Oxford Economic Papers - current issue

Decision-making at the Bank of England: a critical appraisal

Downward, P., Mearman, A. — 2008-06-20

This paper investigates the process of decision-making within the Bank of England and the Monetary Policy Committee (MPC): specifically, the extent of triangulation in the process. Triangulation is the mixing of two or more methods, investigators, theories, or data in a single investigation. Extensive evidence of limited triangulation is found within the MPC process. It is suggested that to enhance the logical consistency of their recommendations, the Bank engages in greater method triangulation. Further, in keeping with the moves towards transparency in the MPC process, it is proposed that procedures for employing the existing triangulation be codified.

Central bank independence and price stability: evidence from OECD-countries

Daunfeldt, S.-O., de Luna, X. — 2008-06-20

In this paper, we use a non-parametric regression method to compare the transition process from high to low inflation with the implementation dates of central bank independence reforms. In most countries, price stability is achieved before more independence is given to the central bank. Moreover, for those countries which have implemented a central bank independence reform under a high inflation regime, no evidence is found that the reforms have actually led to price stability. This suggests that the credibility of a low inflation goal can be achieved without institutional reforms which grant the central bank more independence from the political policymakers.

Targets, zones, and asymmetries: a flexible nonlinear model of recent UK monetary policy

Boinet, V., Martin, C. — 2008-06-20

We estimate a flexible model of the behaviour of UK monetary policymakers in the era of inflation targeting based on a new representation of policymaker's preferences. This enables us to address a range of issues that are beyond the scope of the existing literature. We find a complex relationship between interest rates and inflation: interest rates are passive when inflation is close to the target but there is an increasingly vigorous response as inflation deviates further from the target.

Financial intermediation, monitoring, and liquidity

Marini, F. — 2008-06-20

This paper constructs a theoretical model that integrates the two objectives of capital adequacy requirements and deposit insurance, namely avoiding banking crises and protecting small depositors. The paper also addresses the related question: why do banks fund loans with both equity and demand deposits? The model determines the optimal bank capital structure. In comparison with a Diamond-Dybvig bank which funds loans with demand deposits only, a capitalized financial intermediary provides liquidity to its depositors at a lower cost, and channels more funds to the most efficient investments. The model identifies the sources of market failure that may justify banking regulation.

Effects of government initiatives on youth crime

Sabates, R., Feinstein, L. — 2008-06-20

This paper evaluates the impacts on male juvenile burglary conviction rates of two UK government interventions, the Reducing Burglary Initiative and Educational Maintenance Allowances, only the former of which had crime reduction as an explicit objective. Using difference-in-differences estimation techniques, the paper shows that in areas where both initiatives were introduced convictions for 16 to 18 year olds for burglary fell between 1.1 and 1.5 per 1,000 relative to areas where neither programme was introduced. This is also a much greater crime reduction than for areas that introduced the EMA or the RBI singly. We conclude, therefore, that educational policies can complement direct interventions for crime prevention. These findings also highlight the importance of joined-up thinking in policy delivery, i.e. the interconnections between departmental programmes in the delivery of desirable outcomes.

The composition of government spending and growth: is current or capital spending better?

Ghosh, S., Gregoriou, A. — 2008-06-20

In an endogenous growth framework with two public goods with differing productivities, this paper analytically characterizes optimal fiscal policy for a decentralized economy, whereby the optimal values of the growth rate, tax rate and expenditure shares on the two public goods are linked directly to their productivity parameters. Using panel data for 15 developing countries over 28 years, we show using GMM techniques, that current (capital) spending has positive (negative) and significant effects on the growth rate, contrary to commonly held views. For instance, spending on operations and maintenance has a stronger impact on growth than both health and education spending. We consider the various components on the revenue side of the government budget constraint to take into account possible omitted variable bias that could arise if tax revenue alone was considered.

Merger policy to promote 'global players'? A simple model

Haufler, A., Nielsen, S. B. — 2008-06-20

We use a simple framework where firms in two countries serve their respective domestic markets and a world market to analyse under which conditions cost-reducing mergers will be beneficial for the merging firms, the home country, and the world as a whole. For a national merger, the policies enacted by a national merger authority tend to be overly restrictive from a global efficiency perspective. In contrast, all international mergers that benefit the merging firms will be cleared by either a national or a regional regulator, and this laissez-faire approach is also globally efficient. Finally, we allow for multiple mergers and analyse whether national mergers, international mergers or no mergers will be the equilibrium market structure when the firms' decisions to merge are either taken non-cooperatively or cooperatively.

Voting games and computational complexity

Harrison, G. W., McDaniel, T. — 2008-06-20

Voting rules over three or more alternatives suffer from a general problem of manipulability. However, if the rule is ‘difficult’ to manipulate, in some formal computational sense that is intrinsic to the rule or some cognitive sense specific to the set of voters, then one might not observe manipulation in practice. We evaluate this hypothesis using controlled laboratory experiments. We conclude that one voting rule, due originally to Condorcet, is indeed behaviorally incentive-compatible despite being theoretically manipulable if the underlying preference environment is sufficiently diverse that voters have difficulty ascertaining others’ preferences.