Tim Willems

Visualizing the invisible: estimating the New Keynesian output gap via a Bayesian approach

As both the natural level of output and the New Keynesian output gap cannot be observed in practice, there is quite some debate on the question how these variables look like in practice. Rather than taking the standard approach of using a time trend or the HP-filter to obtain estimates of these two objects, this paper takes a theoretically more sound route by separating trend from cycle via Bayesian estimation of a New Keynesian model, augmented with an unobserved components model for output. This delivers us with model consistent estimates of both the natural level of output and the New Keynesian output gap. These estimates are then compared with the dominant output gap proxies used in the literature. It turns out that the benefits of using the model-based approach taken in this paper mainly emerge in real time, thereby making this method potentially useful for the conduct of monetary policy.

The Benefits of Forced Experimentation: Striking Evidence from the London Underground Network

We estimate that a significant fraction of commuters on the London underground do not travel their optimal route. consequently, a tube strike (which forced many commuters to experiment with new routes) taught commuters about the existence of superior journeys, bringing about lasting changes in behavior. This effect is stronger for commuters who live in areas where the tube map is more distorted, thereby pointing towards the importance of informational imperfections. We argue that the information produced by the strike improved network-efficiency. Search costs are unlikely to explain the suboptimal behavior. Instead, individuals seem to under-experiment in normal times, as a result of which constraints can be welfare-improving.

Actively Learning by Pricing: A Model of an Experimenting Seller

This paper presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy. Consequently, this seller optimally experiments with his price. Resulting price patterns show a lot of discreteness (as observed in the data), which has proved to be a major challenge to most price setting models. This models learning dynamics are able to reconcile individual price flexibility with aggregate price sluggishness, while the experimentation motive can explain the presence of many idiosyncratic price changes in the data as well as the observation that prices are more volatile than costs.

Identifying US Monetary Policy Shocks through Sign Restrictions in Dollarized Countries

Since dollarized countries import US monetary policy, identifying US monetary shocks through sign restrictions on US variables only, does not use all available information. In this paper we therefore include dollarized countries,which enable us to restrict more variables and leave the responses of US output and prices unrestricted (to allow for the working capital view of monetary shocks). We find only little evidence for the latter in the US, as prices fall immediately after most contractionary shocks that we identify. Furthermore, monetary shocks do not seem to have a clear effect on real GDP.

Using Dollarized Countries to Analyze the Effects of US Monetary Policy Shocks

Identifying monetary policy shocks is difficult. Therefore, instead of trying to do this perfectly, this paper exploits a natural setting that reduces the consequences of shock misidentification. It does so by inferring from the responses of variables in dollarized countries. They import US monetary policy just as genuine US states do, but have the advantage that non-monetary US shocks are not imported perfectly. Consequently, this setting reduces the role played by any non-monetary US shocks, while leaving the effects of the true monetary shocks unaffected. Results suggest that prices fall after monetary contractions; output does not show a clear response.

Dictators Walking the Mogadishu Line: How Men Become Monsters and Monsters Become Men

History offers many examples of dictators who worsened their behavior significantly over time (like Zimbabwes Mugabe) as well as dictators who displayed remarkable improvements (like Rawlings of Ghana). The authors show that such mutations can result from rational behavior when the dictators flow use of repression is complementary to his stock of wrongdoings: past wrongdoings then perpetuate further wrongdoings and the dictator can unintentionally get trapped in a repressive steady state where he himself suffers from ex-post regret. This then begs the question why such a dictator would ever choose to do wrong in the first place. The authors show that this can be explained from the dictators uncertainty over his degree of impunity in relation to wrongdoing, which induces him to experiment along this dimension. This produces a setting where any individual rising to power can end up as either a moderate leader, or as a dreaded tyrant. Since derailment is accidental and accompanied by ex-post regret, increasing accountability can be in the interest of both the public and the dictator.

Political Accountability and Policy Experimentation: Why to Elect Left-Handed Politicians?

In an environment where voters face an inference problem on the competence level of policy makers, this paper shows how subjecting these policy makers to reelection can reduce the degree of policy experimentation to the benefit of the status quo. This may be a reason why some notable policy experiments were implemented by non-accountable regimes (cf. Chile and China). Whether experimentation in representative democracies is suboptimally low, depends on societys degree of risk aversion relative to that of the decision maker. If the level of experimentation is suboptimal, taking decisions by direct democracy, or electing risk-loving politicians could improve welfare. Interestingly, risk-lovers also seem to be overrepresented among Presidents of various countries.

Time-consistency and Dictator Punishment: Discretion Rather than Rules?

Following Kydland and Prescott’s (1977) seminal work exhorting the use of rules over discretion, many governments responded by attempting to bind policy makers who are susceptible to time-inconsistency. In subsequent decades, much of the policy discussion and analysis has been concentrated on monetary policy (cf. the extensive literature following Barro and Gordon (1983)). However, there have been other fields where governments have increased their commitment to remain time-consistent. One such area is international justice and the treatment of dictators and warlords who have committed crimes under international law. There, commitment has been increased through the establishment of a permanent International Criminal Court (ICC) in 2002. The purpose of the ICC is to hold high ranking officials (including heads of state) accountable for acts of genocide, war crimes, and crimes against humanity. Indeed, an explicit aim of the Rome Statute (the treaty that established the ICC) is to “to put an end to impunity for the perpetrators of these crimes and thus to contribute to the prevention of such crimes”.