Economic Models - Convex Optimization

94 Andrew Hughes Hallet
Table 3.
Expected losses under a deficit rule, leadership vs. other strategies.
Full Fiscal Simultaneous Losses under
dependence leadership moves simultaneous
δ = 1 δ = 0; λ g 1 = 1 1 = 1 moves: Growth-
λ cb = λ g 1 λ cb = 0
λ cb = λ cb∗ rate equivalents
France 5.78 0.00 0.134 13.4
Germany 16.14 0.00 0.053 5.30
Italy 1.28 0.00 0.207 20.7
Netherlands 1.28 0.00 0.165 16.5
Sweden 4.51 0.00 0.034 3.40
New Zealand 8.40 0.00 0.071 7.10
United Kingdom 3.37 0.00 0.057 5.70
United States 6.46 0.00 0.248 24.8
of America
Canada 12.50 0.00 0.118 11.8
Switzerland 4.79 0.00 0.066 6.60
It is, perhaps, arguable that the Eurozone has adopted a monetary leadership
regime; but the empirical evidence for this was weak, and the fiscal
constraints that could have sustained such a leadership were widely ignored.
The second group of countries has adopted explicit, and mostly publicly
announced, inflation targets. Central banks in these countries have
been granted instrument independence, but not target independence. The
government either sets, or helps to set, the inflation target. In each case, the
government has adopted long-term (supply side) fiscal policies, leaving an
active demand management to monetary policy. These are clear cases in
which there is both fiscal leadership and instrument independence for the
central bank.
The third group represents a set of more flexible economies, with
implicit inflation targeting and a statutory concern for stabilization; also federalism
in fiscal policy and independence at the central bank, and therefore
no declared leadership in either fiscal or monetary policies. This provides
a useful benchmark for the other two groups.
The performance under the different fiscal regimes when the fiscal constraint
is a relatively soft deficit rule is reported in Table 3. Column 1
shows the losses under a dependent central bank in welfare units — leadership
or not. Column 2 reflects the losses that would be incurred under