On Friday, September 9, 2011, Parag Waknis defended his dissertation titled “Essays on Economics of Leviathan Monetary and Fiscal Policies” under the supervision of Professor Christian Zimmermann.
Here is a short description of his dissertation:
Time and again situations arise in various countries where fiscal policy drives the monetary policy. This might happen as a result of unusual situations like the current financial crisis or because of lack of sufficient tax revenues. There is not much literature modeling such policy environment using a money search framework. This dissertation aims to bridge this gap by modifying a much often-used money search model to include a Leviathan or a utility maximizing central bank. The first essay studies the nature of optimal monetary policy of this monetary authority. The analysis suggests multiple outcomes with actual realization depending on context specific factors. For example, fiscal profligacy is associated with higher inflation- a fact borne out by many actual examples. The second essay evaluates a thought exercise in institutional design to control inflation in such a context. It extends the model in the first essay to create an environment with currency competition and then shows that doing so leads to a better inflation outcome under reputation concerns. The third essay looks at the political economy of fiscal policy. To account for a typical developing country setting a model with differentiated political platforms and credit-constrained voters is laid out. The credit-constrained voters depend on local public goods provision for smoothing consumption in the presence of shocks. The model’s implications are then tested with data on 17 Indian states for the period of 20 years. The data does lend substantive support to the contention that political cohesiveness affects the nature of spending. Put together, the three essays form a body of theoretical and empirical research shedding light on a monetary policy environment that features close connection with the fiscal policy.
Parag started his tenure track position on September 1, 2011, and relocated from New York City to New Bedford, MA. Congratulations, Parag!