This paper investigates policy deviations from linear Taylor rules motivated by the risk management approach followed by the Fed during the Greenspan era. We estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy-makers' judgment, proxied by economically meaningful variables, drives the transition across policy regimes. We find that ignoring judgment‐induced nonlinearities while estimating Taylor rules has remarkable costs in terms of fit: above 250 bps in 10 quarters. Although linear Taylor rules describe well the broad contours of monetary policy, they fail to detect relevant policy decisions driven by policy‐makers' judgment.

This paper analyzes how endogenous imperfect exchange rate pass-through affects inflation targeting optimal monetary policies in a New Keynesian small open economy. The paper shows that there exists an inverse relation between the pass-through and the insulation of the economy from foreign and monetary policy shocks, and that imperfect pass-through tends to decrease the variability of the terms of trade. Furthermore, with CPI inflation targeting, in the short run, delayed pass-through constrains monetary policy more than incomplete pass-through and interest rate smoothing amplifies this effect. When the pass-through falls, the variability in economic activity tends to increase and the trade-off between the stabilization of CPI inflation and output worsens depending on how strictly the central bank is targeting CPI inflation. In contrast, with domestic inflation targeting, optimal monetary policy is not constrained and opposite results occur. Finally, with perfect pass-through the choice of flexible CPI inflation targeting seems preferable to flexible domestic inflation targeting while with delayed pass-through the opposite holds.JEL Classification: E52, E58, F41.

No abstract

Do illegal drugs foster public corruption? To estimate the causal e¤ect of drugs on public corruption in California, we adopt the synthetic control method and exploit the fact that crack cocaine markets emerged asynchronously across the United States. We focus on California because crack arrived here in 1981, before reaching any other state. Our results show that public corruption more than tripled in California in the …rst three years following the arrival of crack cocaine. We argue that this resulted from the particular characteristics of illegal drugs: a large trade-o¤ between pro…ts and law enforcement, due to a cheap technology and rigid demand. Such a trade-o¤ fosters a convergence of interests between criminals and corrupted public o¢ cials resulting in a positive causal impact of illegal drugs on corruption.

This paper shows that organised crime harms technological development. We provide evidence that forced resettlement of bosses promoted the mafia's rooting in northern Italy. With forced resettlement as an exogenous source of variation, we unveil that mafias cause a reduction in technology levels. Moving from the technology stock to a flow generating it-innovation-we demonstrate that mafias stifle innovation. We argue that without mafia, Nature selects agents for their innovation capacity. Instead, with mafia, agents face an alternative strategy: relate with mafia; this strategy, infringing property rights and competition, hinders innovation. Using evolutionary dynamics, we show that while mafias decrease innovation, proper sanctions/indemnities can address the problem.