Daniel Kahneman received the Nobel Prize in economics sciences in 2002, December 8, Stockholm, Sweden. This article is the edited version of his Nobel Prize lecture. The author comes back to the problems he has studied with the late Amos Tversky and to debates conducting for several decades already. The statement is based on worked out together with Shane Federik the quirkiness of human judgment. Language: ru

Maps of Bounded Rationality: Psychology for Behavioral Economics

What are the welfare effects of enhanced dissemination of public information through the media and disclosures by market participants with high public visibility? For instance, is it always desirable to have frequent and timely publications of economic statistics by government agencies and the central bank? We examine the impact of public information in a setting where agents take actions appropriate to the underlying fundamentals, but they also have a coordination motive arising from a strategic complementarity in their actions. When the agents have no private information, greater provision of public information always increases welfare. However, when agents also have access to independent sources of information, the welfare effect of increased public disclosures is ambiguous.

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Social Value of Public Information

Econometric policy evaluation: A critique

This paper argues that financial imbalances can build up in a low inflation environment and that in some circumstances it is appropriate for policy to respond to contain these imbalances. While identifying financial imbalances ex ante can be difficult, this paper presents empirical evidence that it is not impossible. In particular, sustained rapid credit growth combined with large increases in asset prices appears to increase the probability of an episode of financial instability. The paper also argues that while low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services prices. Accordingly, in some situations, a monetary response to credit and asset markets may be appropriate to preserve both financial and monetary stability.

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Asset prices, financial and monetary stability: exploring the nexus

The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.

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Housing Market Spillovers: Evidence from an Estimated DSGE Model

The Eurosystem: Transparent andAccountable or ‘Willem in Euroland’

Crisis: Time to Ponder on Traditional Wisdom Beyond dealing with the immediate problems, any crisis raises questions of why and how we got there and what lessons should be drawn to avoid a repetition of past developments--without laying the ground for a new disaster. This line of inquiry also applies to the current crisis in financial markets. Even during the heaviest turbulence a discussion has started on obvious deficits in the system of regulation and supervision and on badly needed improvements. In this article, I concentrate on monetary policy but that does not mean regulatory measures are irrelevant in this context, quite the opposite. For central banks the relation between monetary policy and asset prices has gained new interest and the dominant view has come under critique. The Consensus View There is a broad consensus around the world that central banks should maintain price stability--keeping inflation low and stable. This objective is reflected in the mandate given to the central banks in many countries. Price stability is normally specified in terms of stabilizing an index of consumer prices in one form or another. There are very good reasons for this practice. The purchasing power of money is undermined by an increase in consumer prices; a constant index of consumer prices maintains the real value of money over time. With stable prices, money serves society best as a unit of account, medium of exchange, and store of value. Any index of consumer prices covers only a segment of prices in an economy--although an important one. Prices of assets like real estate or equities are excluded by definition. Most of the time this omission is not seen as a problem, quite the opposite. Monetary policy can only control the development of goods prices over the medium to long term. But, in times of large movements of assets prices, the debate always starts on whether this concentration of monetary policy on consumer prices alone is appropriate or not. Asset price developments have an influence on spending decisions by companies and households. A rising value of one's house makes people richer and might encourage additional consumption. Higher stock prices reduce the cost of equity financing and might help increase investment. The opposite will happen with falling asset prices. This so-called wealth effect will finally, via changes in expenditures, have an influence on the development of consumer goods prices and should therefore be included in inflation and growth projections by central banks. The strategy of inflation targeting comprises this effect beyond which asset prices should not play a role in the conduct of monetary policy. On the role of asset prices there is wide consensus on the following principles: (1) central banks should not target asset prices; (2) central banks should not try to prick a bubble; and (3) central banks should follow a "mop up" strategy after the burst of a bubble, which means injecting enough liquidity to avoid a macroeconomic meltdown. The first two principles are uncontroversial. A central bank has no instruments to target successfully asset prices and creating a macroeconomic disaster by pricking a bubble would ruin the standing of a central bank. (The role of a central bank as a regulator and supervisor is a separate issue.) On the third principle, there is also broad agreement--once a bubble has burst the central bank has to take all necessary steps to avoid the propagation of the consequences of a collapse of asset prices. However, restricting the role of the central bank to a totally passive role in the period of the buildup of a bubble and practically preannouncing its role as the "savior" once the bubble bursts represents an asymmetric approach that risks creating moral hazard with actors driving the development of asset prices. What can be called the "Jackson Hole Consensus" (Greenspan 2002, Blinder and Reis 2005, Mishkin 2007) is exactly that. …

Asset Prices and Monetary Policy

This article is a revised English translation of the Thunen Lecture, given at the Annual Congress of the Verein fur Socialpolitik, September 29, 2004, in Dresden, Germany.

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Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century

How and for whose benefit the European Central Bank (ECB) will work is the most important issue facing Europe, and has been the subject of vast media and academic interest which has already spawned a vast literature of discussion papers in the academic literature, and 'Euro Watch' features. Much of this discussion has been of an increasingly hysterical and political nature and has served to blur rather than inform. This book, written by a team at the ECB, including Otmar Issing the ECB's Chief Economist, provides the first comprehensive, inside, non-technical analysis of the monetary policy strategy, institutional features and operational procedures of the Eurosystem. The goals and the transmission mechanism of monetary policy are explored, as are the theoretical and empirical results underpinning the 'stability-oriented monetary policy strategy' adopted by the ECB. The characteristics of this strategy are also discussed in comparison with suggested alternatives.

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Otmar Issing

Papers

The Eurosystem: Transparent andAccountable or ‘Willem in Euroland’

Asset Prices and Monetary Policy

Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century

Monetary Policy in the Euro Area: Strategy and Decision-Making at the European Central Bank

The International Role of the Euro