Band 22, Heft 1

No election rules are perfect, but they can be better. The Electoral College is increasingly failing to represent voter preferences in determining election winners. A path to reform begins with identifying election goals and establishing voting rules that best achieve these goals.

Given rising inflation the Bank of Japan has come under pressure to tighten monetary policy. The paper examines the risks of an interest rate hike for the sustainability of Japanese government debt, the Bank of Japan and the Japanese financial sector and derives possible repercussions for national and international financial stability. It finds significant valuation and currency risks in the private financial sector that limit the Bank of Japan’s room for manoeuvre. Pegging the yen to the dollar would eliminate appreciation expectations and reduce inflation risk. The loss of freedom in monetary policy making would be small.

The current approach to monetary policy encapsulates the belief that the monetary policy stance can be measured by the level of the real policy rate ( r ) relative to a neutral rate ( r* ). We argue that this interest rate gap ( r  – r* ) is a flawed concept. It would only be meaningful, if r* could be theoretically and empirically unambiguously identified as an essential variable for the establishment of equilibrium conditions in the economy. In this case, the central bank could generate temporary deviations of r from r* to restore equilibrium when an exogenous shock pushed the economy into disequilibrium. But r* is ambiguous in theory and unobservable empirically. The consequence is that we can only measure a monetary policy impulse generated by changes in r, but not its stance relative to an incomprehensible benchmark. Moreover, while short term changes in demand are driven by changes in interest rates, the difference of actual financial rates to a notional neutral rate does not translate into the real world by itself. The level of real interest rates, which affects investment in the medium term, has differed from financial rates, which are managed by the central bank with regard to its estimates of a neutral rate r* . Hence, we argue that the current monetary policy framework is seriously flawed.

In April 2024, the European Union has reformed its set of fiscal rules, aimed at securing sustainable public finances in its member countries. In this paper, we discuss the pathway towards reform and highlight the main characteristics of the reformed set of rules. It is argued that, relative to the original proposals by the Commission, the rules have improved. However, the numerical safeguards may be circumvented to some extent. In sum, there remains plenty of discretionary leeway for a conflict-averse Commission to appease non-compliant member countries.

The effectiveness of economic sanctions is a controversial issue, with their ability to achieve intended goals under scrutiny. This paper offers a distinctive angle by examining how sanctions impact state-owned enterprises (SOEs) within the countries they target. In particular, it focuses on the effects of sanctions on Iranian state-owned enterprises to assess the public sector’s burden. Through difference-in-difference analysis and detailed survey data from the manufacturing industry, the findings indicate that sanctions have a more detrimental effect on the revenue, profitability, and efficiency of SOEs compared to private companies in the same sectors. Unlike private companies, SOEs experienced an increase in wages and employment following the imposition of sanctions, implying their use as a buffer to shield workers during economic hardship. From a distributional standpoint, sanctions disproportionately affected men in the private sector, who then saw the most significant wage benefits in SOEs. However, women in SOEs did not enjoy similar advantages, which suggests that sanctions may have worsened gender disparities in the workforce.

The specific ways in which new businesses create jobs, stimulate productivity and enhance economic growth are complex. Amidst this complexity, a narrative has emerged that business dynamism has suffered a secular decline in recent decades that has continued to today. Our analysis, however, reveals that the so-called “secular trend” is more of a mechanical artifact than an indication of reduced entrepreneurial propensities to enter markets. Moreover, recent data indicate that both gross and net new establishment formation has been at historically unprecedented high levels.

Governors and state legislatures in the United States have a complex relationship. While we often consider them smaller versions of the federal government, this is not accurate. Like at the federal level, there is significant political competition between state legislatures and the executive branch. However, unlike the federal government, state legislatures often face a serious disadvantage because they are part-time in 46 out of 50 states and must consider how to balance power even in their absence. Our work focuses on how legislatures use tools such as Sunset Laws and Administrative Procedure Acts (APAs) to maintain this balance of power and ensure government agencies are responsive to legislative priorities. The central argument is that these mechanisms are not primarily about efficiency or cost savings but rather about power dynamics and preference alignment.

Democratic governments have consistently introduced new policies to address various societal, economic, and environmental issues. However, this ongoing expansion of policy measures risks overburdening the public administrations responsible for their execution. To explore this challenge, we examine how the relationship between the size of sectoral policy portfolios and available implementation capacities impacts the effectiveness of sectoral policies. Our analysis of environmental policies across OECD countries reveals a growing disparity between the number of policies requiring implementation and the resources available to carry them out, which in turn negatively affects policy performance.

Our research examines the overall economic costs arising from high levels of bureaucracy and shed light on whether and to what extent the digitalization of administrative processes can reduce the economic costs of bureaucracy. The results of our international analysis show that a fundamental reduction in bureaucracy is accompanied by a 4.6-percent average increase in real GDP per capita. Using Germany’s GDP as a case study, this would correspond to an annual increase in real GDP per capita of EUR 1,766, or EUR 146 billion in total per year, on average. Moreover, our data suggest that comparable effects are likely to apply to other EU countries as well. Our results also show that a digitalization push in public administration can increase the level of real GDP per capita by 2.7 percent while maintaining the same level of bureaucracy. Moreover, the positive impact of digitalization is particularly strong in countries with high levels of bureaucracy.

Much of the discussion on income mobility is focused on mitigating inequality through taxation and redistribution without considering the institutional and regulatory landscape that contributes to a decrease in income mobility. We present evidence on the role of economic freedom and deregulation in increasing income mobility and argue that policies promoting the two offer a more potent solution towards improving the economic status of the poor. Economic freedom can mitigate the impact of technological shocks on individuals in the lower end of the income distribution, an issue that has significant policy implications in light of the changing technological landscape.

Deregulation, a term generally associated with unbridled speculation and financial crises, goes hand in hand with the denationalization of the economy. Argentina offers a clear example of this. At the center of President’s Milei reform package one finds the constitution of the Ministry of Deregulation and State Transformation headed by Federico Sturzenegger, which is abolishing on average 3.5 regulations per day. Deregulation, however, is here not intended merely as a microeconomic policy tool, but as an essential means for the pursuit of other types of liberalization, in particular the abandonment of monetary nationalism via dollarization and the recovery of international competitiveness over the long run through internal price deflation. The deregulation agenda in Argentina is unique, innovative, and successful. It can serve as a model for other overregulated economies to ignite entrepreneurial freedom and innovation.

The EU Taxonomy is a classification system for sustainable economic activities and a framework for various regulatory initiatives. Its primary objectives are to enhance transparency, to reduce greenwashing and ultimately to redirect capital toward more sustainable activities. However, since its introduction, market participants have raised concerns about whether the benefits justify the costs. This article examines current challenges, such as the initial implementation costs, data gaps, sector and counterparty coverage, while also highlighting opportunities like enhanced international competitiveness and improved ESG risk management. The focus of this article is on banks as both preparers and users of Taxonomy data, addressing issues related to Taxonomy eligibility, alignment, and the Green Asset Ratio (GAR). The article concludes with recommendations for policy makers and authorities to improve the effectiveness of the Taxonomy disclosure.

Stefan Kooths’s (2023) article, “EU Taxonomy: Mission Impossible,” offers a critical perspective on the European Union (EU) Taxonomy, arguing that it conflicts with free-market principles and could potentially impede economic growth. While Kooths (2023) raises legitimate concerns about bureaucratic burdens and the risk of market distortions, this paper argues that the EU Taxonomy is an essential policy tool to correct market failures, enhance transparency in sustainable finance, and catalyze the transition toward a more sustainable and resilient European economy. This commentary addresses Kooths’s criticisms while providing a more balanced view of the Taxonomy’s potential. Specifically, it highlights its role in addressing environmental externalities, boosting investor confidence by reducing greenwashing, and fostering green growth and innovation both within the EU and globally.

The Comment by Mehmandoost Kotlar (2024) misses the main point in the Critique of the EU taxonomy put forward in Kooths (2023). This Critique does not discuss the targets underlying the EU taxonomy but claims that this policy instrument is unsuitable for reaching these targets.