Vitor Gaspar

Exchange Rates and Monetary Policy

This paper looks at the relation between exchange rates and monetary policy. It focuses in particular on the role of the exchange rate of the euro in the context of the ECBs monetary policy strategy. The objective of monetary policy is to maintain price stability. The euro area is a large and relatively closed economy. Therefore, the exchange rate of the euro is not an intermediate target nor is it an objective. Nevertheless, the ECBs stability-oriented monetary policy strategy does not neglect the exchange rate of the euro. Clearly, exchange rate developments are taken into account both when looking at the transmission mechanism of monetary policy and when assessing the current economic situation and prospects for the euro area. Copyright Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia 2002.

Price Level Stability: Some Issues

This article challenges the conventional wisdom that price level targeting necessarily increases the volatility of inflation and economic activity. It shows that the optimal policy under commitment for a society that cares only about the variability of output and inflation involves only a limited degree of base drift. The result crucially depends on the importance of forward- looking behaviour and on the credibility of the commitments. The case for price level targeting is strengthened when the possibility of a binding lower bound on nominal interest rates is considered. This may be increasingly relevant in a low inflation environment. This justifies renewed interest on price level targets in the context of thinking through how to prevent and respond to deflationary risks

The Monetary Policy Strategy of the ECB

Monetary policy is an ongoing process, whose implications can only be understood in conjunction with the broad economic context and with the goals that policy itself is trying to achieve. Just as chess moves acquire meaning in succession, as part of the player’s overall game plan, so sequences of policy actions are linked together with the underlying circumstances and goals by a rigorous, although flexible, logical thread. From Lucas’ early contributions we learned that specific monetary policy actions have different impacts on economic agents depending on the overall policy framework according to which they are conducted. It is the monetary policy strategy — in short, the framework that a central bank uses to translate relevant information into actions and to publicly explain such actions — that really matters when it comes to affecting market expectations and, indirectly, economic behaviour and outcomes.

An Intertemporal Analysis of Development Policies in the EU

Abstract In this paper, we focus on the effects of EU structural transfer programs on the evolution of the EU less developed economies. We develop a two-sector endogenous growth model of private and public physical capital and human capital accumulation in which the public sector and the current account balances play a crucial role. This model is applied to Portugal. Simulation results suggest that structural programs will bring Portuguese GDP per capita to 63.7% of the EU average (up from around 54% in the last two decades), thereby greatly contributing to the process of real convergence of the Portuguese economy to EU standards. Additional transfers, primarily targeted at infrastructure development, are necessary, however, if a greater degree of real convergence is to be achieved. Furthermore, the impact of transfers on public deficits, the current account, and real exchange rates might adversely affect the long run requirements of nominal convergence and might exacerbate the need for budgetary restraint in Portugal. Accordingly, a relaxation of domestic matching fund requirements might be desirable.

Inflation Expectations, Adaptive Learning and Optimal Monetary Policy

This chapter investigates the implications of adaptive learning in the private sectors formation of inflation expectations for the conduct of monetary policy. We first review the literature that studies the implications of adaptive learning processes for macroeconomic dynamics under various monetary policy rules. We then analyze optimal monetary policy in the standard New Keynesian model, when the central bank minimizes an explicit loss function and has full information about the structure of the economy, including the precise mechanism generating private sectors expectations. The focus on optimal policy allows us to investigate how and to what extent a change in the assumption of how agents form their inflation expectations affects the principles of optimal monetary policy. It also provides a benchmark to evaluate simple policy rules. We find that departures from rational expectations increase the potential for instability in the economy, strengthening the importance of anchoring inflation expectations. We also find that the simple commitment rule under rational expectations is robust when expectations are formed in line with adaptive learning.

The impact of financial integration and unilateral public transfers on investment and growth in EC capital-importing countries

Abstract This paper develops an endogenous growth model of private, public, and human capital accumulation, in which the public and the current account balances play a crucial role, with the purpose of studying the impact of financial integration and unilateral public transfers on the intertemporal paths of EC capital-importing economies. While both financial integration and unilateral public transfers generate a wealth effect, they affect different types of investment activities, and have different effects on foreign borrowing. The theoretical model is applied to Portugal. Numerical simulation suggest that these structural changes have a substantial impact on growth and on the convergence of Portuguese GDP per capita to EC standards. The structural changes, however, affect negatively the domestic policy options in face of the requirements of the Economic and Monetary Union in the EC.

Selection bias induced cost overruns

Abstract We develop a procurement model where given optimal rules regarding contractor selection, cost overruns are expected to occur. In this model, although the sponsor has access to unbiased ex ante estimates of project costs, the selection mechanism induces an ex post downward bias on project costs. We further investigate the relationship between signals accuracy and the expected magnitude of the bias.

Imperfect Knowledge and Monetary Policy: Imperfect knowledge, learning, and conservatism

Preliminary and incomplete Please do not quote without permission. Comments most welcomed.

Tax Capacity and Growth: Is There a Tipping Point?

Is there a minimum tax to GDP ratio associated with a significant acceleration in the process of growth and development? We give an empirical answer to this question by investigating the existence of a tipping point in tax-to-GDP levels. We use two separate databases: a novel contemporary database covering 139 countries from 1965 to 2011 and a historical database for 30 advanced economies from 1800 to 1980. We find that the answer to the question is yes. Estimated tipping points are similar at about 12¾ percent of GDP. For the contemporary dataset we find that a country just above the threshold will have GDP per capita 7.5 percent larger, after 10 years. The effect is tightly estimated and economically large.

Macroeconomic Management When Policy Space is Constrained; A Comprehensive, Consistent and Coordinated Approach to Economic Policy

The recovery in GDP growth since the global financial crisis has been halting and weak. Concern is widespread that countercyclical policies have run out of space or lack the power to raise growth or deal with the next negative shock. This note argues that room exists for effective policies and that it should be used if appropriate. The most promising route involves a comprehensive, consistent, and coordinated approach to policy making. Comprehensive policy actions within a country exploit synergies, making the whole greater than the sum of parts. Consistent policy frameworks anchor long-term expectations while allowing decisive short- to medium-term accommodation whenever necessary. Coordinated policies across major economies amplify the helpful effects of individual policy actions through positive cross-border spillovers. The findings of this paper indicate that policy coordination adds particular value if the current approach falls short of reviving growth, or in the event of a further downward shock.