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Die Staatsschuldenkrise im Euroraum kann kurzfristig nicht gelost werden: Die finanzielle Unterstutzung fur die Schuldnerstaaten reicht nicht aus, deren Austeritatsprogramme wirken zu restriktiv und die Mitgliedslander sind nicht bereit, auf Fiskalkompetenz zu verzichten. Die Autoren stellen hier ein Konzept vor, das zu hoheren sWachstumsraten und niedrigeren Schuldenquoten in den betroffenen Landern fuhrt.

International audience; Given the large amount of interaction between research on monetary policy and its practice, this paper examines whether some simple monetary policy rules that have been proposed in the academic literature, part of which has originated from within central banks, provide a reasonable characterisation of actual policy in the UK and the US. The paper finds that the simple rule that describes best actual US monetary policy is a speed limit rule with dynamics, whilst for the UK it is a forward-looking rule. The simpler dynamics in the UK�s monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting.

Mit dem diesjährigen Nobelpreis für Wirtschaftswissenschaften wurden zwei Forscher geehrt, die sich in zwei wesentlichen Arbeiten mit den Möglichkeiten staatlicher Wirtschaftspolitik und den Ursachen konjunktureller Fluktuationen auseinandergesetzt haben. Was beinhalten diese Modelle? Welche Schlussfolgerungen sind aus ihnen für die Wirtschaftspolitik zu ziehen?

Most EU member states will adopt fiscal rules that refer to cyclically-adjusted borrowing limits. Under the standard cyclical adjustment procedure, trend increases in public debt based on cyclical components are prevented if the real-time output gaps used to calculate cyclical components balance over time. We analyse real-time output gaps for EU-15 countries over the 1996-2011 period as estimated by the EU, the IMF and the OECD. Compared to each institution's final estimate, we find that real-time output gaps in our sample period are negatively biased. This bias is observed (i) irrespective of the source of the data, (ii) in all real-time vintages, (iii) basically across the entire cross-section of countries. The magnitude of the bias is considerable: on average, real-time cyclical components as a percentage of GDP are biased downwards by about 0.5 percentage point per year. Our results suggest that fiscal rules should incorporate ex-post checks of the unbiasedness of the cyclical components used within the rule. Potential biases would then decrease or increase future borrowing limits.

We evaluate the effect of relaxing fiscal rules on policy outcomes applying a quasi-experimental research design. In 1999, the Italian central government introduced fiscal rules aimed at imposing fiscal discipline on municipal governments, and in 2001 the rules were relaxed for municipalities below 5,000 inhabitants. This institutional change allows us to implement a difference-in-discontinuities design by combining the before/after with the discontinuous policy variation. Our estimates show that relaxing fiscal rules triggers a substantial deficit bias, captured by a shift from a balanced budget to a deficit that amounts to 2 percent of the total budget. The deficit comes primarily from reduced revenues as unconstrained municipalities have lower real estate and income tax rates. Finally, we investigate the heterogeneity in policy responses across municipalities to provide new evidence about the costs and benefits of restricting fiscal policy. The impact is larger if the mayor can run for reelection, the number of political parties seated in the city council is higher, voters are older, the performance of the mayor in providing public good is lower, and cities are characterized by historical deficit, consistently with models on the political economy of fiscal adjustment.

Many observers consider the German 'debt brake' beyond criticism. In the current crisis, many European countries have difficulties refinancing their budgets, while the German treasury's funding conditions are most favourable. The 'fiscal compact's' call for the introduction of German-style 'debt brakes' in the constitutions of other countries in order to rebuild their credibility on financial markets therefore might seem reasonable. However, there are several reasons to doubt the underlying (macro-) economic reasoning. Two specific problems of the German debt brake are analysed in greater detail: Firstly, the German rule is neither simple nor transparent. The calculation of structural deficits is a complex matter highly sensitive to specification and therefore open to political manipulation. Secondly, the debt brake will ultimately have a pro-cyclical effect because of the way the commonly used cyclical adjustment method works. This will, as a result, destabilise the economy. The German debt brake can therefore hardly serve as a good example for other countries.

In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.

This paper builds a DSGE model for a small open economy (SOE) in which the central bank systematically intervenes both the domestic currency bond and the FX markets using two policy rules: a Taylor-type rule and a second rule in which the operational target is the rate of nominal currency depreciation. For this, the instruments used by the central bank (bonds and international reserves) must be included in the model, as well as the institutional arrangements that determine the total amount of resources the central bank can use. The corner regimes in which only one of the policy rules is used are particular cases of the model. The model is calibrated and implemented in Dynare for 1) simple policy rules, 2) optimal simple policy rules, and 3) optimal policy under commitment. Numerical losses are obtained for ad-hoc loss functions for different sets of central bank preferences (styles). The results show that the losses are systematically lower when both policy rules are used simultaneously, and much lower for the usual preferences (in which only inflation and/or output stabilization matter). It is shown that this result is basically due to the central bank's enhanced ability, when it uses the two policy rules, to influence capital flows through the effects of its actions on the endogenous risk premium in the (risk-adjusted) interest parity equation.

Die bestehenden gesetzlichen Vorgaben zur Rücklagenbildung in der Sozialversicherung sind unsystematisch und unzureichend. Die Bundesregierung bzw. der Gesetzgeber ist daher aufgefordert, die geltenden Regelungen grundlegend zu verbessern und zu systematisieren. Die hier vorgelegte Untersuchung soll einige Überlegungen zur sachgerechten Ausgestaltung der Rücklagen in der Sozialversicherung und einen diesbezüglichen Diskussionsbeitrag liefern. Gleichwohl müssen die hier skizzierten Ergebnisse zur konkreten Höhe der möglichen Sollwerte für die Rücklage noch vertiefend untersucht werden.

The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.

This paper analyses Greek fiscal sustainability from a retrospective and a prospective view. Implications of Greek fiscal (un)sustainability are discussed. In the empirical analysis econometric testing of Greek government solvency during the period 1985-2008 is combined with a scenario analysis of budgetary adjustments during the period 2011-2030 under alternative hypotheses.

This paper analyzes government commitments to ongoing spending programs that require future outlays. Spending commitments are important for understanding partisan politics because they constrain future governments. In a model with one government good, a 'stubborn liberal' policy maker can use precommitted spending to prevent a later conservative government from imposing decisive spending cuts. In a model where parties differ about spending priorities, reelection uncertainty creates a permanent bias towards higher government spending and higher taxes.

Due to the 2008–09 financial crisis and ensuing economic downturn, budgetary problems are on the policymakers’ agenda once again. Fiscal deficits incurred as a result of the financial crisis and economic downturn have caused public debt to rise steeply once again. Moreover, the public debt of some EU countries was already at a high level before the crisis. At a high level of public debt, public finances become susceptible to adverse interest rate and economic growth fluctuations. If interest rates increase, advantageous government programs may be postponed, a debt trap may arise, and crowding out may reduce private investments. Interest rates may increase due to the growing risk aversion and the emergence of risk premiums on sovereign debt. Greece, Ireland and Portugal, which have been the hardest hit by the European debt crisis, have received support from the IMF, and the new EU and the euro area’s Financial Stabilization Mechanism and Financial Stability Facility.

Das Papier untersucht auf der Grundlage der monetären Überinvestitionstheorien von Wicksell (1898), Mises (1912) and Hayek (1929, 1935) das Scheitern von geld- und finanzpolitischen Regeln zur Kontrolle von übermäßigem Geldmengenwachstum und ausufernder Staatsverschuldung. Es zeigt asymmetrische Geld- und Finanzpolitiken in den großen Industrieländern auf, die zu einem Verfall der Geldmarktzinsen gegen Null und einem Anstieg der Staatsverschuldungen auf globale Rekordstände geführt haben. Das strukturelle Absinken des globalen Zinsniveaus wird als Ursache für globale Überinvestitions- bzw. Boom-und-Krisen-Zyklen gesehen, die zu einem Ausufern der Staatsverschuldung geführt haben. Zur Stabilisierung des langfristigen globalen Wachstums wird die Rückkehr zu symmetrischen Regeln in der Geld- und Finanzpolitik gefordert.

This paper presents a review of the most significant fiscal rules policymakers can choose from. The insights from this review are then applied to the current budgetary situation of the European Union. In the European Union, the supranational Stability and Growth Pact (SGP) should provide the necessary guidance in limiting governmental borrowing by member states. In addition to the SGP, European countries are implementing various other fiscal rules that bind central, regional and local governments. We provide empirical estimates of the effect of fiscal rules on fiscal balance, government spending and government revenues, using a Fiscal Rule Index. We find that fiscal rules have some effect on fiscal balances.

The paper examines the optimal combination of central bank independence and conservatism in the presence of uncertain central bank preferences. We develop a model of endogenous monetary policy delegation in which government chooses the central bank's degree of inde-pendence and conservatism so as to minimise society's loss function. We find that the optimal combination between independence and conservatism is not necessarily characterised by substitutability. When uncertainty about the central bank's preferences is high, independence and conservatism can become complements. In this case, giving more independence to the central bank increases the need for conservatism.

Using a sample of OECD countries, this paper finds that while fiscal rules succeeded in reducing total government expenditures and budget deficits in the medium term, they significantly affected the composition of government expenditure: the ratio of social transfers to government consumption declined. In contrast, we do not find a stable effect of fiscal rules on public investment. It is shown that the compositional shift against social transfers is beyond 'from welfare to work' policies, which have been adopted by many OECD countries during the nineties. Our empirical examination reveals that the reduction of social transfers relative to government consumption did not occur in countries with strong legal protection to social rights.

We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation.

Previous studies on electoral competition show that fiscal variables are manipulated by incumbent politicians in order to be re-elected. This phenomenon has been addressed by the literature on electoral budget cycle and, in a decentralised economy, by the literature on yardstick competition. Our objective is to consider the effect of the introduction of a fiscal rule on the opportunistic behaviour of incumbent politicians. We conduct a panel data analysis on the current expenditures of 246 Italian municipalities. The introduction of the domestic stability pact (DSP) seems to change the electoral cycle, by increasing the magnitude of the expenditures during pre-electoral periods. Moreover, our results show that municipalities affected by the DSP are more sensitive to changes in neighbouring jurisdictions' fiscal policies, during pre-electoral periods. We conclude that the introduction of the DSP, besides significantly reducing the level of local public spending, strengthens the opportunistic behaviour of incumbent politicians in pre-electoral years.

Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard New Keynesian model, we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing: The minimum state variable solution and an autoregessive solution under a peg can lead to lower welfare losses than the unique solution under an active interest rate rule. Given that a peg is usually blamed to facilitate endogenous fluctuations, we further show that a peg can be implemented in a way that ensures equilibrium determinacy.

We analyze determinacy and stability under learning (E-stability) of rational expectations equilibria in the Blanchard and Galí (2006, 2008) New-Keynesian model of inflation and unemployment, where labor market frictions due to costs of hiring workers play an important role. We derive results for alternative specifications of monetary policy rules and alternative values of hiring costs as a percentage of GDP. Under low hiring costs - a typical part of the U.S. calibration - for policy rules based on current period inflation and unemployment our results are similar to those of Bullard and Mitra (2002). However, we find that the region of indeterminacy and E-instability in the policy space increases with the hiring costs. So, higher hiring costs - consistent with the European 'sclerotic' labor market institutions - seem to play an important part in explaining unemployment instability. Under lagged data based rules the area where monetary policy delivers both determinacy and E-stability shrinks. These rules perform worse according to these two dimensions when hiring costs go up. Finally, under expectations-based rules - unlike Bullard and Mitra (2002) - an additional explosive region is introduced. Here also the scope for determinacy and E-stability oriented monetary policy decreases. Interestingly - under the same rule and European 'sclerotic' labor market institutions we find that responding too much to expected inflation and too little to expected unemployment may very well be self-defeating. When hiring costs are large, a central bank that follows such a policy rule could very easily end up in the worst-case scenario of both indeterminacy and E-instability.

This paper investigates the consequences of debt stabilization for inflation targeting. If the monetary authority perfectly stabilizes inflation while the fiscal authority holds constant the real value of debt at maturity, the equilibrium dynamics might be indeterminate. However, determinacy can be restored by committing to targeting rules for either monetary or fiscal policy that include a concern for stabilization of the output gap. In solving the indeterminacy problem, flexible inflation targeting appears to be more robust than flexible debt targeting to alternative parameter configurations and steady-state fiscal stances. Conversely, flexible fiscal targeting rules lead to more desirable welfare outcomes. The paper further shows that if considerations beyond stabilization call for a combination of strict inflation and debt targeting rules, the indeterminacy result can be overturned if the fiscal authority commits to holding constant debt net of interest rate spending.

This paper provides a comprehensive empirical assessment of the relation between the cyclicality of fiscal policy, output volatility, and economic growth, using a large cross-section of 88 countries over the period 1960 to 2004. Identification of the effects of (endogenous) cyclical fiscal policy is achieved by exploiting the exogeneity of countries' political and institutional characteristics, which we find to be relevant determinants of fiscal cyclicality. There are three main results: First, both pro- and countercyclical fiscal policy amplify output volatility, much in a way like pure fiscal shocks that are unrelated to the cycle. Second, output volatility, due to variations in cyclical and discretionary fiscal policy, is negatively associated with economic growth. Third, there is no direct effect of cyclicality of economic growth other than through output volatility. These findings advocate the introduction of fiscal rules that limit the use of (discretionary and) cyclical fiscal policy to improve growth performance by reducing volatility.

Channel systems for conducting monetary policy are becoming increasingly popular. Despite their popularity, the consequences of implementing policy with a channel system are not well understood. We develop a general equilibrium framework of a channel system and investigate the optimal policy. A novel aspect of the channel system is that a central bank can "tighten" or "loosen" its policy without changing its target rate by increasing the interest-rate spread symmetrically around the target rate. This questions the characterization of optimal policy through interest-rate rules, as done in a large body of the literature on the optimal design of interest-rate rules.

According to reputational models of political economy, a term limit may change the behavior of a chief executive because he does not have to stand for election. We test this hypothesis in a sample of 52 countries over the period 1977-2000, using government spending, social and welfare spending and deficit as policy choice variables using panel data estimation techniques. We are unable to find significant differences in the behavior of term-limited and non term-limited chief executives. This is in contrast with some previous empirical results based on U.S. states and international data.

Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce 'learning equilibria' in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive inflation. More generally, initial beliefs that are arbitrarily close to the inflation target equilibrium can result in complex economic dynamics, resulting in welfare-reducing fluctuations. On the contrary, central bank communication of policy rules helps stabilize expectations around the inflation target equilibrium.

In this paper, we compare growth and welfare e¤ects of various budget rules within an endogenous growth model with productive public capital, utility enhancing public consumption and public debt. We find that a fixed deficit regime does not affect the long run growth rate compared to a balanced budget while the growth rate is increased by a golden rule. Welfare effects are ambiguous. Simulations indicate that economies populated by households who have a strong tendency to smooth consumption should adhere to a balanced budget rather than a golden rule or a fixed deficit rule from a welfare point of view.

The paper derives the monetary policy reaction function implied by money growth targeting. It consists of an interest rate response to deviations of the inflation rate from target, to the change in the output gap, to money demand shocks and to the lagged interest rate. In the second part, it is shown that this type of inertial interest rate rule characterises the Bundesbank's monetary policy from 1979 to 1998 quite well. This result is robust to the use of real-time or ex post data and to the consideration of serially correlated errors. The main lesson is that, in addition to anchoring long-term inflation expectations, monetary targeting introduces inertia and history-dependence into the monetary policy rule. This is advantageous when private agents have forward-looking expectations and when the level of the output gap is subject to persistent measurement errors.

Central bank independence (CBI) is a very important precondition for price stability. However, the empirical evidence for a correlation between both is relatively weak. In this paper, this weakness is countered with a) an extended measure of monetary commitment, which includes well-known criteria for CBI and external criteria such as convertibility and exchange rate regimes and b) the argument that monetary commitment can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment with data from four decades confirms the crucial role of monetary commitment for price stability.

Staatsverschuldung wird hier als ein negativer externer Effekt verstanden, den Politiker ausüben, um die Kosten ihres politischen Angebots zu senken und somit im politischen Wettbewerb bestehen zu können. Die Gegebenheiten des politischen Wettbewerbs und die Möglichkeit diesen externen Effekt auszuüben, versetzen die Politiker in eine Dilemma-Situation, welche die Vermeidung von Defiziten, also eine Zusammenarbeit zum allgemeinen Vorteil, unmöglich macht und zwangsläufig zu immer neuen Defiziten führt. Ausnahmen ergeben sich nur, wenn die Kosten der Staatsverschuldung internalisiert werden. Da eine vollständige Internalisierung über den Markt aber in der Regel nicht gelingen kann, wird eine erfolgreiche Bekämpfung des Verschuldungsproblems nur mit Hilfe von Regulierung gelingen. Wir plädieren daher für eine Kombination aus Intensivierung des Wettbewerbs, um eine verstärkte Internalisierung der negativen externen Effekte zu erreichen, und Kanalisierung des Wettbewerbs, also Regulierung, um den Einsatz von Staatsverschuldung zu begrenzen und die Dilemmastruktur aufzubrechen.

This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation and taxes are set as a function of total government liabilities. We implement a second-order accurate solution to the model. We have several main findings. First, the size of the inflation coefficient in the interest rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response to output can lead to significant welfare losses. Third, the welfare gains from interest rate smoothing are negligible. Fourth, optimal fiscal policy is passive. Finally, the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey optimal policy.

This paper contributes to the policy evaluation literature by developing new strategies to study alternative policy rules. We compare optimal rules to simple rules within canonical monetary policy models. In our context, an optimal rule represents the solution to an intertemporal optimization problem in which a loss function for the policymaker and an explicit model of the macroeconomy are specified. We define a simple rule to be a summary of the intuition policymakers and economists have about how a central bank should react to aggregate disturbances. The policy rules are evaluated under minimax and minimax regret criteria. These criteria force the policymaker to guard against a worst-case scenario, but in different ways. Minimax makes the worst possible model the benchmark for the policymaker, while minimax regret confronts the policymaker with uncertainty about the true model. Our results indicate that the case for a model-specific optimal rule can break down when uncertainty exists about which of several models is true. Further, we show that the assumption that the policymaker’s loss function is known can obscure policy trade-offs that exist in the short, medium, and long run. Thus, policy evaluation is more difficult once it is recognized that model and preference uncertainty can interact.

Given the large amount of interaction between research on monetary policy and its practice, this paper examines whether some simple monetary policy rules that have been proposed in the academic literature, part of which has originated from within central banks, provide a reasonable characterisation of actual policy in the UK and the US. The paper finds that the simple rule that describes best actual US monetary policy is a speed limit rule with dynamics, whilst for the UK it is a forward-looking rule. The simpler dynamics in the UKís monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting.

This paper proposes an open-economy Phillips Curve that features a real exchange rate channel. The resulting target rule under optimal policy from a timeless perspective (TP) involves additional history dependence in the form of lagged inflation. The target rule also depends on the discount factor as well as IS and Phillips Curve parameters. This is in sharp contrast to a closed economy where the target rule depends only on the change in the output gap, the current rate of inflation and the structural parameter in the Phillips Curve. Because of the additional history dependence in an open economy, price level targeting is no longer consistent with optimal policy. If a real exchange rate channel does not exist in the Phillips Curve, monetary policy eases in the wake of a positive cost-push disturbance under policy from a TP and is thus diametrically opposed to same under discretion. Maximum gains accrue from commitment relative to discretion in an open economy where the real exchange rate is absent from the Phillips Curve and the policymaker places strong emphasis on maintaining price stability.

This paper deploys a simple stock-flow consistent (SFC) model in order to examine various contentions regarding fiscal and monetary policy. It follows from the model that if the fiscal stance is not set in the appropriate fashionthat is, at a well-defined level and growth ratethen full employment and low inflation will not be achieved in a sustainable way. We also show that fiscal policy on its own could achieve both full employment and a target rate of inflation. Finally, we arrive at two unconventional conclusions: first, that an economy (described within an SFC framework) with a real rate of interest net of taxes that exceeds the real growth rate will not generate explosive interest flows, even when the government is not targeting primary surpluses; and, second, that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode.

The paper analyses the performance of simple interest rate rules which feature a response to noisy observations of inflation, output and money growth. The analysis is based on a small empirical model of the hybrid New Keynesian type which has been estimated on euro area data by Stracca (2007). To assess the magnitude of the measurement problems regarding the feedback variables, we draw upon the real-time data set for Germany compiled by Gerberding et al. (2004). We find that interest rate rules which include a response to money growth outperform both Taylor-type rules and speed limit policies once real-time output gap uncertainty is accounted for. One reason is that targeting money growth introduces history dependence into the policy rule which is desirable when private agents are forward-looking. The second reason is that money growth contains information on the "true" growth rate of output which can only be measured imperfectly.

This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral. Naturally, this non-neutrality increases the importance of fiscal aspects for the design of policy rules consistent with determinate dynamics.

We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia. We find that better institutions are connected with lower risk premia. Furthermore deficits and surpluses matter less for risk premia in countries with better institutions. This reflects the market perception, that better institutions will reduce fiscal dificulties and make the monitoring of annual developments less important. The results are robust to controlling for country fixed effects and different estimation methodologies.

The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions about whether the zero interest rate floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy relative to the rest of the world. Negative demand shocks have more prolonged and conspicuous effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. Economies that are more open hit the ZIF for a shorter period of time, and with less harmful effects. The implications of deflationary supply shocks depend on whether the shocks are concentrated in the tradables or the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding.

We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances — a framework that produces a nondegenerate stationary distribution of money holdings. Without type-specific fiscal policy, we show that the zero-nominal-interest-rate policy (the Friedman rule) does not maximize type-specific welfare; further, it may not maximize aggregate ex ante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the central bank deviates from the Friedman rule.

Under a conventional policy rule, a central bank adjusts its policy rate linearly according to the gap between inflation and its target, and the gap between output and its potential. Under 'the opportunistic approach to disinflation' a central bank controls inflation aggressively when inflation is far from its target, but concentrates more on output stabilization when inflation is close to its target, allowing supply shocks and unforeseen fluctuations in aggregate demand to move inflation within a certain band. We use stochastic simulations of a smallscale rational expectations model to contrast the behavior of output and inflation under opportunistic and linear rules.

This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-ofperiod money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants. Keywords: Real balance effects ; predetermined money ; price level determination ; real determinacy ; monetary policy rules

This paper discusses the need and scope for an active fiscal stabilization policy. It is argued that the effectiveness of fiscal policy as a short run stabilizer does not depend on the long run multipliers of (balanced budget) fiscal policies. To the extent that activity can be affected by aggregate demand in the short run, there is a case for a fiscal stabilization policy in terms of temporary variations in taxes or public consumption contingent on the state of the economy. The effectiveness of fiscal policy is supported by empirical evidence. However, an appropriate policy intervention depends both on the nature of the shock and the structure of the economy. There are thus fundamental information problems in pursuing discretionary fiscal policies on top of political economy concerns, and fiscal fine-tuning is not to be recommended. Automatic stabilizers do not to the same extent suffer from these problems, but their strength is not by design but the net result of other policy considerations. Hence, there is a need to consider the structure and size of automatic stabilizers.

This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the correct model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policies

In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB.We find that maximal insurance across this model range in terms of aMinimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion.These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context. JEL Klassifikation: E52, E58, E61

The paper reviews the recent conduct of monetary policy and the central bank's rule-based behavior in Russia. Using different policy rules, we test whether the central bank in Russia reacts to changes in inflation, output gap and the exchange rate in a consistent and predictable manner. Our results indicate that during the period of 1993-2002 the Bank of Russia has used monetary aggregates as a main policy instrument in conducting monetary policy.