Carsten Hefeker

University of Siegen · Institute of Economics

We develop a model to analyze policymakers' incentives to install policy rules, comparing the case of no rule with a binding and a contingent policy rule that allows policymakers to suspend the rule in response to a sufficiently large shock. First, abstracting from political polarization, we show that the choice of the policy rule depends on policy...

The paper analyzes the incentives for governments to coordinate their policies internationally when there is model disagreement and parameter uncertainty in the presence of symmetric or asymmetric shocks. If countries disagree on how policies affect the economies and where shocks can be potentially asymmetric, uncertainty and the type of shocks det...

The paper analyzes under what circumstances policymakers experiment with policies with uncertain outcomes, when they prefer to imitate policies initiated in other countries, and when they prefer to coordinate policies internationally. Policymakers have private costs of active policies and compete internationally in a yardstick competition which giv...

Germany prides itself in having one of the most successful central banks and national currencies with respect to independence and stability. I show that not only were both imposed on the country after 1945, but that German experts and officials resisted both initially. It thus represents a rare case of the successful imposition of institutions from...

What are the incentives for governments to coordinate their policies internationally when there is model disagreement and uncertainty? We build a model where countries disagree on policy targets and how policies affect the economies, and show that uncertainty not only determines the type of cooperative policy but also whether countries want to coop...

A lack of structural reforms is often considered as a major problem in many member countries of EMU. This lack is arguably partly due to uncertainty about outcomes and a disregard for how policies spill over to other countries. Monetary union can reinforce this underprovision of structural reforms. Because centralization of structural policies is p...

What is the strategic incentive for governments and societies to delegate decision making to independent agents? I develop a framework taking into account preference uncertainty and the term length of independent agents in an environment with electoral and preference uncertainty and political polarization. Governments and societies face a trade-off...

This chapter includes the discussion of the paper “Mill and Ricardo: The Genesis of Comparative Advantage” by Roy J. Ruffin (Chap. 9 of this book) and of the comments to this paper by Antonio Loprieno (Chap. 10 of this book). It is based on the transcription of the discussion. The session was chaired by Carsten Hefeker, Professor of Economic Policy...

en We study the role of competition for the hold‐up problem in foreign direct investment in resource‐based industries. The host country government is not only unable to commit not to expropriate investment ex post but also unable to commit to the provision of local resources. In the case of competition for local resources, this dual commitment prob...

We develop a formal model that looks at the mutually endogenous determination of foreign direct investments in the extraction of natural resources, at the decision of host governments to expropriate these investments, and at the level of corruption. Higher investments in resource extraction make expropriation more attractive from the perspective of...

Mit der neuen Präsidentschaft in den USA sind Richtungswechsel auf verschiedenen Gebieten verbunden: Prominent ist dabei die Handelspolitik, die durch Strafzölle, aber auch durch die importbelastende Cashflow-Steuer mit Grenzausgleich und einen schwachen US-Dollar der heimischen Industrie Wettbewerbsvorteile verschaffen soll. Multilaterale Regeln i...

When countries need to implement costly economic policy reforms, these often imply uncertainties about their effectiveness for the home country and their spillovers to other countries. We develop a model to show that under these circumstances countries implement too few or too many policy reforms. From a social perspective, too many reforms follow...

Der Beitrag diskutiert das System der Betrieblichen Altersvorsorge in Deutschland und analysiert kritisch die Vorschläge des Bundesarbeitsministeriums (Nahles-Rente) und einiger hessischer Minister (Deutschland-Rente) zur Stärkung der Betrieblichen Altersvorsorge. In der jetzigen Form ist nicht davon auszugehen, dass die Vorschläge zu einer signifi...

It is widely debated whether a monetary union has to be accompanied by a fiscal transfer scheme to accommodate asymmetric shocks. We build a model of a monetary union with a central bank and two heterogeneous countries that are linked by a fiscal transfer scheme with repercussions on monetary policy. A central bank aiming at securing the existence...

We study how the optimal degree of conservatism relates to decision-making procedures in a Monetary Policy Committee (MPC). In our framework, central bank conservatism is required to attenuate the volatility of monetary decisions generated by the presence of uncertainty about the committee members’ output objective. We show how this need for conser...

The paper develops a theory about the relation between monetary uncertainty and government incentives to implement reforms to reduce structural distortions in labor markets. We show that uncertainty about the central bank's behavior leads to more reforms. Empirical tests employing recently developed measures of central bank transparency around the...

The EU has long viewed economic and institutional convergence as important goals, but the results thus far have been decidedly mixed, and there remain several open questions: How exactly should convergence be defined? How much convergence is necessary? What steps can be taken to improve convergence in the EU, and how can success be defined? Finally...

The implementation of European Union directives into national law is at the discretion of member states. We analyze incentives for member states to deviate from these directives when the European Commission may sue a defecting member state and rulings at the European Court of Justice (ECJ) are uncertain. We find that higher uncertainty about the pr...

This paper examines the optimal monetary delegation arrangement of central bank independence and conservatism in the presence of uncertainty about the central bank’s output objective. We show that full independence is no longer optimal with uncertain central bank preferences, and that optimal delegation involves the choice of both independence and...

The paper analyzes the relation between monetary uncertainty and government incentives to implement economic reforms in order to reduce structural distortions and make economies more flexible. It is shown that uncertainty about the central bank's behavior leads to more reforms. I relate this result to the debate about central bank structure in a la...

The paper analyzes whether it matters if development aid is given in the form of grants or loans. In particular, the question is if grants or loans provide more incentives for the receiving governments to pursue reform policies. The paper also addresses the influence of ex-post and ex-ante conditionality in this context. I find that grants could in...

We contrast the influence of demography and central bank independence on inflation. The recent demographic trends in developed countries are shown to weight more on inflation than central bank independence, while the contrary stands for the period from 1960 to 1979. participants to Bocconi University's Paolo Baffi Center Conference on Central Bank...

Changes in the field of central banking over the past two decades have been nothing short of dramatic. They include the importance of central bank autonomy, the desirability of low and stable inflation, and the vital role played by how central banks communicate their views and intentions to the markets and the public more generally. There remains c...

Zusammenfassung Die Krise Griechenlands wächst sich zu einer Gefahr für den gesamten Euroraum aus. Wie soll die Europäische Union darauf reagieren? Sie befindet sich im Dilemma zwischen Bailout und Bestrafung des „Defizitsünders“. Das erste scheint für den Bestand der Währungsunion unvermeidlich, das zweite ist erforderlich, um einen Moral Hazard z...

The paper uses a comprehensive data set with bilateral direct investment flows and establishes the influence of the de-facto exchange rate regime for FDI flows. We find a strong and significant effect from fixed rates on bilateral FDI flows in developed economies, but no significant effect for developing countries. There is thus no general and unif...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

Rainer Brüderle, Bundesminister für Wirtschaft und Technologie, sieht für eine weitergehende Zentralisierung der Wirtschaftspolitik keinen Grund. Die für die jeweilige Situation eines Mitgliedstaats bestmögliche Ausgestaltung von Strukturreformen gelinge am ehesten in nationaler Verantwortung und entsprechend den nationalen Gegebenheiten. Georg Fah...

We empirically analyse the role of labour market regulations for the impact of trade on growth. The results indicate that countries with flexible labour markets are more likely to harness the gains from trade. This outcome may help to explain the diverse impact of trade on growth.

The paper analyzes the relation between institutional quality, such as corruption, in a country and its monetary regime. It is shown that a credibly fixed exchange rate to a low inflation country, like a currency board, can reduce corruption and improve the fiscal system. A monetary union, however, has ambiguous effects. I find that there is conver...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

The enlargement of the European Monetary Union is likely to lead to an increase of uncertainty about the transmission of monetary policy for the larger union. Adding new members to the central bank council in addition implies that the policy reaction of the enlarged council will be uncertain for an initial period. The paper considers the influence...

In this survey, we present a number of arguments that question some aspects of the conventional view of central bank independence (CBI). We argue CBI is neither necessary nor sufficient for reaching monetary stability. First, CBI is just one potentially useful monetary policy design instrument among several. Second, while the relevant economic theo...

In June 2009 a new financial supervisory framework for the European Union (EU) was endorsed, consisting of a macro- and a micro-prudential pillar. The latter is composed of a Steering Committee, a supranational layer and a network of national supervisory authorities at the bottom, de facto establishing a complex multiple principals-multiple agents...

We develop an overlapping-generations framework with endogenous trans-mission of heterogeneous degrees of inflation aversion in response to social learning from past and own inflation experience. Preference transmission occurs via two channels: 'socialization', whereby parents and peers affect the adoption of a given trait, degree of inflation aver...

When enacting labor market regulation governments face courts that interpret and implement the legal code. We show that the incentives for governments for labor market reform increase with the uncertainty that is involved in the implementation of legal codes through courts. Given that judges have more discretion in common as opposed to civil law sy...

Economic policy reforms are usually costly to governments in the sense that they may lose electoral support and be voted out of office. However, oftentimes they are not the only actor that implements pol-icy changes. Courts may play an important role in interpreting the legal code. Probably more so in common as opposed to civil law sys-tems. Judges...

Which policy objective should a central bank pursue in a monetary union with asymmetric monetary transmission and different rates of inflation? Should it base its decisions on the EU-wide average of inflation and growth or should it instead focus on (appropriately weighted) national utility losses based on national rates of inflation and growth? We...

The paper explores the interaction between debt crises and devaluation. Since the optimal level of devaluation in a crisis depends on the level of debt that has to be serviced, a default makes a devaluation less likely. Expected devaluation depends thus on expectations about default which is also a function of the type of policymaker. Therefore, th...

The present paper develops a formal model of a dual currency board as an alternative to the standard currency board. This is attractive for countries that are exposed to more than one foreign currency. A dual currency board should be more stabilizing for output than a range of alternatives. We derive the conditions under which this is the case.

Die Ungleichgewichte auf den internationalen Finanzmärkten werden von den Finanzministern und Notenbankchefs der Industrieländer mit zunehmendem Unbehagen betrachtet. In Hinblick auf Hedge-Fonds soll bis zum G-8-Gipfel im Juni dieses Jahres ein Verhaltenskodex erarbeitet werden. Inwieweit können Hedge-Fonds zur Instabilität der Finanzmärkte beitrag...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

The paper discusses the relative role of private and public institutions in avoiding and dealing with the consequences of sovereign debt crises. Changes are required in the private sector as well as in the role and policy of the International Financial Institutions. Despite recent experiences with debt crises, necessary changes have not been implem...

Ohne Zusammenfassung

The paper explores exchange rate options for Mercosur countries. We start from the observation that most of the countries in the region have a long-standing tendency for fixed exchange rates, and ask how such a system could best be designed. The Argentine crisis has demonstrated that single currency pegs imply the risk of serious misalignments with...

For many decades the US dollar has remained unchallenged as the world’s dominant international currency. What is behind its persistent pre-eminence in the international monetary system and can this be expected to last? Could the euro rival or even surpass the dollar as the leading currency? If it did, what would be the consequences for Euroland?

Without Abstract

The paper compares different aid policy instruments and their effect on the target group. Starting from a situation where interest groups compete for the resources of the government, international financial institutions aim to change the policy outcome. They can either directly support one group or condition their financial help to the government o...

Das Papier diskutiert die relative Aufgabenteilung von privaten und öffentlichen Institutionen bei der Vermeidung und Bewältigung von Verschuldungskrisen souveräner Staaten. Anders als häufig in der Debatte dargestellt, sind Änderungen sowohl auf Seiten der Anleger gefragt wie auch Änderungen in der Politik und Rolle der Internationalen Finanzinsti...

Der Beitrag analysiert die Geschichte der europäischen Währungsintegration aus politisch-ökonomischer Sicht. Es wird gezeigt, dass die Währungsunion weniger auf politische Faktoren als auf den Einfluss wichtiger wirtschaftlicher Interessengruppen zurückgeführt werden muss. Die Logik der europäischen und der internationalen Integration von Handel un...

We develop a simple model that looks at the incentives of private banks to behave prudentially and undertake costly efforts to lower the probability of bankruptcy or having to be bailed out by a lender of last resort. Government regulators can force banks to increase efforts beyond the privately optimal level. We contrast the national case under au...

Am 1. Januar wird Slowenien als 13. Mitglied der Europäischen Währungsunion beitreten. Bulgarien und Rumänien werden zum gleichen Zeitpunkt neue Mitglieder der EU, so dass die Anzahl der potentiellen Eurokandidatenländer auf 14 anwachsen wird. Welche Auswirkungen sind von der Erweiterung der Eurozone auf die europäische Wirtschaft zu erwarten? Nach...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

Recent theoretical research has studied extensively the link between wage setting and monetary policymaking in unionized economies. This paper addresses the question of the role of monetary uncertainty from both an empirical and theoretical point of view. Our analysis is based on a simple model that derives the influence of monetary uncertainty on...

The paper explores the linkages among political risk, institutions, and foreign direct investment inflows. For a data sample of 83 developing countries covering 1984 to 2003, we identify indicators that matter most for the activities of multinational corporations. The results show that government stability, internal and external conflict, corruptio...

Most proposals for East-Asian monetary cooperation assign a special role to the Japanese yen as anchor currency. We focus on the potential role of the Chinese renminbi. Since China will assume the role of the dominant economy in the region and become a more important destination for Asian products than Japan eventually, this development assigns a s...

Can process conditionality enhance poverty reduction in developing countries? We address this question in a political-economic framework with political distortions on the recipient and the donor side. Process conditionality is a useful tool only if the international financial institutions hold all necessary information to assess the political situa...

The failure of an increasing number of countries to comply with the rules of the Stability and Growth Pact has given fresh impetus to the debate on the appropriateness of the Pact in its present form. This Forum deals with the deficiencies of the present design of the Pact and with possible ways of improving it, including the pertinent proposals by...

The paper explores the linkages between political risk, institutions and foreign direct investment inflows. Using different econometric techniques for a data sample of 83 developing countries and the period 1984 to 2003, we identify those indicators that matter most for the activities of multinational corporations. Overall, 12 different indicators...

The asymptotic distributions of cointegration tests are approximated using the Gamma distribution. The tests considered are for the I(1), the conditional I(1), as well as the I(2) model. Formulae for the parameters of the Gamma distributions are derived from response surfaces. The resulting approximation is flexible, easy to implement and more accu...

The “conservative central banker” has come under attack recently. Explicitly modeling the interaction of a trade union with monetary policy, it has been argued that the standard solution to the inflationary bias in monetary policy might actually be welfare-reducing if the trade union has an exogenous preference against inflation. We reframe this di...

In his contribution Carsten Hefeker points out that most of the official arguments concerning the necessity of the Stability and Growth Pact are not convincing. Nevertheless, a mechanism that credibly avoids excessive debts and deficits is needed in most member states. It would be more useful, however, if such rules would focus on overall debt rath...

The paper reviews exchange rate options for Mercosur countries. We start from the observation that most of the countries in the region have a longstanding tendency to adopt fixed exchange rates, and ask how such a system could best be designed. The Argentine crisis has demonstrated that unilateral currency pegs imply the risk of serious misalignmen...

The pending enlargement of the European Monetary Union (EMU) has brought to the fore the discussion of the voting right distribution in the European Central Bank (ECB) council. We show that, in a model where labor unions internalize the inflationary consequences of wage setting, deviating from a voting scheme based purely on economic size can be be...