The price of congestion in the city and on the highway
Martin Adler (VU University Amsterdam)
Abstract: The cost car travellers impose on each other in additional travel time is a key transport policy input.Despite its ramifications, congestion pricing and congestion zoning strategies are often implemented in an ad-hoc, trial and error fashion. We suggest estimating the local marginal social pricing according to aflexible (i.e. non-parametric) specification that acknowledges endogeneity issues. The reverse causality we address with a control function that instruments flow at hyper-congested locations with flow of another transport mode (bicycle) and flow at normal congested locations. We show that the marginal external cost is non-monotonic and depends on the capacity to flow ratio and street type (i.e. downtown, highway). Car travel at hyper-congested locations during peak hours has a substantially higher marginal social cost and should be priced accordingly.
Field: Spatial economics
Inflation Targeting and Liquidity Traps under Endogenous Credibility
Joep Lustenhouwer ( University of Amsterdam)
Abstract: We derive policy implications for an inflation targeting central bank, who’s credibility is endogenous and depends on its past ability to achieve its targets. We do this in a New Keynesian framework with heterogeneous agents and boundedly rational expectations. Our assumptions about expectation formations are more in line with expectations observed in survey data and laboratory experiments than the fairly restrictive rational expectations hypothesis.
We find that the region of allowed policy parameters is strictly larger under heterogeneous expectations than under rational expectations. Furthermore, with theoretically optimal monetary policy, global stability of the fundamental steady state can be achieved, implying that the system always converges to the targets of the central bank. This result however no longer holds when the zero lower bound (ZLB) on the nominal interest rate is accounted for. Self-fulfilling deflationary spirals can then occur, even under optimal policy. The occurrence of these liquidity traps crucially depends on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target, aggressive monetary easing, or a more aggressive response to inflation.