The threat to monetary policy from the electronic revolution in banking is the possibility of a decoupling' of the operations of the central bank from markets in which financial claims are created and transacted in ways that, at some operative margin, affect the decisions of households and firms on such matters as how much to spend (and on what), how much (and what) to produce, and what to pay or charge for ordinary goods and services. The object of this paper is to discuss how this possibility arises and what it implies, to dismiss as unessential to the argument various extreme characterizations that have arisen in the recent debate on this issue (for example, that no one will use money for ordinary economic transactions), and to address the specific arguments on the issue offered by Charles Goodhart, Charles Freedman and Michael Woodford.
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.
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 history, a new rising power usually experiences great trouble in the existing world order. With the renaissance of Europe and emergence of China, will the world avoid a repetitive painful experience of the old days and register the twenty–first Century as a peaceful century in human history? The answer will very much depend on how these countries manage their foreign affairs.
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.
The corners hypothesis holds that intermediate exchange rate regimes are vanishing, or should be. Surprisingly for a new conventional wisdom, this hypothesis so far lacks analytic foundations. In part, the generalization is overdone. We nevertheless offer one possible theoretical rationale, a contribution to the list of arguments against intermediate regimes: they lack verifiability, needed for credibility. Central banks announce intermediate targets such as exchange rates, so that the public can judge from observed data whether they are following the policy announced. Our general point is that simple regimes are more verifiable by market participants than complicated ones. Of the various intermediate regimes (managed float, peg with escape clause, etc.), we focus on basket pegs, with bands. Statistically, it takes a surprisingly long span of data to distinguish such a regime from a floating exchange rate. We apply the econometrics, first, to the example of Chile and, second, by performing Monte Carlo simulations. The amount of data required to verify the declared regime may exceed the length of time during which the regime is maintained. The amount of information necessary increases with the complexity of the regime, including the width of the band and the number of currencies in the basket.
Thus there is a discrepancy between the expectation of specialists on terrorism and the policy outcome of the U.S. domestic preparedness program. The most common explanation for such a discrepancy is that policymakers are behaving illogically, either out of ignorance or because they harbor ulterior motives (i.e., personal or institutional interests). Explanations of this sort are particularly favored by terrorism specialists. In this paper I argue that there is another explanation for the discrepancy: The policy outcome resulted from a mode of analysis that the substantive specialists do not perform. Put differently and more generally, a policy prescription that is illogical according to one analytic model of a problem may be perfectly logical according to another. The substantive experts on terrorism adhere to an analytic model known as, for lack of a better term "terrorism studies". Its hallmark is a focus on the practice and especially the practitioners of terrorism. In social–psychological terms, terrorism studies is an internal approach to prediction because it focuses on the constituents of the specific problem rather than on the broad distribution of possible outcomes. Thus, using terrorism studies as one's analytical model, it is hard to find a rational explanation for the origin of the U.S. domestic preparedness program.
I will examine relevant aspects of the activities of Poland both leading up to and since its accession into the NATO Alliance. As Poland is generally credited with being the catalyst that precipitated the dissolution of the Soviet Union, its activities are particularly germane. Not only was it the most aggressive in its pursuit of unfettered sovereignty, it represents other important factors that illustrate challenges and opportunities for any alliance.
The purpose of this paper is to look into and understand a variety of factors, particularly the relationship between the United States and China, and how it affects the rallying of forces and the shaping of a new balance of power in the Asia–Pacific. Based on this, an attempt is made here to arrive at a critical evaluation of ASEAN?s current posture, the problems that may arise, and the policy options taken by ASEAN that can contribute to the strengthening of its role and position.
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.
China in 1978 embarked on a major economic transformation, seeking to alter the stance of the previous 30 years and engage economically with the rest of the world in several dimensions—trade, foreign direct investment by private firms, external borrowing by government from both private and public sources, education. Each of these represented a major change in policy. The transformation in the intervening 22 years has been dramatic and palpable, as can be seen in the sky–lines of the major cities.
Published in Journal of East Asian Studies 1, no. 1 (February 2001).
This paper introduces various sources of consumer heterogeneity in one-sector representative-consumer growth models and develops tools to study the evolution of the distribution of consumptions, assets and incomes. These tools are applied to the Ramsey-Cass-Koopmans model of optimal savings and the Arrow-Romer model of productive spillovers. The RC property per se places very few restrictions on the nature of observed distributions, and a wide range of distributive dynamics and income mobility patterns can arise as the equilibrium outcome. An example illustates how to use these tools to generate quantitative predictions and compare them to the data.
The purpose of this paper is to develop a greater understanding for US perceptions of Common European Security and Defence policy (CESDP) by looking at major factors, interests, threats, and opportunities that seem to influence thevarying degrees of US support. The first chapter of this paper gives a short historical overview of European security and defence issues and examines the current process of developing CESDP. The second chapter focuses on US strategic interests in Europe and the compatibility of American and European interests. The third chapter presents both opportunities and threats that European security and defence reforms could pose to the transatlantic security partnership. The final chapter looks at possible outcomes of CESDP and discusses ways to ensure a lasting transatlantic partnership on security and defence.
We define a country's technology as a triple of eficiencies: one for unskilled labor, one for skilled labor, and one for capital. We find a negative cross–country correlation between the eficiency of unskilled labor and the eficiencies of skilled labor and capital. We interpret this finding as evidence of the existence of a World Technology Frontier. On this frontier, increases in the eficiency of unskilled labor are obtained at the cost of declines in the eficiency of skilled labor and capital. We estimate a model in which firms in each country optimally choose from a menu of technologies, i.e. they choose their technology subject to a Technology Frontier. The optimal choice of technology depends on the country's endowment of skilled and unskilled labor, so that the model is one of appropriate technology. The estimation allows for country–specific technology frontiers, due to barriers to technology adoption. We find that poor countries tend disproportionately to be inside the World Technology Frontier.
In an effort to address this shortcoming, we develop in this article a model of political competition that seeks to capture important characteristics of political competition in underdeveloped polities. These characteristics include: 1. That the state is weak (Evans, Skocpol, and Rueschmeyer (1985); Evans (1995); Myrdal, Kohli, and Shu (1994)). That is, the state lacks a monopoly over the use of violence (Weber (1958)); the use of coercion is controlled by political ?lites. 2. That democratic institutions are weak. Political competition is not governed by the rules of elections. 3. That politicians compete for private rents, extracted from public revenues (Marcouiller and Young (1995)). 4. That politics is "personalistic". Because of charisma (Apter (1963)); a tradition of "big man" politics (Jackson and Rosberg (1982)); or the forces of cultural identity (Geertz (1963)), personal characteristics can be as important as issue stands in determining the appeal of politicians. To analyze political competition in political settings that share these characteristics, we develop a simple model of political competition in which two politicians compete to recruit tax–paying citizens into their respective political camps.
What is the optimal number of currencies in the world? Common currencies aspect trading costs and, thereby, the amounts of trade, output, and consumption. From the perspective of monetary policy, the adoption of another country?s currency trades offers the benefits of commitment to price stability against the loss of an independent stabilization policy. The nature of the trade depends on coñmovements of disturbances, on distance, trading costs, and on institutional arrangements such as the willingness of anchor countries to accommodate to the interests of clients.
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.
This document is organized around "political" and "economic" institutions. We begin with the former, with a discussion of the role of the judicial system and of the separation of power followed by the electoral law and structure of parliament; and a discussion of crime prevention and criminal justice system. We then move to economic institutions; we focus on those that have to do with the bureaucracy and provision of social services; monetary and fiscal institutions, namely the Central Bank, the budget process and, especially important, the local/central government relationships.