Randma-Liiv & Savi: The Impact of the Fiscal Crisis on Public Administration

ABSTRACT:

The global financial, economic and fiscal crisis is undoubtedly the most important and urgent problem that Western states face today, and it will continue to be a challenging issue for several years to come. After the outburst of the crisis, governments all over the world have been challenged to react to and cope with the sharp economic downturn and related social effects. This has raised the question about the implications of the fiscal crisis on public administration on the research agenda, as many governments in Europe and elsewhere have initiated and implemented reform measures to cope with lower revenues. With the fact that the previous worldwide economic and fiscal crisis in the 1970s led to major public management reforms in many Western states as a background, it is intriguing to investigate the crisis-related dynamics in contemporary public administration. How governments, politics and administrations have responded to the global crisis and what impact the crisis has on public administration and governance is and will continue to be a challenging issue for years to come, because of the intricate linkages between states, markets and civil societies (Pollitt 2010; Thynne 2011).

 

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Jordan: A Century of Central Banking – What Have We Learned?

ABSTRACT:

All of us who are interested in the century-long experience of central banking in the United States owe a great debt to Allan Meltzer. His several-years-long efforts gave us over 2,000 pages of careful documentation of decisionmaking in the Federal Reserve for the first 75 years (Meltzer 2003, 2010a, 2010b). The first score of years transformed a lender-of-last-resort, payments processor, and issuer of uniform national currency into a full-fledged central bank with discretionary authority to manage a fiat currency.

Even in the mid-1930s, then Senator Carter Glass declared that we did not have a central bank in the United States. However, legislation in 1933 and 1935 had institutionalized the Federal Open Market Committee (FOMC), which had previously been an informal coordinating committee.

In an interview several years before his death, Milton Friedman was asked about any regrets in his long career. He replied that he wished he had paid more attention early on to what Jim Buchanan had been saying about the behavior of politicians and bureaucrats (Friedman 2003). Any discussion about any institution of government can be fruitful only in the context of the public-choice elements of decisionmaking by individuals who occupy policymaking positions. For the past century, the economic theories of prominent personalities in the central bank’s policymaking bodies have been the dominant factors giving us the very mixed results we have witnessed.

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Goyal, Jategaonkar, Megginson & Muckley: Whence the privatized firm dividend premium?

ABSTRACT:

We find that the major determinants of the payout premium of firms after privatization are improved firm operating performance and a prevalence of agency costs which are mitigated by higher pay outs. We examine up to 82,612 firm-years (up to 409 privatized and 6,193 non-privatized firms) across 26 countries. The privatized firm payout premium increases substantively in civil law countries and is inversely related to the proportion of closely held shares. It also increases with firm earnings, efficiency and growth opportunities. Our main findings do not materially differ in respect to the international variation over time of the dividend tax penalty and across the state of economic development in the country of firm privatization but they are not evident in industry sectors with high levels of regulation. We therefore provide an economic rationale for the higher pay outs of privatized firms.

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Moe: Shadow Banking – Policy Challenges for Central Banks

ABSTRACT:

Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown. They broadened their tool kit and extended liquidity support to nonbanks and key financial markets. Many want central banks to embrace this expanded role as “market maker of last resort” going forward. This would provide a liquidity backstop for systemically important markets and the shadow banking system that is deeply integrated with these markets. But how much liquidity support can central banks provide to the shadow banking system without risking their balance sheets? I discuss the expanding role of the shadow banking sector and the key drivers behind its growing importance. There are close parallels between the growth of shadow banking before the recent financial crisis and earlier financial crises, with rapid growth in near monies as a common feature. This ebb and flow of shadow-banking-type liabilities are indeed an ingrained part of our advanced financial system. We need to reflect and consider whether official sector liquidity should be mobilized to stem a future breakdown in private shadow banking markets. Central banks should be especially concerned about providing liquidity support to financial markets without any form of structural reform. It would indeed be ironic if central banks were to declare victory in the fight against too-big-to-fail institutions, just to end up bankrolling too-big-to-fail financial markets.

 

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Orphanides: The Need for a Price Stability Mandate

ABSTRACT:

The founding of the Federal Reserve was a good idea, but its performance during its first hundred years has been hampered by the lack of clarity of its mandate. At times its mandate was interpreted as requiring the pursuit of multiple targets resulting in the failure to safeguard price stability over time. This article reviews the evolution of the Federal Reserve’s mandate and argues that Congress should clarify the primacy of price stability as the central bank’s mandate to ensure that the Federal Reserve will better safeguard monetary stability going forward.

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Goodfriend: Lessons from a Century of Fed Policy – Why Monetary and Credit Policies Need Rules and Boundaries

 From the INTRODUCTION:

In 1913 the United States overcame a long-standing distrust of government intervention in the monetary system to establish a central bank. The Fed was to employ its independent monetary and credit policy powers to improve on the rules of the classical gold standard, rules that were seen as unduly restrictive. We now know that faith then placed in discretion over rules was misplaced. The independence given the Fed to pursue discretionary policy in the public interest proved counterproductive.

On the monetary policy side, in line with public and political pressures, the Fed’s inclination to prioritize low unemployment over low inflation produced go-stop monetary policy after World War II that delivered neither, and instead produced the Great Inflation and rising unemployment. The Volcker Fed disinflation in the early 1980s eventually brought both inflation and unemployment down, and showed that effective monetary stabilization policy needs the discipline of an interest rate rule based on a credible commitment to low inflation.

On the credit policy side, there has been since World War II a gradual relaxation of the Fed’s last resort lending discipline. Fed lending supported insolvent depositories in the 1970s and 1980s. And Congress in 1991 granted the Fed virtually unlimited power to lend beyond depositories in a crisis. Unbridled credit policy independence in conjunction with its financial independence drew the Fed into a massive expansion of credit in the 2007-09 credit turmoil with the “implied promise of similar actions in times of future turmoil.”

The lesson from the Fed’s first century is that wide operational and financial independence given to monetary and credit policy subjects the Fed to incentives detrimental for macroeconomic and financial stability. The paper tells the story.

 

Available for download here.

Gilligan, O’Brien & Bowman: Sovereign Wealth Funds – The Good Guy Investment Actors?

 

ABSTRACT:

Sovereign wealth funds (SWFs) have been portrayed in some quarters as potential bad guys in global financial markets due to their supposed political as opposed to commercial intentions and influence. However, two key international developments during and since the 2008/2009 Global Financial Crisis have prompted some abatement in the hostility and mistrust displayed towards SWFs. First, SWFs provide substantial and growing sources of much-needed liquidity in global capital markets. Secondly, the Generally Agreed Principles and Practices – GAPP (The Santiago Principles) were created in 2008, which are a multilateral initiative to directly address governance issues associated with SWFs. Thus, SWFs have become a more accepted element of global financial markets and more is now known about how they operate and where their investment priorities tend to lie. However, there is still much to learn about the important roles that SWFs are likely to play in global markets, particularly how they may contribute to the public good. Accordingly, this article considers the good guy potential of SWFs by elucidating how SWFs may not only be a facilitative economic mechanism but also an important tool for societal benefit. In so doing, this article focuses on the role that they might play in domestic investment in order to stimulate the growth of social capital and nation building in their home country, as well as progress made by SWFs themselves to improving their standards and processes of governance.

 

 

 

Lekniute, Beetsma & Ponds: A value-based approach to pension redesign in the US state plans

ABSTRACT:

This paper explores the financial sustainability of a typical U.S. state defined-benefit pension fund under the continuation of current policies and under alternative policies, such as alternative contribution, indexation and investment allocation policies. We explore the “classic” asset-liability management (ALM) results, which indicate that a policy of conditional indexation may substantially improve the financial position of the fund. We also investigate the value-based ALM results, which provide a market-based evaluation of the net benefit of the contract to the various stakeholders. All participant cohorts under our simulation horizon derive a substantial net benefit from the pension contract, implying that tax payers make substantial contributions to this pension arrangement. The aforementioned measures can be instrumental in alleviating the burden on the tax payer, though this will happen at the cost of a reduction in the value of the contract to the participants.

 

Available for download here.

Lothian: Democracy, Law and Global Finance – A Legal and Institutional Perspective

ABSTRACT:

Finance has become more a problem than a solution to what the world most wants: socially inclusive growth. It has become a source of crises that threaten the development of the real economy. It has escaped accountability to democratic institutions and often helped, instead, to influence and corrupt them. Its potential to contribute to broad-based opportunity-expanding growth has been largely and massively squandered.

In this piece I seek to understand not only how this failure manifests itself in some of the major countries and regions of the world, but also, how it can be corrected.

The intellectual and policy response to the crisis in its American and European epicenters has almost entirely suppressed discussion of two themes of immense importance: the link between redistribution and recovery and the connection of finance to the real economy. My analysis recovers these suppressed themes by relating them to a third theme: the deficit of democratic accountability that lies at the root of many of these problems.

 

Available for download here.

De Grauwe and Ji: Disappearing government bond spreads in the eurozone – Back to normal?

ABSTRACT:

Since the announcement of the Outright Monetary Transactions (OMT) programme by Mario Draghi, President of the ECB, in 2012, the government bond spreads began a strong decline. This paper finds that most of this decline is due to the positive market sentiments that the OMT programme has triggered and is not related to underlying fundamentals, such as the debt-to-GDP ratios or the external debt position that have continued to increase in most countries. The authors even argue that the market’s euphoria may have gone too far in taking into account the same market fundamentals. They conclude with some thoughts about the future governance of the OMT programme.

 

Available for download here.