Imperfect Credibility and Robust Monetary Policy

This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank.s approximating model, the paper's main findings are as follows. First, a central bank.s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can bene.t from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.

Partner Selection into Policy Relevant Field Experiments

This study investigates the issue of self-selection of stakeholders into participation and collaboration in policy-relevant experiments. We document and test the implications of self-selection in the context of randomised policy experiment we conducted in primary schools in the UK. The main questions we ask are (1) is there evidence of selection on key observable characteristics likely to matter for the outcome of interest and (2) does selection matter for the estimates of treatment eff ects. The experimental work consists in testing the e ffects of an intervention aimed at encouraging children to make more healthy choices at lunch. We recruited schools through local authorities and randomised schools across two incentive treatments and a control group. We document the selection taking place both at the level of local authorities and at the school level. Overall we nd mild evidence of selection on key observables such as obesity levels and socio-economic characteristics. We find evidence of selection along indicators of involvement in healthy lifestyle programmes at the school level, but the magnitude is small. Moreover, We do not find signifi cant di erences in the treatment e ffects of the experiment between variables which, albeit to a mild degree, are correlated with selection into the experiment. To our knowledge, this is the rst study providing direct evidence on the magnitude of self-selection in fi eld experiments.

Policy Labels and Investment Decision-making

Much attention in recent years has turned to the potential of behavioural insights to improve the performance of government policy. One behavioural concept of interest is the effect of a cash transfer label on how the transfer is spent. The Winter Fuel Payment (WFP) is a labelled cash transfer to offset the costs of keeping older households warm in the winter. Previous research has shown that households spend a higher proportion of the WFP on energy expenditures due to its label (Beatty et al., 2011). If households interpret the WFP as money for their energy bills, it may reduce their willingness to undertake investments which help achieving the same goal, such as the adoption of renewable energy technologies. In this paper we show that the WFP has distortionary effects on the renewable technology market. Using the sharp eligibility criteria of the WFP in a Regression Discontinuity Design, this analysis finds a reduction in the propensity to install renewable energy technologies of around 2.7 percentage points due to the WFP. This is a considerable number. It implies that 62% of households (whose oldest member turns 60) would have invested in renewable energy but refrain to do so after receiving the WFP. This analysis suggests that the labelling effect spreads to products related to the labelled good. In this case, households use too much energy from sources which generate pollution and too little from relatively cleaner technologies.

Monetary Policy in Times of Financial Stress.

Some studies argue that the Fed reacts to financial market developments. Using data covering the period 1985:Q1 - 2008:Q4 and employing an augmented Taylor rule specification, we re-examine that conjecture. We find that evidence in favour of such a reaction is largely driven by the Fed’s behaviour during the 2007-2008 financial crisis.

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck’ and ‘good policy’ played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.

Consumer Behaviour in a Social Context: Implications for Environmental Policy

In this paper we summarise some of our recent work on consumer behaviour, drawing on recent developments in behavioural economics, in which consumers are embedded in a social context, so their behaviour is shaped by their interactions with other consumers. For the purpose of this paper we also allow consumption to cause environmental damage. Analysing the social context of consumption naturally lends itself to the use of game theoretic tools, and indicates that we seek to develop links between economics and sociology rather than economics and psychology, which has been the more predominant field for work in behavioural economics. We shall be concerned with three sets of issues: conspicuous consumption, consumption norms and altruistic behaviour. Our aim is to show that building links between sociological and economic approaches to the study of consumer behaviour can lead to significant and surprising implications for conventional economic policy prescriptions, especially with respect to environmental policy.

Moral Behaviour, Altruism and Environmental Policy

Free‐riding is often associated with self‐interested behaviour. However if there is a global mixed pollutant, free‐riding will arise if individuals calculate that their emissions are negligible relative to the total, so total emissions and hence any damage that they and others suffer will be unaffected by whatever consumption choice they make. In this context consumer behaviour and the optimal environmental tax are independent of the degree of altruism. For behaviour to change, individuals need to make their decisions in a different way. We propose a new theory of moral behaviour whereby individuals recognise that they will be worse off by not acting in their own self‐interest, and balance this cost off against the hypothetical moral value of adopting a Kantian form of behaviour, that is by calculating the consequences of their action by asking what would happen if everyone else acted in the same way as they did. We show that: (a) if individuals behave this way, then altruism matters and the greater the degree of altruism the more individuals cut back their consumption of a ’dirty’ good; (b) nevertheless the optimal environmental tax is exactly the same as that emerging from classical analysis where individuals act in self‐interested fashion.

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck’ and ‘good policy’ played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.