inconsistency--such as the desirability of monetary policy delegation to an independent conservative central banker--and it accounts for some novel results deriving from informational asymmetries about the central bankers degree of conservatism. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester