Sharun W. Mukand

In Search of the Holy Grail: Policy Convergence, Experimentation, and Economic Performance

We consider a model of policy choice in which appropriate policies depend on a country’s own circumstances, but the presence of a successful leader generates an informational externality and results in too little ‘policy experimentation’. Corrupt governments are reined in while honest governments are disciplined inefficiently. Our model yields distinct predictions about the patterns of policy imitation, corruption, and economic performance as a function of a country’s location vis-a-vis successful leaders. In particular, it predicts a U-shaped pattern in economic performance as we move away from the leader in the relevant space of characteristics: close neighbors should do very well, distant countries moderately well on average with considerable variance, and intermediate countries worst of all. An empirical test with the experience of post-socialist countries provides supportive results.

Outsourcing and International Labor Mobility: A Political Economy Analysis

We analyze the political economy of worker displacement, in an environment characterized by individual-specific uncertainty about the precise distributional consequences of a change in the economic environment. This change allows the displacement of high-paid Northern workers by low-paid, skilled Southern workers who were previously barred from competing with Northern workers, due to restrictions on the mobility of workers, and/or because of technological limits on the mobility of jobs. But while a policy of relative openness may be economically efficient, it may also have adverse distributional consequences. The dilemma faced by the Northern politician is that limiting the inflow of human capital might exacerbate the outflow of jobs, as firms “outsource” or “offshore” tasks that had previously been performed domestically. In particular, why does the outsourcing of service sector jobs have greater political resonance than the loss of manufacturing jobs? Why does the displacement of information technology workers seem to generate a disproportionate amount of political backlash? We trace the political implications of differences in the “vulnerability” of workers, and suggest that one answer may lie in the general-purpose nature of information technology, which allows greater mobility of workers and tasks across sectors than an improvement in sector-specific productivity.

Expectations and the Central Banker: Making Decisions the Market Expects to See?

Reflecting on his experience as a central banker, Alan Blinder (1998) observed that “while I never saw a single case of a central banker succumbing to the temptation that so worried Kydland and Prescott, I often witnessed central bankers sorely tempted to deliver the policy that the markets expected or demanded.” In this paper we develop a framework that examines conditions under which a central banker is tempted to “follow the markets.” In doing so, we explore the implications of increased market ‘consensus’ on the practice of monetary policy and show that ineciency in policymaking is most likely precisely when there is a very high consensus that economic fundamentals are weak or strong. In addition, our results also shed light on (i) why interest rates may not be high enough even when the central bank’s information suggests a rise in asset prices may be due to ‘bubble’ shock; (ii) why a central banker may be reluctant to adopt a loose monetary policy even when investors seem to be very pessimistic about the path of future output; and (iii) why, contrary to conventional models, we sometimes observe an upward revision of private sector’s forecasts of inflation when the central bank tightens its monetary policy. The results have implications for transparency of monetary policy.