Monetary policy is one of the two principal means (the other being fiscal policy) by which government authorities in a market economy regularly influence the pace and direction of overall economic activity, importantly including not only the level of aggregate output and employment but also the general rate at which prices rise or fall. The ability of central banks to carry out monetary policy stems from their monopoly position as suppliers of their own liabilities, which banks in turn need (either as legally required reserves or as balances for settling interbank claims) in order to create the money and credit used in everyday economic transactions. Important developments both in research and in the actual conduct of monetary policy in recent decades have revolved around the choice of a short–term interest rate versus a reserve quantity as the central bank's direct operating instrument, whether to use some measure of money as an intermediate target, whether to constrain the central bank to follow some fairly simple policy rule, what degree of political independence a central bank should have, and whether to target inflation. Some key areas of ongoing research in this area, as of the beginning of the 21st century, are whether the behavioral process by which monetary policy affects nonfinancial economic activity centers more on money or on credit, quantitative measurement of whatever is the mechanism at work, the –off between price inflation and real aspects of economic activity like output and employment, and just why it is that the public in most industrialized countries is as averse to inflation as is apparently the case.
Most central banks, including the U.S. Federal Reserve System, implement their monetary policy by setting interest rates. This paper reviews the major changes that have taken place along the way from the Federal Reserve's interest rate–based policy structure of the 1960s to the interest rate–based structure in place today, and then goes on to consider three open questions that this way of conducting monetary policy presents: (1) whether there is a nominal anchor' problem, and if so whether explicit inflation targeting would solve it, (2) whether there is a role in this policymaking process for interest rates other than whatever particular rate the Federal Reserve chooses to set, or equivalently for equity prices, and (3) to what extent the electronic revolution now under way in banking threatens the efficacy of an interest rate–based monetary policy. The paper concludes by considering the implications of the rules–versus–discretion debate for the role of interest rates in monetary policymaking.
The purpose of this paper is to sketch the general contours and rationale of the U.S. domestic preparedness program, and to identify the most significant problems of domestic preparedness.4 The first section discusses the program?s origins and evolution. While the basic motivation of the domestic preparedness program has been the perception of a rising threat, the specifics of the program have been determined not by any guiding strategic concept but by discrete, uncoordinated legislative appropriations and administrative initiatives. The second section elaborates on the basic rationale behind the domestic preparedness program, explaining how these highly specific domestic policy innovations relate to the national security objective of reducing the threat of WMD terrorism to America. The third section describes the major policy and management challenges facing the program.
We seek in our analysis to understand the forces that favor and oppose currency unions, that is, we extend the classic analysis of optimum currency areas from Mundell (1961). One consideration, not touched on in Mundell?s economic analysis, is that individual currencies are sometimes valued simply out of national pride. One would have expected these nationalistic concerns to be more intense for language than for money, yet most countries willingly use the language of another country, typically the one of a former colonial ruler. Given this acceptance of transplanted language, it is surprising how often people reject currency unions–which sometimes involve the use of another country's currency– simply on the grounds that important countries are supposed to have their own money.
Today, the United States government spurs research mainly through direct funding and the granting of patents. Both methods are vitally important, but each causes serious problems–and each has proved inadequate in spurring the research needed to develop effective vaccines against HIV, tuberculosis and malaria.
This paper studies the relationship between international conflict and the size distribution of countries in a model in which both peaceful bargaining and non–peaceful confrontations are possible. We show how the size distribution of countries depends on the likelihood, benefits and costs of conflict and war. We also study the role of international law and show how better defined international "property rights" may lead to country breakup and more numerous local conflicts.
This paper is about trade liberalization, not globalization. It considers whether the significant steps that have been taken in this direction since the formation of the General Agreement on Tariffs and Trade (GATT) in 1948, have resulted not only in the freer movement of goods and services across borders, but also in a fairer, more open international trading system.
In recent years, many countries have instituted monetary reforms aimed at improving anti–inflation credibility. Is it a problem, however, that international welfare spillover effects seldom receive much consideration in the design of monetary reforms? Surprisingly, the answer may be no. Under plausible conditions, as domestic rules improve and international financial markets become more complete, the Nash and cooperative monetary rule setting games converge. We base our analysis on a utility–theoretic sticky–wage (new open economy macroeconomics) model; the question we pose simply could not have been adequately formulated using earlier models of monetary cooperation.
Should governments pursue economic growth first and foremost, or should they focus on poverty reduction? The recent debate on these questions has generated more heat than light, because it has become embroiled in a wider, political debate on globalization and the role of World Bank/IMF conditionality. As an empirical matter, it is clear that growth and poverty reduction go largely hand in hand. The real questions in this debate should be: What are the policies that yield these rewards, and would a poverty focus facilitate their adoption?
La primera revolución de la diplomacia fue la de su nacimiento como institución. En realidad, el arte u oficio de las relaciones internacionales existe desde que se produjeron los primeros contactos entre pueblos diferentes, durante la más remota Antigüedad. Se sabe que, ya en el siglo XIV a.C., había algún tipo de relación formal entre egipcios y habitantes de la Mesopotamia. Pero fue el contacto estrecho entre las ciudades–estado de la Grecia clásica lo que dio origen a la diplomacia institucionalizada. Heraldos y un cierto código de conducta le otorgaron carta de naturaleza. Las relaciones diplomáticas de esta primera época tenían carácter puntual. A partir de entonces, paulatinamente, el poder político se fue centralizando y la comunicación entre las distintas entidades que lo albergaban se fue intensificando.
This paper discusses different views about what is wrong with the world, or as an economist would say, the principal distortions that are present. The intent is to clarify the logic behind the proposals for reforming the international financial architecture and provide a means of assessing them. (The actual assessment is performed in the companion paper "Getting it Right: What to Reform in International Financial Markets," Fernández–Arias and Hausmann, 2000.)
This paper provides an overview and assessment of reform initiatives, both those currently on the table and those that are not but we think should be. The intent is to clarify the logic behind these proposals and assess them from a Latin American perspective. Our discussion is based on the extent to which reform initiatives alleviate the problems we identified in the companion paper "What?s Wrong with International Financial Markets," (Fernández–Arias and Hausmann, 1999). The overall conclusion is that the current approach to reforming the international financial architecture is not appropriate for the task and a paradigm shift is required.
Gravity–based cross–sectional evidence indicates that currency unions stimulate trade; cross–sectional evidence indicates that trade stimulates output. This paper estimates the effect that currency union has, via trade, on output per capita. We use economic and geographic data for over 200 countries to quantify the implications of currency unions for trade and output, pursuing a two–state approach. Our estimates at the first stage suggest that belonging to a currency union more than triples trade with the other members of the zone. Moreover, there is no evidence of trade–diversion. Our estimates at the second stage suggest that every one percent increase in trade (relative to GDP) raises income per capita by roughly 1/3 of a percent over twenty years. We combine the two estimates to quantify the effect of currency union on output. Our results support the hypothesis that the beneficial effects of currency unions on economic performance come through the promotion of trade, rather than through a commitment to non–inflationary monetary policy, or other macroeconomic influences.
Globalization of trade and finance has gone a long way over the last –century. But it is less impressive than most non–economists think, judged either by the standard of 100 years ago or by the hypothetical standard of perfect international integration. The paper documents the extent of globalization, and some reasons for the barriers that remains. It then briefly considers the implications for economic growth and the implications for goals not measured by GDP equality and the environment. The conclusion is that globalization is not the primary obstacle to efforts to address such concerns.
We investigate how the number and size of local political jurisdictions in an area is determined. Our model focuses on the tradeoff between the benefits of economies of scale and the costs of a heterogeneous population. We consider heterogeneity in income, race, ethnicity, and religion, and we test the model using American school districts, school attendance areas, municipalities, and special districts. Using both cross–sectional and panel analysis, we find evidence of a significant tradeoff between economies of scale and racial heterogeneity. We find weaker tradeoffs between economies of scale and income or ethnic heterogeneity. That is, it appears that people are willing to sacrifice the most, in terms of economies of scale, in order to avoid racial heterogeneity in their jurisdiction.
The contemporary study of immigration has come a long a way — or at least so it seems to someone whose interests in the subject were first sparked in that prehistoric era we call the late 1970s. Others already knew better, but at the time it wasn't clear to me that there was a field to master, nor a subject that would live for long. Immigration had long since disappeared from the scholarly radar screen, and though it was quietly undergoing a renaissance, its rebirth was hard for this, admittedly obtuse, graduate student to discern. The older literature appeared truly antique. Yes, there was a relevant body of scholarship dating from the 1960s, but this seemed dated, and in any case, reeked of a melioristic liberalism so hopelessly passe that one couldn't take it seriously. It was also easy to succumb to the political correctness of the time: the authors of Beyond the Melting Pot were then at the height of their neo–conservative phase, making theirs the type of book one read only after having wrapped it in a brown, paper cover.
Our argument, in short, is that most of the risks being generated in modern industrialized societies are the product of technologically induced structural transformations inside na–tional labor markets. Increasing productivity, changing consumption patterns, and saturated demand for products from the traditional sectors of the economy are the main forces of change. It is these structural sources of risk that fuel demands for state compensation and risk sharing.
This paper looks again at the U.S. deficit debate of the 1980s, this time with the benefit of the Commerce Department's newly revised data for that period and also in light of the experience of the 1990s when sizeable budget surpluses replaced chronic large deficits. The familiar conclusion that sustained government deficits at full employment depress private capital formation has stood up well in both regards. By contrast, the more recent experience in particular has sharply contradicted any simple notion that the government balance and the current account balance move in parallel. Other relevant issues include the equilibrium (that is, noninflationary) unemployment rate, the response of private saving to government dissaving, and the role of debt and equity in financing private capital formation.
In "Rigor or Rigor Mortis: Rational Choice and Security Studies," Stephen Walt warns of the dangers to the field of security studies that are in store "[i]f formal theory were to dominate security studies as it has other fields of political science." He backs up these warnings by evaluating published formal work in the field according to seemingly reasonable criteria, finding that the gain in rigor inherent in formal work is not sufficient to offset its empirical, creative, and policy–relevance weaknesses. While Walt ends with a plea for diversity, the overall structure of the argument puts rational choice on trial, finds it lacking but threatening to become dominant, and does little to serve the purpose of encouraging pluralism.
This essay considers some prescriptions that are currently popular regarding exchange rate regimes: a general movement toward floating, a general movement toward fixing, or a general movement toward either extreme and away from the middle. The whole spectrum from fixed to floating is covered (including basket pegs, crawling pegs, and bands), with special attention to currency boards and dollarization. One overall theme is that the appropriate exchange rate regime varies depending on the specific circumstances of the country in question (which includes the classic optimum currency area criteria, as well as some newer criteria related to credibility) and depending on the circumstances of the time period in question (which includes the problem of successful exit strategies). Latin American interest rates are seen to be more sensitive to US interest rates when the country has a loose dollar peg than when it has a tight peg. It is also argued that such relevant country characteristics as income correlations and openness can vary over time, and that the optimum currency area criterion is accordingly endogenous.