"Economics and Politics of Macroeconomic Police"
|Author:||PhDr. Adam Geršl, Ph.D. (31.3.2012)|
|Year:||2006 - summer|
|Leaders:|| † prof. Ing. Karel Kouba DrSc.
|Work type:|| Dissertations
|Awards and prizes:|
|Abstract:||The dissertation thesis presents a collection of six research papers that deal with macroeconomic policies from both economics and political economy perspective.
Chapter I focuses on an interesting part of exchange rate policy, namely on foreign exchange intervention. The strong appreciation of the Czech koruna in 2001 - 2002 and foreign exchange interventions conducted by the Czech central bank under inflation targeting regime provided a nice opportunity to summarize the existing pros and cons of this controversial monetary and exchange rate policy instrument. In this paper, the strong Czech koruna appreciation, its possible causes, and policy measures taken by the central bank against it are described. The chapter also presents the main motives for conducting FX interventions, theoretical channels through which foreign exchange intervention may influence exchange rate, and some basic empirical evidence on their effectiveness. Finally, the foreign exchange interventions conducted by the Czech central bank in 2001 and 2002 are discussed and those done in July – September 2002 in a rather secret manner assessed as relatively efficient.
Chapter II provides a natural follow-up of chapter I, as it tries to measure the effect of Czech National Bank’s FX interventions on exchange rate, thus assessing the effectiveness of this interesting exchange rate policy instrument. The chapter reviews several approaches to testing the effectiveness of foreign exchange interventions and applies some of them to the data on interventions conducted by the Czech National Bank in 2001 and 2002. The reaction function of the central bank and the impact of interventions on exchange rate level and conditional and implied volatility is estimated, and the successfulness of interventions discussed within the event-study approach. The results indicate that interventions conducted by the Czech National Bank had only small short-term effect on exchange rate level and to a certain extent contributed to the increased conditional and implied volatility.
Chapter III reviews the literature on dynamic inconsistency of monetary policy, and discusses, also in a formalized way, the different measures how to limit the incentive of policymakers to use inflation to maximize their objective function, leading to an inefficient outcome of higher than necessary inflation without any impact on real economy. The nature of the dynamic inconsistency problem is presented in a game theory framework and the chapter then discusses the rules versus discretion dilemma, reputation building, flexibility versus credibility trade-off, independence of central banks, and optimal contracts for central bankers, i.e. issues in the monetary constitution that attracted a lot of attention over the last two decades. The value added above the review of standard solutions to inflation bias lies in the use of constitutional economics perspective when discussing the role of rules in monetary policy and in the discussion of checks and balances as a means to solve the flexibility versus credibility problem.
Chapter IV follows the public choice approach to monetary policy and applies a methodology originally developed by an American economist Thomas Havrilesky in late 1980s and early 1990s for measuring political pressure on central banks and testing whether such pressure influences monetary policy. The methodology is applied to the Czech National Bank, next to the original Federal Reserve and the Deutsche Bundesbank the third central bank to which this methodology has been applied. We aim at answering the question whether there has been political pressure exercised on the Czech National Bank between 1997 and 2005, and whether the bank has fallen prey to it, accommodating the revealed preferences of those executing the pressure. Using the same methodology that has been applied to the Federal Reserve and the Deutsche Bundesbank also allows some basic comparisons of all three central banks in terms of the amount of political pressure they face and their responsiveness to it.
Chapter V, which is a joint work with Nils Goldschmidt (Walter Eucken Institute, Freiburg) and Ekkehard Köhler (University of Freiburg), discusses the concept of central bank independence from the constitutional economics perspective. In principle, what we look for is an “optimal” monetary constitution that would, on the one hand, insulate the central bank from short-term political pressures, but on the other hand, it would reflect citizens’ preferences as to the desired range of inflation and responsiveness to economic shocks. The chapter reviews the proposals that have been already made within the constitutional economics and related sub-disciplines such as the German ordoliberalism or arguments made by F.A. von Hayek, and discusses in detail elements of monetary constitution that serve to link central banks and politics. We argue that the optimal set of institutional elements must also allow some dependence of central bank on politics, but must at the same time guarantee that monetary policy is not misused for narrow political purposes.
Chapter VI uses a dynamic inconsistency model known from monetary policy to assess three alternative proposals how to reform fiscal constitution in order to limit government’s incentive to use fiscal policy for maximizing political support. The return to ever-balanced-budget rule, state-contingent rules, and the establishment of an independent Fiscal Policy Committee with power to set public deficit with the aim of stabilizing the economy are discussed from the constitutional perspective, analyzing different incentives that these proposals create for government and alternative means to enhance credibility of the arrangement.