Central Bank Independence and Deflation

Deflation presents special challenges to central banking, as traditional monetary policy tools are highly inefficient in dealing with deflationary pressures. In this case, the Federal Reserve must use alternative monetary policy tools that are specially designed to artificially boost asset prices through “printing press” or currency manipulation. Unfortunately, these alternative monetary policy tools create unintended political, geopolitical, and social consequences that overreach into the direct responsibilities of other branches of government. Thus, the government must be able to influence Federal Open Market Committee decisions that potentially affect (or contradict) U.S. foreign policy, U.S. trade policy, U.S. dollar policy, and deliberate domestic/global wealth distribution policies.     

Does India's growth matter? Evidence from the SAARC nations

The study estimates the extent of spillover effects that India's real per capita gross domestic product (GDP) growth rate has on the growth rates of other countries in the South Asian Association for Regional Cooperation (SAARC) region for the period 2003–2016. It also identifies whether the conventional trade channel is the means through which growth is transmitted from India to her neighboring countries. Using a random effects model, we conclude that on average, a 1 percentage point increase in India's real per capita GDP growth rate results in 0.46 percentage point increase in the per capita GDP growth rates of other SAARC nations. However, this does not occur through the trade channel primarily due to low levels of intraregional trade. Also, using time dummies, the paper analyzes whether there has been any significant change in the degree of spillover effects in the postfinancial crisis period, where countries have been observed to insulate themselves to a certain extent.     

Evolution of monetary policy approaches: A case study of Indian economy

The monetary policy framework of India has undergone several transformations reflecting underlying macroeconomic and financial conditions as also the dominant socio‐politico‐economic paradigm. The present study makes pertinent commentary notes on different monetary policy approaches, including, for instance, the era of development planning, the era of monetarism, the era of multiple indicator approach, and the era of inflation targeting in India along with their respective advantages and disadvantages.     

Time-consistent monetary policy under output persistence

This note merges the fact that real activity is persistent with a Barro-Gordon type model of endogenous monetary policy. It shows that persistence crucially affects policy choices. This applies in non-cooperative games with a finite horizon, and in games with an infinite horizon. Always, enforceable inflation announcements move higher when output persistence increases. Policymakers who discount future utility by 10% annually produce about ten times as much inflation under near-hysteresis as in a natural-rate scenario. A change in the policymaker's time preference may affect inflation both ways, depending on present time preference and persistence.     

From doves to hawks: A spatial analysis of voting in the Monetary Policy Committee of the Bank of England

This article examines the making of monetary policy in the United Kingdom between 1997 and 2008 by analysing voting behaviour in the Bank of England's Monetary Policy Committee (MPC). It provides a new set of measures for the monetary policy preferences of individual MPC members by estimating a Bayesian item response model. The article demonstrates the usefulness of these measures by comparing the ideal points of outgoing MPC members with their successors and by looking at changes over time in the median ideal point on the MPC. The analysis indicates that the British Government has been able to move the position of the median voter on the MPC through its appointments to the Committee. This highlights the importance of central bank appointments for monetary policy.     

The interaction of monetary policy and wages

This paper focuses on the interaction of monetary policy and wage formation in economies with strong labor unions. Government and unions are viewed as endogenous utility maximizers and the macroeconomic consequences of their strategic interaction are explored with the aid of some elements of simple game theory. Specifically, it is shown (a) how labor unions adjust wages to prices so as to maximize their utility following changes in monetary policy; (b) how the effectiveness of monetary policy is circumscribed without necessarily being nullified by the utility-maximizing reactions of unions; and (c) how the interplay of government and unions can create a persistent tendency towards inflation and unemployment simultaneously.     

Is There an Association Between Gasoline Prices and Physical Activity? Evidence from American Time Use Data

Obesity is epidemic in the United States, and there is an imperative need to identify policy tools that may help fight this epidemic. A recent paper in the economics literature finds an inverse relationship between gasoline prices and obesity risk—suggesting that increased gasoline prices via higher gasoline taxes may have the effect of reducing obesity prevalence. This study builds upon that paper. It utilizes cross‐sectional time series data from the American Time Use Survey (ATUS) over 2003–2008, utilizes the increases that occurred in gasoline prices in this period due to Hurricane Katrina and to the global spike in gasoline prices as a “natural experiment,” and explores how time spent by Americans on different forms of physical activity is associated with gasoline price levels. Economic theory suggests that higher gasoline prices may alter individual behavior both via a “substitution effect” whereby people seek alternatives to motorized transportation, and an “income effect” whereby the effect of higher gasoline prices on the disposable family budget leads people to make various adjustments to what they spend money on. The latter may lead to some increase in physical activity (for example, doing one's own yard work instead of hiring help), but may also lead to decreases in other physical activities that involve expenses, such as team sports or workouts at the gym. Thus, ultimately, the relationship between gasoline prices and physical activity must be empirically determined. Results from multivariate regression models with state and time fixed effects indicate that higher gasoline prices are associated with an overall increase of physical activity that is at least moderately energy intensive. The increases are most pronounced in periods where gasoline prices fluctuate more sharply and unexpectedly. These results appear robust to a number of model specifications. One of the major components of this increase appears to be an increase in housework that is at least moderately energy intensive—such as interior and exterior cleaning, garden, and yard work. This tentatively suggests that there is an income effect of higher gasoline prices, or a possible increase in prices of such services when gasoline prices increase. However, the increases in physical activity associated with increased gasoline prices are weaker among minorities and low socioeconomic status (SES) individuals. Hence, while a policy that increases gasoline prices via raised gasoline taxes may have benefits in terms of increasing overall physical activity levels in the United States, these benefits may not accrue to low SES individuals to the same extent as to their higher SES counterparts. This suggests that if increasing physical activity is the primary goal, then it may be more efficient to use a tax that can exert an income effect on mid‐to‐high SES households, such as a targeted income tax. On the other hand, if gasoline taxes are imposed to address other negative externalities of gasoline use, then these taxes may have the added benefit of increasing physical activity at least among some segments of U.S. society.     

Inflationary effects of oil price shocks in Indian economy

Stabilising inflation around certain preconceived level remains the predominant objective of monetary authorities all over the world as its variability has crucial ramifications on the real economy. However, the effective operation of monetary policy to this end largely hinges on the nature and dynamics of inflation both in the short‐run and long‐run. In this context, the present study focuses on theoretical investigation of how crude oil price fluctuations affect inflation in a real economy. Moreover, the study examines the nature of relationship between crude oil price fluctuations and inflation and its impact with reference to Indian economy. The study suggest that, in India, although the price of petroleum products are insulated against international crude oil price fluctuations by way of subsidies in order to curb inflation, in the long run, inflation manifest itself in the form of worsening fiscal deficit and undermine the sustainability of public debt. Copyright © 2016 John Wiley & Sons, Ltd.     

Homeowner Behavior,Health Status,and Medicaid Payment Eligibility: Evidence from the Deficit Reduction Act of 2005

This paper analyzes the effect of a change in the status of housing equity as a protected asset for Medicaid long‐term care payment eligibility. A difference‐in‐difference‐in‐differences strategy is employed to estimate the effect of the policy on the housing equity holdings of potentially treated individuals. Using a panel of unmarried homeowners, the policy induced treated individuals who were likely to require long‐term care to hold less housing equity by values of $82,000 to $193,000 relative to control individuals. This equates to relative reductions of 12 to 29 percent for treated individuals after the policy change. Similar effects are not observed when considering health measures less predictive of long‐term care services and for a sample of married households who were unlikely affected by the policy. These estimates confirm the importance of the housing asset as a shelter for Medicaid eligibility.     

The causal nexus of interest rate policy and gold market: The case of Turkey

The relevance of gold to the financial market and global economies is responsible for the commodity's (gold) link with financial instruments such as the oil price, currency and gold price, stock index, and other commodities price. In this case, the causal analysis between the interest rate and the gold price has been examined in a novel approach. This study uses the standard Granger causality approach to test the relationship for the economy of Turkey over the period June 1, 2000–June 1, 2017. The results revealed that while gold price depends on daily announcements, demand, and supply, the interest rate depends on some factors such as the monetary policy of the central bank, inflation rate, and different macroeconomic parameters. Thus, the causality between the two financial instruments is observed to be significant. According to the conducted statistical analysis, the interest rate and gold price have interaction between each other. Because there is insufficient evidence in the extant literature that establishes a causality relationship between the two variables, the current study is believed to enhance policy directives and contribute to the financial literature. Considering the peculiar situation of the Turkish financial market, this novel approach presents significant policy directions.     

Political Influences on Monetary Policy 1914–84

This study examines political, institutional and economic influences on monetary policy in the long run. A monetary policy reaction function is estimated, which focuses principally on the influence of the administration, Congress and the Federal Reserve on outcomes; these influences are estimated together with a variety of economic and political controls. The findings show that partisan control of the White House is particularly important in explaining variations in the growth of the quantity of money over time. Republican control of the White House is associated with tighter money, and Democratic control with looser money, but there are exceptions. Finally, the indirect influence of partisanship on the economic variables in the reaction function suggest that the total effects are stronger than the direct effects alone.     

The Pass‐Through of Taxes on Sugar‐Sweetened Beverages to Retail Prices: The Case of Berkeley,California

Obesity and diet‐related chronic disease are increasing problems worldwide. In response, many governments have enacted or are considering taxes on energy‐dense foods. Perhaps the most commonly recommended policy is a tax on sugar‐sweetened beverages (SSBs). This paper estimates the extent to which a tax on SSBs is passed through to consumers in the form of higher prices. We examine the first city‐level tax on SSBs in the United States, which was enacted by the voters of Berkeley, California, in November 2014. We collected the prices of various brands and sizes of SSBs and other beverages before and after the implementation of the tax from a near‐census of convenience stores and supermarkets in Berkeley, California. We also collected prices from stores in a control city: San Francisco, where a similar voter referendum failed despite majority support. Estimates from difference‐in‐differences models indicate that, across all brands and sizes of products examined, 43.1 percent (95 percent confidence interval: 27.7 to 58.4 percent) of the Berkeley tax was passed on to consumers. The estimates also are consistent with cross‐border shopping. For each mile of distance between the store and the closest store selling untaxed SSBs, pass‐through rose 33.3 percent for 2 L bottles and 25.8 percent for 12‐packs of 12 ounce cans.     

Testing the ownership society: Ownership and voting in Britain

Prior work on political effects of personal asset ownership in the United Kingdom has found a causal link between home and share ownership and conservative political preferences and voting. These estimates appear to confirm the “ownership society” thesis tying privatization and asset ownership to improved prospects for conservative parties. This paper proposes a new identification strategy for testing this causal connection that improves on earlier research designs. I exploit temporal variability in panel data to better specify the definition of home ownership and control for unobserved confounders associated with ownership. Under this design, home ownership is found to have no or very weak effects on voting in the 1997 and 2001 General Elections. Where weakly significant results are found, they suggest a mixed effect on partisan outcomes at the ballot box. Finally, while extending this strategy to financial assets does support the “ownership society” hypothesis, doing so illuminates a very different set of identification problems, which point to underlying flaws in the “ownership society” argument itself.     

When the Interest Rate on the National Debt Is a Policy Variable (and “Printing Money” Does Not Apply)

Modern Monetary Theory (MMT) argues that the interest rate on the national debt for a monetary sovereign is a policy variable, not subject to whether bond markets “accept” or “reject” it. This paper defines measures of the components of the standard analysis of fiscal sustainability. It then methodically describes the Federal Reserve's operations relevant for understanding why interest rates on government debt in the United States have been and continue to be driven by monetary policy. A corollary that emerges—“printing money,” as economists usually understand it—is not applicable and has never been advocated by MMT.     

Monetary Sovereignty: Nature,Implementation, and Implications

Monetary sovereignty is a central concept of Modern Money Theory (MMT). The paper explores the characteristics of monetary sovereignty, the means used to implement it, and some of its theoretical and policy implications. Herein, it is shown that monetary sovereignty involves a high degree of coordination between the central bank and the national treasury. The paper also argues that monetary sovereignty is not special to the United States, does not require direct monetary financing of the treasury, does not tell us anything about the optimal size of the fiscal balance, and is not dependent on the willingness of foreigners to hold the domestic currency.     

Climate change policy discontinuity and its effects on Australia's national electricity market

Australia's National Electricity Market (NEM) became unstable in 2016/2017 after 20 years of consistent performance. The South Australian grid collapsed on 28 September 2016 – Australia's first black system event since 1964. Wholesale prices in the region trebled to $120+/MWh; soon after Hazelwood power station announced its exit with just 5 months’ notice. The problem spread as prices elsewhere doubled to $89/MWh from a long‐run average of $42.50. The NEM is experiencing a supply‐side crisis. Consistent with the requirement to decarbonise the system, aged coal‐fired generators are exiting but decades of climate change policy discontinuity has frustrated the entry of new plant. Long‐dated capital‐intensive asset industries like electricity supply anticipate a conventional policy cycle. What they have experienced instead is consistent with garbage can theory. Policy clarity may be emerging for only the second time in two decades. As with the NEM, its durability will depend on cooperative federalism.     

Evaluating the effectiveness of policies related to drunk driving

New findings are presented on the effectiveness (in terms of fatal crash reductions) of state‐level public policies related to drunk driving. Conventional estimates of policy effects might be biased because of the endogeneity of policies; this concern is addressed by analyzing the time pattern of policy effects with respect to the date of adoption. For the 0.08 BAC law, the results suggest that a bias upward exists, but the policy is still somewhat effective. Graduated licensing programs for young drivers and the Mothers Against Drunk Driving (MADD) organization are also evaluated for the first time in this type of analysis. The estimated time pattern of effects for graduated licensing suggest that its effects are also overstated in conventional analyses, but the policy is still effective for young drivers. The estimates for MADD do not imply an effect, but this result could be due to the crudeness of the variable used. © 2003 by the Association for Public Policy Analysis and Management.     

The mysterious overvaluation of KRW in the 1990s†

Existing theories on real exchange rates predict a significant undervaluation of the Korean won (KRW) in the early and mid-1990s. The paper demonstrates why this expectation did not materialize and instead an unprecedentedly large degree of overvaluation took place. Focusing on three variables, namely, financial repression, devaluation pass-through, and policy exhibitionism, the paper examines how the unraveling of the developmental state eventually gave rise to the 1990s’ overvaluation. It argues that the policy exhibitionism of the new civilian government amplified the influence of Chaebol on monetary policies, which in turn created a strong appreciative force to KRW. It also contends that the increasing exchange rate pass-through onto the prices of imported intermediate goods explains why Chaebol did not desire to tame the excessive appreciative trend despite its detrimental effect on their exports. The paper offers policy implications for other state-led, emerging economies.     

Public debt stabilization: the relevance of policymakers’ time horizons

Policymakers are stuck in time. Political short-termism, policy myopia, policy short-sightedness, and similar words have been coined to emphasize the present-centric policy thinking. Politics tends to produce short time horizons, and as a result, policymakers often fail to use present opportunities to mitigate future harms. Focusing on fiscal and monetary strategic interactions, given different separate decision makers, our paper aims to explore the effects of policymakers’ time horizons on debt stabilization. To formalize our ideas, we use the novel concept of Nonlinear-model-predictive-control Feedback Nash Equilibrium (NFNE) and find that present-centric policy thinking and decision horizons matters under several dimensions.     

The ruthless Fed: A critique of the AST hypothesis

This paper examines the hypothesis that the Great Contraction was the result of rational rent-seeking by members of the Federal Reserve System. In contrast to the AST hypothesis, evidence on the share prices of member banks that survived the contraction suggests that the owners of these banks suffered an absolute decline in real wealth and a decline relative to a broad spectrum of other investment alternatives. Furthermore, monetary surprises had no statistically discernible effect on the share prices of these banks. This evidence conflicts with the notion that rational rent-seeking would lead the owners of member banks and their bureaucratic conspirators in the Federal Reserve System to unleash a policy with the goal of contracting the money supply by 35 percent.