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Are you in favour of monetary and fiscal rules?

My answer to the previous question covers my views on monetary rules.

Personally I am against balanced budget rules for national governments but

in favour of such rules for sub-national governments.

Does reducing inflation from moderate rates, say from 10 per cent to 5 per

cent, bring any significant real economic benefits in the form of improved

performance with respect to employment and economic growth?

If inflation remained stable forever at say 10 per cent, with perfect certainty

and everything adjusted, it wouldn’t matter very much. But higher inflation

results in more variable and less predictable inflation, which is costly. Thus,

on balance I believe that there are benefits in reducing inflation.

Where do you stand on the issue of European Monetary Union? For countries

like Italy and the UK do the costs of Monetary Union not outweigh the

benefits?

The benefits of Monetary Union have been oversold. There are clearly both

pros and cons to such an arrangement. Italy has benefited from the Maastricht

target, otherwise it would have done even less to put its ‘house in order’.

However, this is not sufficient reason to join a monetary union. Although a

full answer to this question would require a whole article, my feeling is that

the economic arguments in favour of European Monetary Union are quite

weak.

In your view what are the most important lessons and policy implications to

arise from recent research into the interaction of politics and the macroeconomy?

First procedures, namely how policies are determined. This matters for the

outcome. Second, when thinking about ‘optimal institution building’ one

should not ignore conflicts of interests. Third, models based on ‘social planners’

cannot completely explain the empirical evidence and may be misleading

or useless if used for policy prescriptives.

What kind of political system is most conducive to macroeconomic stability?

For an OECD economy I would choose an electoral system with a majoritarian

emphasis. The American system of presidential–legislative checks and balances

has also worked quite well. Different electoral systems imply different

choices in the trade-off between moderation and gridlock. An English system

is probably at the extreme of the ‘no moderation but no gridlock’ scale. The

current Italian system is at the opposite end. Perhaps the US system is a

happy medium.

At the moment what research are you currently engaged in and what in your

opinion are the important areas of research which macroeconomists should

concentrate on in the future?

I am working on three main areas. The first area is the issue of the political

economy of major fiscal adjustments where I have already published several

papers with Roberto Perotti. I am also interested in what determines the

number and shapes of countries, that is, economic theories of secessions and

mergers and their relationship with factors such as geography and trade and

so on. For example, see my paper with Enrico Spolare [1997]. Third, I am

also researching into the effect of socio-ethnic fragmentation on the choice of

fiscal policy in US cities and localities. Personally, I find issues relating to

fiscal policy more intriguing than those associated with monetary policy,

especially as we know less about the former than the latter. I think that the

political economy of social security reforms and, more generally, reforms of

the welfare state will be the number one item in the policy agenda of OECD

countries during the next decade. The research of economists needs to keep

up with important events.