The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models

This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. As a result, the central bank should adopt a loss function that differs from the social loss function. Carefully designing the central bank s loss function with consistent targets can harmonize optimal and consistent policy. This desirable result emerges from two observations. First, the social loss function reflects a normative process that does not necessarily prove consistent with the structure of the microeconomy. Thus, the social loss function cannot serve as a direct loss function for the central bank. Second, an optimal loss function for the central bank must depend on the structure of that microeconomy. In addition, this paper shows that control theory provides a benchmark for institution design in a game-theoretical framework.

The Making of Optimal and Consistent Policy: An Implementation Theory Framework for Monetary Policy

This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. As a result, the social loss function cannot serve as a direct loss function for the central bank. Accordingly, we employ implementation theory to design a central bank loss function (mechanism design) with consistent targets, while the social loss function serves as a social welfare criterion. That is, with the correct mechanism design for the central bank loss function, optimal policy and consistent policy become identical. In other words, optimal policy proves implementable (consistent).

Age Related Differences in Individual Quality of Life Domains in Youth with Type 1 Diabetes.

BACKGROUND: Investigating individual, as opposed to predetermined, quality of life domains may yield important information about quality of life. This study investigated the individual quality of life domains nominated by youth with type 1 diabetes. METHODS: Eighty young people attending a diabetes summer camp completed the Schedule for the Evaluation of Individual Quality of Life-Direct Weighting interview, which allows respondents to nominate and evaluate their own quality of life domains. RESULTS: The most frequently nominated life domains were 'family', 'friends', 'diabetes', 'school', and 'health' respectively; ranked in terms of importance, domains were 'religion', 'family', 'diabetes', 'health', and 'the golden rule'; ranked in order of satisfaction, domains were 'camp', 'religion', 'pets', and 'family' and 'a special person' were tied for fifth. Respondent age was significantly positively associated with the importance of 'friends', and a significantly negatively associated with the importance of 'family'. Nearly all respondents nominated a quality of life domain relating to physical status, however, the specific physical status domain and the rationale for its nomination varied. Some respondents nominated 'diabetes' as a domain and emphasized diabetes 'self-care behaviors' in order to avoid negative health consequences such as hospitalization. Other respondents nominated 'health' and focused more generally on 'living well with diabetes'. In an ANOVA with physical status domain as the independent variable and age as the dependent variable, participants who nominated 'diabetes' were younger (M = 12.9 years) than those who nominated 'health' (M = 15.9 years). In a second ANOVA, with rationale for nomination the physical status domain as the independent variable, and age as the dependent variable, those who emphasized 'self care behaviors' were younger (M = 11.8 years) than those who emphasized 'living well with diabetes' (M = 14.6 years). These differences are discussed in terms of cognitive development and in relation to the decline in self-care and glycemic control often observed during adolescence. CONCLUSIONS: Respondents nominated many non-diabetes life domains, underscoring that QOL is multidimensional. Subtle changes in conceptualization of diabetes and health with increasing age may reflect cognitive development or disease adjustment, and speak to the need for special attention to adolescents. Understanding individual quality of life domains can help clinicians motivate their young patients with diabetes for self-care. Future research should employ a larger, more diverse sample, and use longitudinal designs.

Transition Zones of Forested Inland Wetlands in Northeastern Connecticut

Inland wetlands are valuable natural resources intimately associated with the hydrologic cycle. This study was designed to (1) investigate vegetation distribution and selected physical and chemical properties of wetland and bordering upland soils and the interface between the two, and (2) provide the ground truth necessary for the identification and delineation of deciduous wetland forests using false-color infrared (FCIR) imagery.

The Optimal Capital Structure of Banks: Balancing Deposit Insurance, Capital Requirements and Tax-Advantaged Debt

The capital structure and regulation of financial intermediaries is an important topic for practitioners, regulators and academic researchers. In general, theory predicts that firms choose their capital structures by balancing the benefits of debt (e.g., tax and agency benefits) against its costs (e.g., bankruptcy costs). However, when traditional corporate finance models have been applied to insured financial institutions, the results have generally predicted corner solutions (all equity or all debt) to the capital structure problem. This paper studies the impact and interaction of deposit insurance, capital requirements and tax benefits on a bankÇs choice of optimal capital structure. Using a contingent claims model to value the firm and its associated claims, we find that there exists an interior optimal capital ratio in the presence of deposit insurance, taxes and a minimum fixed capital standard. Banks voluntarily choose to maintain capital in excess of the minimum required in order to balance the risks of insolvency (especially the loss of future tax benefits) against the benefits of additional debt. Because we derive a closed- form solution, our model provides useful insights on several current policy debates including revisions to the regulatory framework for GSEs, tax policy in general and the tax exemption for credit unions.