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Versatile Forward Guidance: Escaping or Switching?
(2018)CEPR Discussion PapersWe examine how forward guidance should be designed when an economy faces negative natural real interest-rate shocks and subsequent supply shocks. Besides a standard approach for forward guidance, we introduce two flexible designs: escaping and switching. With escaping forward guidance, the central banker commits to low interest rates in the presence of negative natural real interest-rate shocks, contingent on a self-chosen inflation rate ...Working Paper -
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Coalition Preclusion Contracts and Moderate Policies
(2016)CEPR Discussion PapersWe examine the effects of a novel political institution called Coalition Preclusion Contracts (CPCs) on the functioning of democracies with proportional representation. CPCs enable political parties to credibly exclude one or several parties from the range of coalitions they are prepared to envisage after elections. We consider a simple political game with a two-dimensional policy space in which three parties compete to form the government. ...Working Paper -
Money Creation, Monetary Policy, and Capital Regulation
(2016)CEPR Discussion PapersWe develop a general equilibrium model to study money creation by private banks and examine the impact of monetary policy and capital regulation. There are two production sectors, financial intermediation, aggregate shocks, safe deposits, and two types of money creation: private deposits when banks grant loans to firms or to other banks and central bank money when the central bank grants loans to private banks. We show that in the baseline ...Working Paper -
The Effects of Higher Re-election Hurdles and Costs of Policy Change on Political Polarization
(2016)CEPR Discussion PapersWe develop and study a two-period model of political competition where (i) changes of policies impose costs on all individuals, and (ii) such costs increase linearly with the magnitude of the policy change. The contribution is two-fold. First, we show that intermediate marginal costs yield the lowest levels of policy polarization, welfare being a single-peaked function of the marginal cost. Second, we apply our model to the design of ...Working Paper -
On the Economics of Crisis Contracts
(2016)CEPR Discussion PapersWe examine the impact of so-called "Crisis Contracts" on bank managers' risk-taking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs. This can be viewed as a retroactive tax that is levied only when a crisis occurs and that leads to a form of collective liability for bank managers. ...Working Paper -
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An Appraisal of History-bound Reelections
(2016)CEPR Discussion PapersIn this paper we introduce history-bound reelections. In their simplest form, they are embodied in a "Score-replication Rule". Under such rules an incumbent has to match the highest vote-share he/she has obtained in any previous election in order to be reelected. We develop a simple three-period model to examine Score-replication Rules. We show that suitable variants of such rules can improve welfare as they reduce the tendency of reelected ...Working Paper -