Columbia International Affairs Online

CIAO DATE: 02/05/08

The Journal of Economic Perspectives

 

Vol. 21, No. 4, Fall 2007

Symposium: Monetary Policy

• The Case for Forecast Targeting as a Monetary Policy Strategy
  Michael Woodford

  At central banks around the world, including the Bank of England, Sweden's Riksbank, Norway's Norges Bank, and the Reserve Bank of New Zealand, policy is conducted on the basis of "inflation-forecast targeting": the central bank constructs quantitative projections of the economy's expected future evolution based on the way in which it intends to control short-term interest rates, and public discussion of those projections plays a critical role in justifying the banks' conduct of monetary policy to the public. What accounts for the appeal of this approach? Should it be adopted more widely or more explicitly? I review the long-running debate between proponents of monetary rules and proponents of discretionary monetary policy and argue that inflation-forecast targeting represents a powerful synthesis of the two approaches. I explore some common questions that arise about inflation-forecast targeting and consider how the U.S. Federal Reserve might move toward an explicit policy of inflation-forecast targeting.

• Macroeconomic Modeling for Monetary Policy Evaluation
  Jordi Galí and Mark Gertler

  We describe some of the main features of the recent vintage of macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation of macro models and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: 1) the significant role of expectations of future policy actions in the monetary transmission mechanism and 2) the importance for the central bank of tracking the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.

• How the World Achieved Consensus on Monetary Policy
  Marvin Goodfriend

  The worldwide progress in monetary policy is a great achievement and, especially considering the situation 30 years ago, a remarkable success story. I describe how the world achieved a working consensus on the core principles of monetary policy by the late 1990s. I survey the muddled state of affairs in the 1970s, and then ask: What happened in Federal Reserve policy to produce an understanding of the practical principles of monetary policy? How did formal institutional support for targeting low inflation abroad follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? I explain how the modern theoretical consensus—known alternatively as the New Neoclassical Synthesis or the New Keynesian model of monetary policy—reinforces key advances: the priority for price stability; the targeting of core rather than headline inflation; the importance of credibility for low inflation; and preemptive interest rate policy supported by transparent objectives and procedures. Of course, a working consensus does not constitute complete agreement. Accordingly, the conclusion identifies important monetary policy issues that remain to be explored.

• The Evolution of Central Bank Governance around the World
  Christopher Crowe and Ellen E. Meade

  The past two decades have seen enormous changes in central banks and their practices. In some countries, older institutions have been fundamentally restructured. In other, such as the countries of the former Soviet Union, entirely new central banks have been established. The member countries of the European Union have created a supranational central bank that oversees a monetary union. In all of these situations, central bank law was either revised or written de novo, while institutional objectives, practices, and structures were amended or created from scratch. In this article, we survey and quantify the trends in two major areas of central bank governance: independence and transparency. We document the steady progress toward greater central bank independence and transparency in a large number of industrial and developing countries over the past 10 to 15 years and discuss the effects of these aspects of governance on inflation. Finally, we touch on committee structure and decision making.

Symposium: Human Resource Management

• Personnel Economics: The Economist's View of Human Resources
  Edward P. Lazear and Kathryn L. Shaw

  Personnel economics drills deeply into the firm to study human resource management practices like compensation, hiring practices, training, and teamwork. Why should pay vary across workers within firms—and how "compressed" should pay be within firms? Should firms pay workers for their performance on the job or for their skills or hours of work? How are pay and promotions structured across jobs to induce optimal effort from employees? Why do firms use teams and how are teams used most effectively? How should all these human resource management practices, from incentive pay to teamwork, be combined within firms? Personnel economists offer new tools to analyze these questions—and new answers as well.

• Human Resources from an Organizational Behavior Perspective: Some Paradoxes Explained
  Jeffrey Pfeffer

  Workplaces in America and elsewhere show pervasive job dissatisfaction, distrust, and disengagement, with the evidence suggesting that these problems are getting worse and have a number of negative consequences for employers as well as employees. What follows is a necessarily selective exploration of human resource management in organizations, covering why it is often done so badly, what theory suggests about how to do it better, and why so little of what is known is actually implemented.

• Paying Respect
  Tore Ellingsen and Magnus Johannesson

  Why do people work? Economic theory generally, and the principal–agent model specifically, emphasize the role of material incentives. But many academics, for example, work diligently year after year for a nearly fixed real salary, continuing to work hard as they approach retirement, although financial incentives are usually absent. We will argue that while economists have been right to focus on incentives, they have been wrong to focus so exclusively on material incentives. While workers appreciate monetary rewards, they also get utility from what (they believe that) others think about them. We lay out a body of evidence that, taken as a whole, makes a strong case that respect matters in the workplace, above and beyond material rewards. We discuss evidence that workers respond to attention, symbolic rewards, and trust—and even that material incentives in some cases lead to less effort. Finally, we argue that many of these observations can be captured in a standard principal–agent model, once the principals and the agents are assumed to care about respect or esteem as well as money.

Articles

• The Economics of Dowry and Brideprice
  Siwan Anderson

  Payments between families at the time of marriage have existed throughout the history of most developed countries and are currently pervasive in many areas of the developing world. These payments can be substantial enough to affect the welfare of women and a society's distribution of wealth. Recent estimates document transfers per marriage amounting to four to six times annual household income. This paper first establishes some basic facts about the prevalence and magnitude of marriage payments. It then discusses how such patterns vary across countries depending upon economic conditions, societal structures, institutions, and family characteristics. Marriage payments have evolved within societies over time: in some periods, payments have risen sharply; in some cases, payments have shifted from the grooms’ side to the brides', and vice versa; sometimes, property rights over such payments shift between marrying partners and parental generations. The second part of this paper discusses the economic literature devoted to explaining these facts.

• Bankruptcy Reform and Credit Cards
  Michelle J. White

  From 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. By 2004, more Americans were filing for bankruptcy each year than were graduating from college, getting divorced, or being diagnosed with cancer. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law. It made bankruptcy law much less debtor-friendly. Personal bankruptcy filings fell to 600,000 in 2006. This paper explores why personal bankruptcy rates rose, and will argue that the main reason is the growth of "revolving debt"—mainly credit card debt. It explains how the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 altered the conditions of bankruptcy. Finally, this essay considers the balances that need to be struck in a bankruptcy system and how the U.S. bankruptcy system strikes these balances in comparison with other countries. I argue that a less debtor-friendly bankruptcy policy should be accompanied by changes in bank regulation and truth-in-lending rules, so that lenders have a greater chance of facing losses when they supply too much credit or charge excessively high interest rates and fees.

Features

• Markets: Preserving Funeral Markets with Ready-to-Embalm Laws
  David E. Harrington

  Thirty-nine states currently have ready-to-embalm laws, which typically require that all firms selling any type of funeral service (even those specializing in cremations) have embalming preparation rooms and all funeral directors be trained as embalmers. Ready-to-embalm laws are designed to preserve the status-quo in funeral markets, thereby protecting currently licensed funeral directors from the ravages of competition. These laws attempt to preserve funeral markets as they existed in the mid-twentieth century, markets that centered on traditional funerals sold by small, full-service funeral homes. The economic chemicals needed to preserve the status quo are harsh, leading to higher funeral prices and often poorer-quality services. The empirical evidence suggests that these laws reduce the cremation rate, the market share of Internet casket retailers, the penetration of national chains, and the number of funeral directors who are immigrants. They also appear to substantially increase the retail price of direct cremations and the cost of traditional funerals. Commissions in several states have recently recommended repealing ready-to-embalm laws, arguing that they are anticompetitive. The evidence presented in this paper should make their recommendations harder to ignore.

• Retrospectives: Léon Walras and the Nobel Peace Prize
  Agnar Sandmo

  This paper is an account of the history of Léon Walras's attempt to be awarded the Nobel Peace Prize for 1906. It describes Walras's moves to get three of his Lausanne colleagues to nominate him for the prize, the arguments advanced in the proposal, and the reception that it received by the Norwegian Peace Prize Committee in Kristiania (Oslo). It discusses whether Walras had realistic reasons to believe that he stood a chance of winning the prize, and it evaluates the validity of the arguments on which the proposal was based.

• Recommendations for Further Reading
  Timothy Taylor

• Corrections

• Notes

• Index by Author to Volume 21