Semper aliquid haeret.
– Francis Bacon to adapt Plutarch
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Notes
- 1.
Knight’s emphasis on uncertainty decoupled him from the predominant economic theory of the time, which emphasized decision-making under conditions of perfect certainty or under the established laws of probability.
- 2.
Note, however, that those Central and Eastern European EU economies currently in the waiting room for entering the European Monetary Union (the so-called members with a derogation, a bulk off them being members of the ERM II) might strive to converge with the euro area economy before they will enter it as full members. For instance, they adapt their monetary policy strategies to that of the ECB and money demand might become more stable. Hence, the probability of structural breaks due to the entry of new members should be significantly lower than at the start of EMU.
- 3.
See Kydland and Prescott (1977). The earlier literature focused on time inconsistency leading to the well-known inflation bias and on means of overcoming policy imperfections. More recently, time inconsistency issues have attracted renewed attention due to the large influence of the New Keynesian theoretical framework. See, for instance, Calvo (1978) and Clarida, Gali, and Gertler (1999).7See in this context, for instance, Dennis (2003).
- 4.
The proper perspective for addressing such issues is found in the principal-agent literature. See, for instance, Persson and Tabellini (1993).
- 5.
OECD (2005) applies a consistent procedure to derive policy priorities to foster growth across OECD countries and identifies labour market reforms as being particularly important in, e.g., the Euro area. However, this does not at all imply that reforms in other areas are unimportant. Hence, we analyze a variety of different reform measures in the empirical part of this section.
- 6.
van Poeck and Borghijs (2001) argue that the prospect of qualifying for EMU should provide as big an incentive for labour-market reform as EMU membership itself. They conclude that EMU countries did not reform more than other countries and, unlike elsewhere, their progress on reform seemed unrelated to the initial level of unemployment. For a period from the early nineties up to 1999, Bertola and Boeri (2001) only focus on cash transfers to people of working age, e.g. unemployment benefits, and on job protection. They arrive at exactly opposite conclusions, i.e. reforms accelerated more in the euro area than outside.
The IMF (2004) looks at the impact of a range of factors including macroeconomic conditions, political institutions, reform design and variables aimed to capture attitudes towards structural reform on different policy areas across OECD countries from the mid-1970s up to the late 1990s. It finds that EU membership leads to faster moves towards liberalization of product markets. However, it does not clarify whether this represents an effect of EMU and/or policies to prepare for EMU. See also Duval and Elmeskov (2005, p. 10).
- 7.
- 8.
- 9.
- 10.
- 11.
Alternatively, labour market reforms might contain the reduction of unemployment benefits, the rise of the efficiency of labour market policy, the substitution of collective by individual wage negotiations, lower minimum wages for young employees, the revision of the laws of wage negotiations (increasing the negotiation power of employees) and the reduction of both taxes and employment protection in general reform reduce equilibrium unemployment. See for instance, Buscher et al. (2005). Daveri & Tabellini (2000), Lindbeck and Snower, and Nicoletti and Scarpetta (2005). For the interrelation of product and labour market reforms see Ebell and Haefke (2003), Kugler and Pica (2004) and Nicoletti and Scarpetta (2005).
- 12.
- 13.
Concerning the structure of the game, the expected loss function should be minimized. But for clarity of exposition, the expectations operator is left out.
- 14.
Strictly speaking, the monetary rule can in this case simply be expressed as a k-percent rule without feedback component.
- 15.
An increase of nominal rigidities intensifies the credibility problem of monetary policy. Hence, the incentive of politicians to reduce the increasing credibility problem by more labour market reforms expands. However, this effect should be – and actually is according to the extensive calibrations by Belke and Kamp (1999a, 1999b), Sect. 4.3 – less relevant in reality if the nominal rigidities are diminished by market-oriented reforms, resulting in higher wage flexibility.
- 16.
See Lohmann (1992). The Lohmann trade-off describes the trade-off between the utility of a monetary policy rule by commitment and the costs by the loss in flexibility.
- 17.
- 18.
- 19.
- 20.
Crowe and Meade (2007) 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 10–15 years and discuss the effects of these aspects of governance on inflation. See also Neumann (2002).
- 21.
The notion that the central bank might be subject to an inflation bias has its roots in the literature on the time inconsistency, problem which is developed in Sect. 6.3 above.
- 22.
An efficient decision making is given in this context, if no unnecessary delays occur in monetary policy making and the decisions are made at minimal costs.
- 23.
This advantage can also be understood as a handicap of our approach because voting situation in the ECB Governing Council is not displayed with all its particularities. This argument will be considered shortly in the conclusions, where we show up possibilities for further research.
- 24.
The characteristic function is a function, denoted v, that associates a number, denoted v(C) with every subset C (coalition) of N (player set). The number v(C) is interpreted as the value created when the members of C cooperate.
- 25.
Additionally, the following conditions should hold: The set of all players forms a winning coalition, the set of zero players represents a losing coalition and the addition of players to a coalition cannot turn it from winning to losing.
- 26.
Widgrén (1994) also calculates both indices for the Council of Ministers of the European Community. Nevertheless he interprets the Shapley-Shubik index despite the fact that the analyzed council decides over public goods. His main argument is the high level of communication within the committee.
- 27.
- 28.
The consideration of the Executive Board as one player also significantly simplifies the calculations. Power Indices can be calculated exactly for games with approximately not more than 27 players. This restriction results of the time of calculation which doubles when adding one new player.
- 29.
Tables 6.6 and 6.7 reveal the relative voting frequencies that have been used in the calculation of power indices.
- 30.
Remember that in our setup power indices identify the voting power of every player according to his influence on the voting outcome. Most of these indices start from the idea of a swing: a player i has a swing when his exit out of a winning coalition C turns it to a losing one. Player i is then decisive for the coalition C. See extensively our above section on how to apply the power index concept.
- 31.
If the Banzhaf index is considered instead, the differences are even larger. In this case, the Executive Board has 14 to 70 times more power at its disposal.
- 32.
The development of the Banzhaf index reveals significant breaks at similar stages of the euro-area enlargement process as the Shapley index does (Fig. 7.13).
- 33.
For a review of such paradoxes see Holler and Kellermann (1978, p. 107).
- 34.
The numbers refer to the calculated Shapley values.
- 35.
The exact results are summarised in Belke and Styczynska (2006), Annex, Table A.3.
- 36.
See the discussion of the assumptions in our above section on how to apply the power index concept.
- 37.
The Shapley index is normally closer to the voting rights than the Banzhaf index, as discussed in Sutter (2001, p. 341).
- 38.
The explanation is that the indices can always be summed up to one and the Banzhaf indices were higher for the Executive Board.
- 39.
- 40.
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Belke, A., Polleit, T. (2009). Theory of Monetary Policy. In: Monetary Economics in Globalised Financial Markets. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-71003-5_6
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