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1. Monetary Policy in an Uncertain World: The Case for Rules

Author:
James A. Dorn
Publication Date:
01-2018
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Since monetary policy operates in an uncertain world, discretionary policymaking relying on macroeconomic models of the economy is a weak reed upon which to base policy. The complexity of economic systems and constant changes in the underlying data mean errors may occur in a discretionary regime that can lead to monetary and financial instability.1 The 2008 financial crisis is a case in point: central bankers and their expert staffs failed to anticipate the crisis, and may have worsened it by keeping policy rates too low for too long (Taylor 2012). Moving to a rules‐​based regime would not eliminate radical uncertainty, but it could decrease institutional uncertainty—or what Robert Higgs (1997) has called “regime uncertainty”—and thus reduce the frequency of policy errors. Higgs focused on the uncertainty caused by fiscal and regulatory policies that attenuated private property rights by decreasing expected returns on capital. A discretionary monetary regime increases uncertainty about the future purchasing power of money and thereby undermines an important property right.
Topic:
Economics, Monetary Policy, Economic structure, and Macroeconomics
Political Geography:
Global Focus

2. Is the Government Buying Science or Support? A Framework Analysis of Federal Funding-induced Biases

Author:
Patrick J. Michaels and David E. Wojick
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
The purpose of this report is to provide a framework for doing research on the problem of bias in science, especially bias induced by Federal funding of research. In recent years the issue of bias in science has come under increasing scrutiny, including within the scientific community. Much of this scrutiny is focused on the potential for bias induced by the commercial funding of research. However, relatively little attention has been given to the potential role of Federal funding in fostering bias. The research question is clear: does biased funding skew research in a preferred direction, one that supports an agency mission, policy or paradigm? Federal agencies spend many billion dollars a year on scientific research. Most of this is directly tied to the funding agency mission and existing policies. The issue is whether these financial ties lead to bias in favor of the existing policies, as well as to promoting new policies. Is the government buying science or support?
Topic:
Government

3. Fatalistically Flawed: A Review Essay on Fragile

Author:
George Selgin
Publication Date:
03-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Not long ago a colleague of mine, who works regularly with legislators, attended a conference at which the lunch speaker, a famous economist, began by telling everyone why governments regulate financial institutions. The reasons the economist gave consisted of various (supposed) financial-market failures. Said the colleague to me later: “I just wanted to stand up and shout, 'That's got nothing to do with it!'” I relate this because some readers may otherwise fail to appreciate the importance of a work whose chief revelation is that financial legislation — and consequently the general structure of financial systems — are shaped by politics. My colleague didn't need to be told, but others, including many economists, evidently do. In Fragile by Design: The Political Origins of Banking Crises Scarce Credit, Charles Calomiris and Stephen Haber tell them. Banking arrangements, they argue, are “not a passive response to some efficiency criterion but rather the product of political deals that determine which laws are passed” (pp. 13 and 38). What's more, the laws such deals give rise to are, more often than not, detrimental to bank safety and soundness. In few words, banking instability has its roots, not in any fragility inherent to commercial banking, but in deals struck between governments and various interest groups. Fragile by Design is at once an alternative interpretation of the history of banking and a contribution to the debate on the causes of the recent crisis. Though other reviewers have tended to focus their attention on the latter contribution, many of Fragile by Design's most important insights, as well as many of its more serious flaws, are independent of its take on the subprime crisis. It is to those insights and flaws that I wish to draw attention
Topic:
Government

4. A Roadmap to Monetary Policy Reforms

Author:
Norbert J. Michel
Publication Date:
03-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
We now have a 100-year history by which to judge the Federal Reserve's performance. On balance, the Fed has not increased economic stability relative to the pre-Fed era. The Great Depression, the great stagflation, and the 2008 financial crisis have all occurred on the Fed's watch. Even excluding the Great Depression, business cycles have not become appreciably milder, nor have recessions become less frequent or measurably shorter. The Fed has strayed so far from the classic prescription for a lender of last resort—to provide short-term funds to solvent institutions at penalty rates—it strains all reason to suggest that it has successfully fulfilled that function. Its regulatory failures are numerous. It failed even to see the 2008 financial crisis coming. Perhaps the best that can be said about the Fed is that the variability in inflation has declined since 1984.

5. The Conservatorships of Fannie Mae and Freddie Mac: Actions Violate HERA and Established Insolvency Principles

Author:
Mark A. Calabria and Michael Krimminger
Publication Date:
02-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Not long ago a colleague of mine, who works regularly with legislators, attended a conference at which the lunch speaker, a famous economist, began by telling everyone why governments regulate financial institutions. The reasons the economist gave consisted of various (supposed) financial - market failures. Said the colleague to me later: “I just wanted to stand up and shout, 'That's got nothing to do with it!'”
Topic:
Economics

6. The Case against a Carbon Tax

Author:
Robert P. Murphy, Patrick J. Michaels, and Paul "Chip" Knappenberger
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
A vigorous campaign aimed at American policymakers and the general public has tried to create the perception that a federal carbon tax (or similar type of “carbon price”) is a crucial element in the urgently needed response to climate change. Within conservative and libertarian circles, a small but vocal group of academics, analysts, and political officials are claiming that a revenue-neutral carbon tax swap could even deliver a “double dividend” — meaning that the conventional economy would be spurred in addition to any climate benefits. The present study details several serious problems with these claims. The actual economics of climate change — as summarized in the peer-reviewed literature as well as the U.N. and Obama Administration reports — reveal that the case for a U.S. carbon tax is weaker than the public has been told.
Topic:
Climate Change, Economics, Energy Policy, and Politics
Political Geography:
Global Focus

7. On the Desirability of Nominal GDP Targeting

Author:
Julio Garin, Robert Lester, and Eric Sims
Publication Date:
08-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Topic:
Economics, Human Welfare, Markets, and GDP
Political Geography:
Global Focus

8. The Supply of Transaction Assets, Nominal Income, and Monetary Policy Transmission

Author:
Joshua R. Hendrickson and David Beckworth
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Over the last few years, the Federal Reserve has conducted a series of large scale asset purchases. Given the Federal Reserve’s dual mandate, the objective of this policy has been to generate an increase in real economic activity while maintaining a low, stable rate of inflation. The effectiveness of large scale asset purchases and the ability of the central bank to achieve a particular target has been subject to debate. The monetary transmission mechanism is of primary importance for understanding the effects of both the recent large scale asset purchases and of monetary policy more generally. The purpose of this paper is to propose a monetary transmission mechanism and to present empirical support for this mechanism. In particular, this paper suggests that monetary policy is transmitted through changes in the growth rate of transaction assets through both a direct and indirect effect. First, an increase in the growth rate of the monetary base, whether through lump sum transfers or open market operations, generates a real balance effect that increases real economic activity. Second, the indirect effect is through bank lending. Since bank loans are often a function of nominal income, expansionary monetary policy increases bank lending. Since economics agents are forward-looking and the the effects of monetary policy are persistent, monetary policy is transmitted through the expected future time path of the growth of transaction assets and nominal income. This characteristic is especially important in light of the policy recommendations of Sumner (2011, 2012) and Woodford (2012), in which the central bank attaches an explicit target for the level of nominal income to large-scale asset purchases.1
Topic:
Economics, Markets, Monetary Policy, and Federal Reserve
Political Geography:
Global Focus

9. International Developments in the Insurance Sector: The Road to Financial Instability?

Author:
Therese M. Vaughan and Mark A. Calabria
Publication Date:
05-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
International activity related to the regulation and supervision of financial services has exploded since the global financial crisis. The crisis exposed weaknesses in the structure for regulating internationally active banks, and motivated a number of work streams aimed at strengthening standards (most notably, significant revisions to the Basel capital standard for internationally active banks, now known as Basel III). The insurance sector was also stressed by the meltdown in financial markets that occurred in 2007-2008, albeit far less than the banking sector, and, with the exception of AIG, it is generally recognized that insurers played little role in the financial crisis, and that traditional insurance activities do not pose a systemic risk to the financial system.1,2 Nonetheless, the insurance sector has also been targeted for a new stream of regulatory initiatives at the international level. The most important organizations with respect to these activities are the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB), both based in Basel, Switzerland. The purpose of this paper is to review these developments and to highlight potential concerns for U.S. insurance markets.
Topic:
Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
Global Focus

10. A Tale of Two Villages: Kinship Networks and Political Preference Change in Rural India

Author:
Neelanjan Sircar
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
This paper develops a theory on how voters form and change political preferences in democratic developing world contexts. In the developing world, where state institutions are often weak, voters tend to be more focused on the competence and capacity of parties and candidates to deliver benefits. Such information may be difficult to ascertain, so voters must glean information from how candidates conduct themselves during the electoral campaign. Voters use kinship networks to develop more accurate preferences by collectively reasoning through newly available information on candidates. In order to demonstrate these claims, this study analyzes data collected on political preferences and kinship networks in two villages just before and after the campaign period during the 2011 Assembly election in the Indian state of West Bengal. The paper finds very strong kinship network effects on changes in issue preferences and vote choice over the course of the campaign and explains the results through qualitative work and a series of network autoregressive statistical models. In sum, this paper demonstrates how voters develop independent preferences and implement political change, even in low information contexts with weak human capital.
Topic:
Democratization, Politics, Self Determination, and Elections
Political Geography:
India