Nicola Viegi

Inflation Targets as Focal Points

In a world characterised by noisy information and conflicting signals, no Central Bank is always able to affect private sector expectations. Based on Morris and Shins model, monetary policy then becomes an information game, in which individuals form their expectations based on all the information that is available to them (public and private). However individual agents also know that ultimately inflation is affected by both the objectives of the Central Bank (and hence the policies it pursues) as well as the average expectation formed by the all agents. They thus need to evaluate both actions. Central to our argument is the way that individuals interpret these actions to form their expectations. We apply Bacharachs methodology to provide a framework for assessing everyones interpretations. Our contribution is to merge these two models to show that a monetary policy regime that has explicit quantitative objectives may provide individuals with better anchors for expectations to coordinate at. However, that is only true first, if no great shocks are anticipated to hit the economy and second, when all other public information is very unclear thus rendering the inflation target the only clear piece of information. We derive in detail the conditions under which this is true.

Imperfect transparency and the strategic use of information: an ever present temptation for central bankers?

Most economists argue that transparency in monetary policy is desirable because it helps the private sector make better informed decisions. They also argue that a lack of transparency has been a key problem in Europes monetary policy. Using standard models—where there are also opportunities to use fiscal policy—we show that a lack of transparency will have very different effects depending on whether it represents a lack of political transparency or a lack of economic (or information) transparency. The former allows the central bank to create and exploit a ‘strategic’ reputation to its own advantage. The latter does not. Thus, political transparency helps us understand how monetary policy decisions are made. But economic transparency would reveal what information went into those decisions.

Can the ECB be Truly Independent? Should It Be?

Most of the literature on the independence of the Central Bank assumes only one policy instrument is available: monetary policy. If we introduce fiscal policy as well, when preferences may differ among policy-makers, the situation is radically different. In this case fiscal policy will substantially weaken the impact of the Central Banks actions, and may annihilate them altogether. The Stability Pact may then be a liability, instead of an asset, because it renders both policies impotent (even if credible). We examine whether there is any incentive to retain monetary policy independence; and whether accountability can and should be used to ensure fiscal and monetary policies support each other, rather than undermine each other.

Transparency and the Strategic Use of Private Information in Monetary Policy

Most economists argue that transparency in monetary policy is desirable because it helps the private sector make better informed decisions. They also argue that a lack of transparency has been the key problem in Europe’s monetary policy. Using standard models - where there are also opportunities for fiscal policy - we show that a lack of transparency will have very different effects depending on whether it represents a lack of political transparency or a lack of economic (or information) transparency. The former allows the Central Bank to create and exploit a “strategic” reputation to its own advantage. The latter does not. Thus, political transparency helps us understand how monetary policy decisions are made. But economic transparency reveals what information went into those decisions.

Inflation Targeting as a Coordination Device

The paper analyses inflation targeting when two independent policy authorities (a central bank and a National Government) have divergent preferences for the optimal policy mix. We demonstrate that the main advantage of inflation targeting, as a policy regime, is that it represents a simple proxy for full coordination between policy authorities. Inflation targeting therefore helps because it reduces the conflicts between fiscal and monetary policy, expecially where there are strong “spillovers” between the two policies. These results are then tested, and largely validated, in a simulation framework using a small open economy calibrated model.

Aiming for the Bull's Eye: Inflation Targeting under Uncertainty

We study the implications of uncertainty for ination targeting. We apply Brainards static framework which imposes multiplicative uncertainty in the monetary transmission. Brainards main result is that in the presence of uncertainty, monetary authorities become naturally more cautious. But this also implies that monetary objectives are seldom achieved. We there- fore attempt next to ...nd a monetary rule that reaches the objectives set more often, improving therefore the welfare of the Central Bank. Such a rule is the result of a new algorithm that we put forward, in which the ination target is state contigent. The Central Bank sets (as an auxil- liary step) therefore, a variable ination target that depends optimally, on both the degree of uncertainty as well as on the shocks that occur each time. We show that such a rule helps the CB attain its objectives more often thereby reducing the losses incurred. Moreover, and as a corollary to such an approach, the rule derived is ex ante neutral to the degree of uncertainty.

A credibility proxy : tracking US monetary developments

The purpose of this paper is two-fold: first, we propose a method for checking empirically whether inflation expectations are anchored in the long run, and at what level. The extent of anchoring then serves as a proxy for the credibility of the monetary authority. Second, to assess how well this measure proxies credibility, we cross-check it against periods for which the level of credibility is known and generally agreed upon. To this end, we apply our measure to the US inflation history since 1963, which includes both the period of the Great Inflation, in which credibility was poor and deteriorating, as well as the period of the Great Moderation during which credibility in the monetary authority was gradually re-established. Finally we check what our measure of credibility tells us about the crisis period.

DEBT, DEMOCRACY AND REPRESENTATION IN SOUTH AFRICA

Contrary to most newly independent colonies which borrowed extensively in order to fuel economic growth and development, the post‐apartheid South African government pursued a different path. With the advent of democracy in 1994 they chose to stabilize the economy and reduce public debt via the adoption of an austere fiscal programme. We argue that the choice was made in order to gain greater policy independence from creditors and portray an image of sound fiscal management to potential international investors. The consequences of the decision were, however, quite the opposite. The South African government’s austere and prudent response to debt made its bonds more attractive. It has therefore become more, not less, dependent on the constraints of creditors, albeit international creditors, and so more subject to investor scrutiny and sentiment. And, yet, as a result of the fact that in South Africa the interests of domestic creditors do not enjoy formal, political representation, South Africa still lacks creditworthiness and remains a relatively risky place in which to invest.

A Theory of Colonial Governance

This paper considers conditions of optimality in a co-optive strategy of colonial rule. It proposes a simple model of elite formation emanating from a colonisers quest to maximise extracted rents from its colonies. The results suggest multiple optimal solutions, depending on the specification of the production function, the governance technology chosen by the coloniser and the technological parameters of the model. For instance, in agrarian colonial societies, the results suggest that under a technology of governance by numbers, a large elite population is a direct reflection of a high productivity-enhancing technology by the coloniser. In contrast, under a governance technology by quality, the better the productivity-enhancing technology, the lower the quality of human capital that is transferred to the elite. Additionally, under a composite governance technology, and given non-linearity conditions defined by the productivity distance threshold, the better the productivity-enhancing technology, the smaller the optimal elite size that is chosen by the coloniser. An alternative set of results is obtained assuming an industrial economic set-up (or interdependent production). These results suggest that the long debate about the apparent superiority of one European colonisation experience over the other is much more intricate than is often perceived in the literature. The insight from the model is also useful in understanding why the stock of human capital available in countries emerging from colonisation varied considerably across colonial experiences and from one country to another.

Interdependence of Fiscal Debts in EMU

We use an overlapping generations model to show that a bail-out is the optimal response to a fiscal crisis when the level of integration in a Monetary Union is high and the departure from Ricardian equivalence is significant. As it may not be optimal expost, the no bail-out rule is not credible ex-ante. To make it credible, one would have to look for arrangements that make the cost of one country defaulting sufficiently small, such that it does not impose a risk to the viability of the whole Monetary Union. One way to do that that we exploit is by reducing the relative size of the individual fiscal authority (from national to regional, for example).