Strategic delegation in monetary unions

In monetary unions, monetary policy is typically made by delegates of the member countries. This procedure raises the possibility of strategic delegation - that countries may choose the types of delegates to influence outcomes in their favor. We show that without commitment in monetary policy, strategic delegation arises if and only if three conditions are met: shocks affecting individual countries are not perfectly correlated, risk-sharing across countries is imperfect, and the Phillips Curve is nonlinear. Moreover, inflation rates are inefficiently high. We argue that ways of solving the commitment problem, including the emphasis on price stability in the agreements constituting the European Union are especially valuable when strategic delegation is a problem.

Optimal second-degree price discrimination and arbitrage: On the role of asymetric information among buyers

The traditional theory of monopolistic screening tackles individualself-selection but does not address the possibility that buyers couldform a coalition to coordinate their purchases and to reallocate thegoods. In this paper, we design the optimal sale mechanism which takesinto account both individual and coalition incentive compatibilityfocusing on the role of asymmetric information among buyers. We showthat when a coalition of buyers is formed under asymmetric information,the monopolist can do as well as when there is no coalition. Although inthe optimal sale mechanism marginal rates of substitution are notequalized across buyers (hence there exists room for arbitrage), theyfail to realize the gains from arbitrage because of the transaction costsin coalition formation generated by asymmetric information.

Research joint ventures and optimal R&D policy with asymmetric information

When to allow Research Joint Ventures (RJVs) or not is an importantinstrument in the development of an optimal R&D policy. Theregulator, however, is unlikely to know all the relevant informationto regulate R&D optimally. The extent to which there existappropriability problems between the firms is one such variable thatis private information to the firms in the industry. In a duopolysetting we analyze the characteristics of a second-best R&D policywhere the government can either allow RJVs or not and give lump-sumsubsidies to the parties involved. The second-best R&D policy withoutsubsidies will either block some welfare improving RJVs or allow somewelfare reducing ones. With lump-sum subsidies, the second-best policytrades off the expected subsidy cost with allowing welfare decreasingRJVs or blocking welfare increasing ones.

Pharmaceutical generics, vertical product differentiation and public policy

This paper studies oligopolistic competition in off-patent pharmaceuticalmarkets using a vertical product differentiation model. This model canexplain the observation that countries with stronger regulations havesmaller generic market shares. It can also explain the differences inobserved regulatory regimes. Stronger regulation may be due to a higherproportion of production that is done by foreign firms. Finally, a closelyrelated model can account for the observed increase in prices by patentowners after entry of generic producers.

Endogenous policy leads to inefficient risk sharing

We analyze risk sharing and fiscal spending in a two-region model withcomplete markets. Fiscal policy determines tax rates for each state ofnature. When fiscal policy is decentralized, it can be used to affect prices of securities. To manipulate prices to their beneffit, regionschoose pro-cyclical fiscal spending. This leads to incomplete risk sharing,despite the existence of complete markets and the absence of aggregaterisk. When a fiscal union centralizes fiscal policy, securities pricescan no longer be manipulated and complete risk sharing ensues. If regionsare homogeneous, median income residents of both regions prefer the fiscalunion. If they are heterogeneous, the median resident of the rich regionprefers the decentralized setting.

Monetary policy shocks and transmission in Italy: A VAR analysis

This paper provides updated empirical evidence about the real and nominal effects of monetary policy in Italy, by using structural VAR analysis. We discuss different empirical approaches that have been used in order to identify monetary policy exogenous shocks. We argue that the data support the view that the Bank of Italy, at least in the recent past, has been targeting the rate on overnight interbank loans. Therefore, we interpret shocks to the overnight rate as purely exogenous monetary policy shocks and study how different macroeconomic variables react to such shocks.

Optimal bail out policy, conditionality and constructive ambiguity

This paper addresses the issue of the optimal behaviour of the Lender of Last Resort (LOLR) in its microeconomic role regarding individual financial institutions in distress. It has been argued that the LOLR should not intervene at the microeconomic level and let any defaulting institution face the market discipline, as it will be confronted with the consequences of the risks it has taken. By considering a simple costbenefit analysis we show that this position may lack a sufficient foundation. We establish that, instead, uder reasonable assumptions, the optimal policy has to be conditional on the amount of uninsured debt issued by the defaulting bank. Yet in equilibrium, because the rescue policy is costly, the LOLR will not rescue all the banks that fulfill the uninsured debt requirement condition, but will follow a mixed strategy. This we interpret as the confirmation of the "creative ambiguity" principle, perfectly in line with the central bankers claim that it is efficient for them to have discretion in lending to individual institutions. Alternatively, in other cases, when the social cost of a bank's bankruptcy is too high, it is optimal for the LOLR to bail out the insititution, and this gives support to the "too big to fail" policy.

Economic booms, trade deficits and economic policy

Many economic booms have been accompanied by realexchange rate appreciations, large trade defcits -whichhave sometimes persisted after the return to the initialexchange rate parity- and a deteriorating traded sector.Those circumstances have typically raised the questionof the de-sirability of some stabilization policy. We show that the dynamics induced by an expectedproductivity shock in an economy where the capital stockis non-mobile across sectors, match those circumstances.Furthermore, we obtain that credit market imperfectionstend to exacerbate trade deficits, and to cause aninefficient capacity reduction in the traded sector.Some stabilization policies are explored.

Monetary policy in the Euro area: Lessons from 5 years of ECB and implications for Turkey

We examine monetary policy in the Euro area from both theoretical and empirical perspectives. We discuss what theory tells us the strategy of Central banks should be and contrasts it with the one employed by the ECB. We review accomplishments (and failures) of monetary policy in the Euro area and suggest changes that would increase the correlation between words and actions; streamline the understanding that markets have of the policy process; and anchor expectation formation more strongly. We examine the transmission of monetary policy shocks in the Euro area and in some potential member countries and try to infer the likely effects occurring when Turkey joins the EU first and the Euro area later. Much of the analysis here warns against having too high expectations of the economic gains that membership to the EU and Euro club will produce.

New evidence on inflation persistence and price stickiness in the Euro area: Implications for macro modelling

This paper evaluates new evidence on price setting practices and inflation persistence in the euro area with respect to its implications for macro modelling. It argues that several of the most commonly used assumptions in micro-founded macro models are seriously challenged by the new findings.

Price regulation of plastic money: A critical assessment of Spanish rules

Recent decisions by the Spanish national competition authority (TDC) mandate paymentsystems to include only two costs when setting their domestic multilateral interchange fees(MIF): a fixed processing cost and a variable cost for the risk of fraud. This artificiallowering of MIFs will not lower consumer prices, because of uncompetitive retailing; but itwill however lead to higher cardholders fees and, likely, new prices for point of saleterminals, delaying the development of the immature Spanish card market. Also, to the extent that increased cardholders fees do not offset the fall in MIFs revenue, the task of issuing new cards will be underpaid relatively to the task of acquiring new merchants, causing an imbalance between the two sides of the networks. Moreover, the pricing scheme arising from the decisions will cause unbundling and underprovision of those services whose costs are excluded. Indeed, the payment guarantee and the free funding period will tend to be removed from the package of services currently provided, to be either provided by third parties, by issuers for a separate fee, or not provided at all, especially to smaller and medium-sized merchants. Transaction services will also suffer the consequences that the TDC precludes pricing them in variable terms.

A simple access pricing rule to achieve the Ramsey outcome for interconnected networks

This paper considers a general and informationally efficient approach to determine the optimal access pricing rule for interconnected networks. It shows that there exists a simple rule that achieves the Ramsey outcome as the unique equilibrium when networks compete in linear prices without network-based price discrimination. The approach is informationally efficient in the sense that the regulator is required to know only the marginal cost structure, i.e. the marginal cost of making and terminating a call. The approach is general in that access prices can depend not only on the marginal costs but also on the retail prices, which can be observed by consumers and therefore by the regulator as well. In particular, I consider the set of linear access pricing rules which includes any fixed access price, the Efficient Component Pricing Rule (ECPR) and the Modified ECPR as special cases. I show that in this set, there is a unique rule that implements the Ramsey outcome as the unique equilibrium independently of the underlying demand conditions.

On the receiver pays principle

This paper extends the theory of network competition betweentelecommunications operators by allowing receivers to derive a surplusfrom receiving calls (call externality) and to affect the volume ofcommunications by hanging up (receiver sovereignty). We investigate theextent to which receiver charges can lead to an internalization of thecalling externality. When the receiver charge and the termination(access) charge are both regulated, there exists an e±cient equilibrium.Effciency requires a termination discount. When reception charges aremarket determined, it is optimal for each operator to set the prices foremission and reception at their off-net costs. For an appropriately chosentermination charge, the symmetric equilibrium is again effcient. Lastly,we show that network-based price discrimination creates strong incentivesfor connectivity breakdowns, even between equal networks.

Minimum price variations, time priority and quotes dynamics

We analyze the impact of a minimum price variation (tick) and timepriority on the dynamics of quotes and the trading costs when competitionfor the order flow is dynamic. We find that convergence to competitiveoutcomes can take time and that the speed of convergence is influencedby the tick size, the priority rule and the characteristics of the orderarrival process. We show also that a zero minimum price variation is neveroptimal when competition for the order flow is dynamic. We compare thetrading outcomes with and without time priority. Time priority is shownto guarantee that uncompetitive spreads cannot be sustained over time.However it can sometimes result in higher trading costs. Empiricalimplications are proposed. In particular, we relate the size of thetrading costs to the frequency of new offers and the dynamics of theinside spread to the state of the book.

Pitfalls in the modeling of forward-looking price setting and investment decisions

The present paper makes progress in explaining the role of capital for inflation and output dynamics. We followWoodford (2003, Ch. 5) in assuming Calvo pricing combined with a convex capital adjustment cost at the firm level. Our main result is that capital accumulation affects inflation dynamics primarily through its impact on the marginal cost. This mechanism is much simpler than the one implied by the analysis in Woodford's text. The reason is that his analysis suffers from a conceptual mistake, as we show. The latter obscures the economic mechanism through which capital affects inflation and output dynamics in the Calvo model, as discussed in Woodford (2004).